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1
FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[ x ]ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For
the fiscal year ended December 31, 1998
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1943
Commission File Number: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of Registrant as specified in its charter)
OHIO NO. 31-1364046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
(Address of principal executive offices, including zip code)
(740) 753-1951
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, without par value
Preferred Stock Purchase Rights
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $23,682,240 on March 15,
1999.
There were 4,927,815 shares of the Registrant's Common Stock
outstanding on March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III.
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This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
PART I
ITEM 1. BUSINESS.
Rocky Shoes & Boots, Inc. has two subsidiaries: Five Star Enterprises
Ltd. ("Five Star"), a Cayman Islands corporation, which operates a manufacturing
facility in La Vega, Dominican Republic, and Lifestyle Footwear, Inc.
("Lifestyle"), a Delaware corporation, which operates two manufacturing
facilities in Aquadilla, Puerto Rico. Unless the context otherwise requires, all
references to "Rocky" or the "Company" include Rocky Shoes & Boots, Inc. and its
subsidiaries.
OVERVIEW
The Company is the successor to the business of The Wm. Brooks Shoe
Company, a company established in 1932 by William Brooks, who was later joined
by F. M. Brooks, the grandfather of the Company's current Chairman, President
and Chief Executive Officer, Mike Brooks. The business was sold in 1959 to a
company headquartered in Lancaster, Ohio. John W. Brooks, the father of Mike
Brooks, remained as an employee of the business when it was sold. In 1975, John
W. Brooks formed John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co.
("Rocky Co.")) as an Ohio corporation, reacquired the Nelsonville, Ohio
operating assets of the original company and moved the business' principal
executive offices back to Nelsonville, Ohio. In 1993, the Company, Rocky Co.,
Lifestyle and Five Star were parties to a reorganization, and in 1996, Rocky Co.
was merged with and into the Company, resulting in the Company's present
corporate structure.
Following completion of the Company's initial public offering in 1993,
the Company began to convert all of its factories to a modular "Team
Pass-Through" manufacturing system. This system substantially increased total
manufacturing capacity and operating efficiencies. Most of the Company's
footwear is manufactured in the Company's facilities located in Nelsonville,
Ohio, the Dominican Republic and Puerto Rico. The Company purchases raw
materials from a number of domestic and foreign sources. The principal raw
materials used in the production of the Company's footwear, in terms of dollar
value, are leather, GORE-TEX waterproof fabric, CORDURA nylon fabric and soling
materials. The Company's footwear is distributed nationwide and in Canada from
the Company's warehouse located in Nelsonville, Ohio. The Company stores
finished goods in the warehouse until they are used to fill an order. If the
product ordered is in inventory, it can be shipped to customers within one week
of the order.
In the past, the Company has benefited from a relatively low effective
tax rate. The Company receives favorable tax treatment on income earned by its
subsidiary in Puerto Rico and benefits from local tax abatements available to
such subsidiary. Beginning the fourth quarter of Fiscal 1996, the Company
elected to repatriate future earnings of its subsidiary in the Dominican
Republic. The repatriation of earnings from its subsidiary in the Dominican
Republic is subject to federal income tax, but is exempt from state and local
taxation.
___________
ROCKY(R) is a federally registered trademark of Rocky Shoes & Boots, Inc. This
report also refers to trademarks of corporations other than the Company. See
"Business -- Patents, Trademarks and Trade Names."
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STRATEGY
The Company's objective is to increase sales within its core product
categories and markets and to leverage the ROCKY brand into new markets with
products that emphasize the reputation of the Company's footwear for
performance, innovation, quality, comfort and durability. Key elements of the
Company's strategy are as follows:
Maintain Performance, Innovation and Quality. Performance, innovation
and quality are hallmarks of the ROCKY brand. The Company believes it has
developed a competitive advantage through its ability to produce high quality
performance footwear incorporating premium materials such as GORE-TEX waterproof
breathable fabric. The Company continually strives to develop new products and
to introduce innovations in each of its footwear market segments. The Company
stresses quality control at every stage of its manufacturing process. Each
manufacturing facility is staffed with trained quality assurance personnel, and
a portion of each manufacturing employee's compensation is based on the level of
product quality of each employee's respective work group.
Increase Awareness of the ROCKY Brand. The Company believes that its
long-term reputation for performance, innovation and quality has increased
awareness of the ROCKY brand. To increase the strength of its brand, the Company
has reformulated its advertising strategy by shifting its focus from the retail
trade directly to the consumer. A key component of this new strategy includes
advertising through cost-effective cable broadcasts aimed at audiences which
share the demographic profile of the Company's typical customers. Similarly, the
Company has shifted its national print advertising campaign to more
consumer-oriented publications. Management believes that by directly targeting
the consumer it can convey a broader and more consistent image of the ROCKY
brand, thereby increasing demand for its products at higher retail prices.
Leverage the ROCKY Brand. The Company believes that the ROCKY brand has
become a recognizable and established brand name for performance
quality-conscious consumers in the rugged outdoor and occupational segments of
the men's footwear market. The Company intends to continue to leverage the ROCKY
brand with a major emphasis on broadening its share of the casual market segment
Additionally, the Company licenses the ROCKY brand for use on certain
complementary products, such as socks, hats and accessories in an effort to
expand brand recognition.
Utilize Exclusive Rocky-Focused Sales Force. The Company historically
sold its footwear through manufacturers' representatives who carried ROCKY brand
products as well as other non-competing products. In an effort to ensure full
representation of its complete product line and consistent support of its
customers, late in 1995, the Company began replacing its manufacturers'
representatives with exclusive sales representatives who sell only ROCKY brand
products. Currently, approximately 80% of the Company's sales force is comprised
of exclusive sales representatives.
Capitalize on Manufacturing Process. The Company manufactures its
products under a twin-plant concept by producing its labor intensive "upper
portion" in its lower wage rate plants in the Dominican Republic and Puerto Rico
and completing its footwear in Puerto Rico and Nelsonville, Ohio where it uses
state-of-the-art bottoming techniques. In early 1999, the Company began to
manufacture opening price point hunting boots in the Dominican Republic. The
Company utilizes a modular "Team Pass-Through" manufacturing system in each of
its manufacturing facilities. The Company believes that this system, which
allows each person to perform a number of different tasks, is superior to a
traditional assembly line approach, which requires each person to perform a
single repetitive task. This system increases the number of pairs of footwear
produced per square foot of manufacturing space, reduces work-in-process
inventory and direct labor and improves the Company's production yields. In
addition, the Company believes that its manufacturing process allows it to
respond quickly to changes in product demand and consumer preferences.
Expand Product Sourcing. The Company's sourced products represented
approximately 18% of its revenue in 1998. The Company primarily sources products
from independent manufacturers in the Far East. The Company sources products
which are manufactured to its specifications. This enables the Company to reach
price points that it cannot obtain with most products manufactured in its own
facilities. A greater portion of the Company's products may be sourced in the
future if the Company expands and reaches capacity in its manufacturing
facilities. The Company
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employs a full-time quality assurance staff to inspect each shipment sourced in
the Far East. All of the Company's sourced products are designed by the
Company's design and engineering team.
PRODUCT LINES
The Company's product lines consist of rugged outdoor, occupational and
casual footwear. ROCKY brand products emphasize quality, patented materials,
such as GORE-TEX waterproof breathable fabric, CORDURA nylon fabric, CAMBRELLE
cushioned lining and THINSULATE thermal insulation. The following table
summarizes the Company's product lines:
RUGGED OUTDOOR OCCUPATIONAL CASUAL
-------------- ------------ ------
TARGET MARKET............ Hunters and outdoorsmen Law enforcement Retail customers of
personnel, security premium casual wear
guards, postal workers,
paramedics and factory
and construction workers
SUGGESTED RETAIL
PRICE RANGE........... $89 - $239 $69 - $179 $59 - $189
DISTRIBUTION Sporting goods stores, Retail uniform stores, Independent retail stores,
CHANNELS.............. outdoor specialty stores mail order catalogs, department store chains,
and mail order catalogs specialty safety stores mail order catalogs and
and independent retail sporting goods stores
stores
COMPANY'S LEADING BEAR CLAW, SNOW STALKER, ELIMINATOR, ROCKY 911 TUFF TERRAINERS, OUTBACKS
BRAND NAMES........... SUPERSTALKERS and MOUNTAIN SERIES, ALPHA, CROSSTECH, and ROCKERS
STALKERS WORKSMART, BEAR CLAW
STEEL TOE and WORKMAX
Rugged Outdoor Footwear. Rugged outdoor footwear, which is the
Company's largest product line in terms of total net sales, represented $47.6
million, or 53.7%, of Fiscal 1998 net sales. The Company's rugged outdoor
footwear consists of all season sport/hunting boots that are typically
waterproof and insulated and a line of rubber footwear. Rubber footwear was
introduced by the Company in 1998 and consists of patterned and non-patterned
knee boots, chest and hip waters and insulated cold weather pack boots. These
products are designed to keep outdoorsmen comfortable in extreme conditions.
Most of the Company's rugged outdoor footwear have outsoles which are designed
to provide excellent cushioning and traction. Although Rocky's rugged outdoor
footwear is regularly updated to incorporate new camouflage patterns, the
Company believes its products in this category are relatively insensitive to
changing fashion trends. For example, two of the Company's most popular current
boot styles were introduced in 1984 and 1988, respectively.
Occupational Footwear. Occupational footwear, which is the Company's
second largest product line, represented $23.9 million, or 26.9%, of Fiscal 1998
net sales. All occupational footwear styles are designed to be comfortable,
flexible, lightweight, slip resistant and durable and are typically worn by
people who are required to spend a majority of their time at work on their feet.
Certain styles of the Company's occupational wear incorporate Gore's CROSSTECH
fabric, which is resistant to blood born pathogens. Several of the Company's
occupational footwear products are similar in design to certain of the Company's
rugged outdoor footwear styles, except the Company's occupational footwear is
primarily black in color and features innersole support systems. This product
category includes work/steel toe footwear designed for industrial, construction
and manufacturing workers who demand leather work boots that are durable,
flexible and comfortable. Many companies require their workers to wear steel toe
boots and often provide purchase programs for their employees' footwear needs.
Casual Footwear. Aggregate sales of the Company's casual footwear were
$8.1 million in Fiscal 1998, accounting for 9.1% of net sales. The Company's
casual products target the upscale segment of the market and include
well-styled, comfortable leather shoes of a variety of constructions, including
traditional handsewn. Most of the Company's footwear
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in this segment is waterproof and highly functional for outdoor activity. The
Company has placed increased emphasis on expanding its market share within the
casual segment by increasing the number of its product offerings and more
directly targeting the retail consumer. The Company currently offers
approximately 80 styles of footwear within this market segment. In 1999, the
Company introduced the ROCKY FORMZ series of comfort casuals. The ROCKY FORMZ
system utilizes a method of custom fitting that molds the footbed around a
customer's foot to provide a unique and lasting fit.
Other. The Company manufactures and/or markets a variety of
accessories, including GORE-TEX waterproof oversocks, GORE-TEX waterproof
booties, innersole support systems, foot warmers, laces and foot powder.
GORE-TEX waterproof oversocks are sold under the ROCKY brand and as private
label products. Additionally, the Company periodically contracts its excess
manufacturing capacity for shoe uppers and bottoms to other shoe manufacturers.
Aggregate sales of other products, including contract manufacturing, were $4.3
million in Fiscal 1998, representing 4.8% of net sales.
Net Sales Composition. The following table indicates the percentage of
net sales derived from each major product line and the factory outlet store for
the periods indicated. Historical percentages may not be indicative of the
Company's future product mix.
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
Rugged outdoor footwear........................................ 53.7% 52.4% 57.8%
Occupational footwear.......................................... 26.9 24.3 23.3
Casual footwear................................................ 9.1 8.2 5.7
Factory outlet stores.......................................... 5.5 5.2 6.6
Other. . ...................................................... 4.8 9.9 6.6
--- --- ---
100.0% 100.0% 100.0%
===== ===== =====
PRODUCT DESIGN AND DEVELOPMENT
Product design and development are initiated both internally by the
Company's development staff and externally by customers and suppliers. The
Company's product development personnel, marketing personnel and sales
representatives work closely to identify opportunities for new styles,
camouflage patterns, design improvements and the incorporation of new materials.
These opportunities are reported to the Company's development staff which
oversees the development and testing of the new footwear. The Company also
receives design and product innovation ideas from tradeshows and from its
customers and suppliers who work with the Company to design footwear
incorporating desired features or product innovations. The Company strives to
develop products which respond to the changing needs and tastes of consumers
under time constraints imposed by the market. As part of the design process, the
Company maintains a computer aided design (CAD) system, which significantly
shortens the development period for new footwear styles. Once the product design
has been approved for production, a last (a reusable form utilized in the
manufacture of footwear) is developed by the Company and then reproduced by a
third-party supplier.
SALES, MARKETING AND ADVERTISING
The Company has developed comprehensive marketing and advertising
programs to gain national exposure for its ROCKY brand products in its targeted
markets. By creating strong brand awareness, the Company seeks to increase the
general level of retail demand for its products, expand its customer base and
increase brand loyalty. The Company's footwear is sold by more than
approximately 2,650 retail and mail order companies in the United States and
Canada. The Company's largest customers include: Cabela's, Inc., Bass Pro Shops,
Inc. and Dick's Clothing and Sporting Goods for rugged outdoor footwear;
Fecheimer Brothers Uniforms, Inc., R & R Uniforms, Inc. and Galls, Inc. for
occupational
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footwear; J.C. Penney Company, Inc. for casual footwear. No single customer
accounted for more than 10% of the Company's revenues in Fiscal 1998.
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 70 exclusive
sales representatives and manufacturers' representatives, operating in 14
geographic territories, who sell the Company's products throughout the United
States and in Canada. The Company has historically sold its products through
manufacturers' representatives who carried ROCKY brand products as well as other
non-competing products. In an effort to ensure full representation of its
complete product line and consistent support of its customers, late in 1995, the
Company began replacing its manufacturers' representatives with exclusive sales
representatives who sell only ROCKY brand products. Currently, 80% of the
Company's sales force is comprised of exclusive sales representatives. The
Company also changed its sales and manufacturing representatives compensation
program by setting performance goals based on sales growth, development of new
accounts and increased penetration of existing accounts with new products. The
Company's exclusive sales representatives and manufacturers' representatives are
paid on a commission basis and are responsible for sales, service and follow-up.
The Company advertises and promotes the ROCKY brand through a variety
of methods, including product packaging, national print advertising and a
telemarketing operation. In addition, the Company attends numerous tradeshows,
which have historically been an important source of new orders. 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 that its long-term reputation for quality has
increased awareness of the ROCKY brand. To further increase the strength of its
brand, the Company has reformulated its advertising strategy by shifting its
focus from the retail trade directly to the consumer. A key component of this
new strategy includes advertising through cost-effective cable broadcasts aimed
at audiences which share the demographic profile of the Company's typical
customers. Similarly, the Company has shifted its national print advertising
campaign to more consumer-oriented publications. The Company places full page
advertisements in a number of magazines and other publications having national
and international circulations, including Sports Afield, Field & Stream, North
American Hunter, Outdoor Life, North American Fisherman, Police and Security
News, Rescue and Law and Order. The Company's print advertisements and
television commercials emphasize the waterproof nature of the Company's footwear
as well as its high quality, comfort, functionality and durability. Management
believes that by directly targeting the consumer it can create a more
recognizable, consistent image of the ROCKY brand, thereby increasing demand for
its products at higher retail prices.
All of the Company's advertisements include a toll free number for
consumers to inquire about the Company's products and to locate their nearest
retailer. The Company's national telemarketing operation is a "store-locator"
system. A potential customer calls into the telemarketing center where trained
telemarketing representatives, who are familiar with all styles of ROCKY
footwear, respond to questions and refer the caller to one to three retailers in
or near the caller's area according to ZIP code. The telemarketing
representative records the name, address and telephone number of the caller, and
a letter is sent to the potential customer thanking him or her for the inquiry,
again identifying the nearby retailers and inviting the caller to visit the
stores to try on a pair of ROCKY shoes or boots. An additional letter is sent to
each of the retailers who were recommended to the caller, providing the
retailers with the name, address and telephone number of the caller and
requesting that their staff contact the potential customer and personally invite
them to the store to shop for ROCKY footwear. A ROCKY postcard is provided for
the retailer's convenience. A similar process is used with reader service cards
placed in various publications which advertise the Company's products.
MANUFACTURING AND SOURCING
The Company manufactures its products under a twin-plant concept by
producing the labor intensive "upper portions" in its lower wage rate plants in
the Dominican Republic and Puerto Rico and completing its footwear in Puerto
Rico and Nelsonville, Ohio where it uses state-of-the-art bottoming techniques.
In early 1999, the Company began to
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manufacture opening price point hunting boots in the Dominican Republic. The
Company utilizes a modular "Team Pass-Through" manufacturing system in each of
its manufacturing facilities. The Company believes that this system, which
allows each person to perform a number of different tasks, is superior to a
traditional assembly line approach, which requires each person to perform a
single repetitive task. This system increases the number of pairs of footwear
produced per square foot of manufacturing space, reduces work-in-process
inventory and direct labor and improves the Company's production yields. In
addition, the Company believes that its manufacturing process allows it to
respond quickly to changes in product demand and consumer preferences.
Quality control is stressed at every stage of the manufacturing process
and is monitored by trained quality assurance personnel at each of the Company's
manufacturing facilities. Every pair of ROCKY footwear, or its component parts,
produced at the Company's facilities is inspected at least five times during the
manufacturing process with some styles inspected up to nine times. Every
GORE-TEX waterproof fabric bootie liner is individually tested by filling it
with compressed air and submerging it in water to verify that it is waterproof.
Quality control personnel at the Nelsonville, Ohio warehouse conduct quality
control testing on incoming sourced finished goods and raw materials and inspect
random samples from the finished goods inventory from each of the Company's
manufacturing facilities to ensure that all items meet the Company's high
quality standards. A portion of each manufacturing employee's compensation is
based on the level of product quality of each employee's respective work group.
Most of the Company's footwear is produced in its own facilities in
Nelsonville, Ohio, the Dominican Republic and Puerto Rico. The Company sources
some footwear from manufacturers in the Far East, primarily China, which in 1998
accounted for approximately 18% of its revenues. During late 1998, the Company
entered into a joint venture with a factory in China to develop Gore-tex
products. Pursuant to the joint venture, the Company will supply the technology
and know-how to the factory to become W. L. Gore certified. The Company has an
exclusive agreement with the product source for two years. The Company believes
this source will improve sourced product quality and produce better gross
margins. A greater portion of the Company's products may be sourced in the
future if the Company expands and reaches capacity in its manufacturing
facilities. The Company sources products to reach price points that it cannot
obtain with products manufactured in its own facilities. The Company will source
products from outside facilities only if the Company believes that these
facilities will maintain the high quality that has become associated with ROCKY
brand footwear. All product sourcing is planned and implemented under the
direction and supervision of the Company's Director of Sourcing.
Compliance with federal, state and local regulations with respect to
the environment has not had any material effect on the earnings, manufacturing
process, capital expenditures or competitive position of the Company. Compliance
with such laws or changes therein could have a negative impact in the future.
SUPPLIERS
The Company purchases raw materials from a number of domestic and
foreign sources. The Company does not have any long-term supply contracts for
the purchase of its raw materials, except for limited blanket orders on leather
to protect the Company's wholesale selling prices for an extended period of
time. The principal raw materials used in the production of the Company's
footwear, in terms of dollar value, are leather, GORE-TEX waterproof breathable
fabric, CORDURA nylon fabric and soling materials. The Company believes that
these materials will continue to be available from its current suppliers, and
that, with the exception of GORE-TEX waterproof breathable fabric, there are
acceptable present alternatives to these suppliers and materials.
GORE-TEX waterproof fabric is purchased under license directly from W.
L. Gore & Associates, Inc. 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
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name has high brand name recognition and the GORE-TEX waterproof breathable
fabric used in the manufacture of ROCKY footwear has a reputation for quality
and proven performance.
Under the Company's licensing agreement with Gore, a prototype or
sample of each style of shoe or boot designed and produced by the Company that
incorporates GORE-TEX waterproof breathable fabric must be tested and approved
by Gore before the Company is permitted to manufacture or sell commercial
quantities of that style of footwear. Gore's testing involves immersing the
Company's footwear prototype for days in a water exclusion tester and flexing
the prototype 500,000 times, simulating a 500-mile march through several inches
of water. The prototype is then placed in a sweat absorption and transmission
tester to measure "breathability," which is the amount of perspiration that can
escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be
waterproof for one year from the date of purchase. When a customer claims that a
product is not waterproof, the product is returned to the Nelsonville, Ohio
manufacturing facility for further testing. If the product fails this testing
process, it is either replaced or credit is given, at the customer's discretion.
The Company believes that, historically, the claims associated with this
guarantee have been consistent with guarantee claims in the footwear industry.
The Company licenses the technology and purchases insole sets for the
ROCKY FORMZ system from Perfect Impression Footwear Company ("PIFC"). As long as
contract minimums are maintained, the Company has an exclusive license for
PIFC's custom fitting system in North America.
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal
fluctuations in the sale of its rugged outdoor footwear. A majority of orders
for the Company's rugged outdoor footwear are placed in January through April
for delivery in July through October. In order to meet demand, the Company must
manufacture its rugged outdoor footwear year round to be in a position to ship
advance orders during the last two quarters of each calendar year. Accordingly,
average inventory levels have been highest during the second and third quarters
of each calendar year and sales have been highest in the last two quarters of
each calendar year. Because of seasonal fluctuations, there can be no assurance
that the results for any particular interim period will be indicative of results
for the full year or for future interim periods.
Many of the Company's products, particularly its rugged outdoor
footwear line, are used by consumers in cold or wet weather. Mild or dry weather
can have a material adverse effect on sales of the Company's products,
particularly if mild or dry weather conditions occur in broad geographical areas
during late fall or early winter. Also, due to variations in weather conditions
from year to year, results for any single quarter or year may not be indicative
of results for any future quarter or year. Due to a relatively mild winter in
many areas of the United States during the 1998 to 1999 winter season, the
Company believes some of its customers may not have sold a significant portion
of their inventory to retail consumers.
Footwear retailers in general have begun placing orders closer to the
selling season. This increases the Company's business risk because it must
produce and carry inventories for relatively longer periods. In addition, the
later placement of orders may change the historical pattern of orders and sales
and increase the seasonal fluctuations in the Company's business. There can be
no assurance that the results for any particular interim period or year will be
indicative of results for the full year or for any future interim period or
year.
BACKLOG
At June 30, 1998 and June 30, 1997, the Company had unfilled orders
from its customers in the amount of approximately $34.7 million and $32.2
million, respectively. By comparison, at December 31, 1998 and December 31,
1997, backlog was $4.7 and $3.7 million, respectively. Because a majority of the
Company's orders are placed in January through April for delivery in July
through October, the Company's backlog is lowest during the October through
December period and peaks during the April through June period. Factors other
than seasonality could have a
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significant impact on the Company's backlog and, therefore, the Company's
backlog at any one point in time may not be indicative of future results.
Generally, orders may be canceled by customers prior to shipment without
penalty.
PATENTS, TRADEMARKS AND TRADE NAMES
The Company owns 22 United States patents for shoe upper designs and
four United States patents for shoe sole designs. The Company has four other
United States design patent applications for shoe uppers and one United States
design patent application for a shoe sole that have been allowed, but for which
patents have not yet been issued. The Company has three additional United States
design patent applications pending for shoe uppers. The Company is not aware of
any infringement of its patents or that it is infringing any patents owned by
third parties.
The Company owns United States federal registrations for its marks
ROCKY(R), ROCKY BOOTS(R) (which claims a ram's head Design as part of the mark),
ROCKY BOOTS and Design(R) (which claims a ram's head Design as part of the
mark), BEAR CLAW(R), CORNSTALKERS(R), COME WALK WITH U.S. and Design(R), ROCKY
911 SERIES and Design(R), SNOW STALKER(R), 4 WAY STOP and Design(R), ROCKY and
Design(R) for cigars, ROCKY ROCKY SHOES & BOOTS INC. SINCE 1932 and Design(R)
plus a detailed full ram Design, and STALKERS(R). Additional mark variations for
ROCKY BOOTS(R) and Design (which claims a ram's head Design as part of the
mark), TAC-TEAM(TM), ELIMINATOR(TM), PROHUNTER(TM), and LONGBEARD(TM) are the
subject of pending United States federal applications for registration. In
addition, the Company uses and has common law rights in the marks ROCKY(R)
MOUNTAIN STALKERS(R), and other ROCKY(R) marks. During 1994, the Company began
to increase distribution of its goods in several countries, including countries
in Western Europe, Canada and Japan. The Company has applied for trademark
registration of its ROCKY(R) mark in a number of foreign countries.
The Company also uses in its advertising and in other documents the
following trademarks owned by corporations other than the Company: GORE-TEX(R)
and CROSSTECH(R) are registered trademarks of W.L. Gore & Associates, Inc.;
CORDURA(R) is a registered trademark of E.I. DuPont de Nemours and Company;
THINSULATE(R) is a registered trademark of Minnesota Mining and Manufacturing
Company; and CAMBRELLE(R) is a trademark of Koppers Industries, Inc. The Company
is not aware of any material conflicts concerning its marks or its use of marks
owned by other corporations.
COMPETITION
The Company operates in a very competitive environment. Product
function, design, comfort, quality, technological improvements, brand awareness,
timeliness of product delivery and pricing are all important elements of
competition in the markets for the Company's footwear. The Company believes
that, based on these factors, it competes favorably in its rugged outdoor
footwear and occupational footwear market niches. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company has at least five major competitors in each of its
markets. All of these competitors have strong brand name recognition in the
markets that they serve.
The footwear industry is subject to rapid changes in consumer
preferences. The Company's casual product line and certain styles within its
rugged outdoor and occupational product lines are susceptible to fashion trends.
Therefore, the success of these products and styles are more dependent on the
Company's ability to anticipate and respond to changing fashion trends and
consumer demands within its niche market in a timely manner. The Company's
inability or failure to do so could adversely affect consumer acceptance of
these product lines and styles and could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
At December 31, 1998, the Company had approximately 1,752 full-time
employees and 23 part-time employees. Approximately 1,364 of these full-time
employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 1,394 employees engaged in production and the balance in
managerial and administrative positions. The
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production employees at the Nelsonville, Ohio facility are represented by the
Amalgamated Clothing and Textile Workers Union. The current collective
bargaining agreement between the Company and the union was reached in May 1998
and will expire in May 2000. The Company believes the agreement is consistent
with other contracts in the footwear industry. Management considers its
relations with all of its employees, both union and non-union, to be good.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition to the other information in this report, readers should carefully
consider that the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results of operations for 1998 and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Dependence on Sales Forecasts. The Company's investments in
infrastructure and product inventory are based on sales forecasts and are
necessarily made in advance of actual sales. The markets in which the Company
does business are highly competitive, and the Company's business is affected by
a variety of factors, including brand awareness, changing consumer preferences,
product innovations, fashion trends, retail market conditions, weather
conditions and economic and other factors. One of management's principal
challenges is to improve its ability to predict these factors, in order to
enable the Company to better match production of its products with demand. In
addition, the Company's growth over the years has created the need to increase
these investments in infrastructure and product and to enhance the Company's
operational systems. To the extent sales forecasts are not achieved, costs
associated with infrastructure and carrying cost of product inventory would
represent a higher percentage of revenue, which would adversely affect the
Company's financial performance.
Changes in Consumer Demand. The footwear industry is subject to rapid
changes in consumer preferences. Demand for the Company's products, particularly
the Company's casual product line and certain styles within its rugged outdoor
and occupational product lines, may be adversely affected by changing fashion
trends. The future success of the Company will depend upon the Company's ability
to anticipate and respond to changing consumer preferences and fashion trends in
a timely manner. The Company's failure to adequately anticipate or respond to
such changes could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, sales of the
Company's products may be negatively affected by weak consumer spending as a
result of adverse economic trends or uncertainties regarding the economy. See
"Business -- Competition."
Seasonality. The Company has historically experienced, and expects to
continue to experience, significant seasonal fluctuations in the sale of its
products. The Company's operating results have varied significantly in the past,
and may vary significantly in the future, partly due to such seasonal
fluctuations. A majority of the orders for the Company's rugged outdoor footwear
are placed in January through April for delivery in July through October. To
meet demand, the Company must manufacture its products year-round. Accordingly,
average inventory levels have been highest during the second and third quarters
of each calendar year, and sales have been highest in the last two quarters of
each calendar year. The Company believes that sales of its products will
continue to follow this seasonal cycle. Additionally, the Company does not have
long-term contracts with its customers. Accordingly, there is no assurance that
the results for any particular quarter will be indicative of results for the
full year or for the future. The Company believes that comparisons of its
interim results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the factors mentioned
above as well as factors discussed elsewhere in this Form 10-K, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock will likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Seasonality and Weather."
Impact of Weather. Many of the Company's products, particularly its
rugged outdoor footwear line, are used primarily in cold or wet weather. Mild or
dry weather has in the past and may in the future have a material adverse effect
on sales of the Company's products, particularly if mild or dry weather
conditions occur in broad geographical areas
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during late fall or early winter. Also, due to variations in weather conditions
from year to year, results for any single quarter or year may not be indicative
of results for any future period. See "Business -- Seasonality and Weather."
Competition. The footwear industry is intensely competitive, and the
Company expects competition to increase in the future. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company's ability to succeed depends on its ability to remain
competitive with respect to the quality, design, price and timely delivery of
its products. Competition could materially adversely affect the Company's
business, financial condition and results of operations. See "Business --
Competition."
Reliance on Suppliers. The Company purchases raw materials from a
number of domestic and foreign sources. The Company does not have any long-term
supply contracts for the purchase of its raw materials, except for limited
blanket orders on leather. The principal raw materials used in the production of
the Company's footwear, in terms of dollar value, are leather, GORE-TEX
waterproof fabric, CORDURA nylon fabric and soling materials. The Company
believes that currently there are acceptable alternatives to these suppliers and
materials, with the exception of the GORE-TEX waterproof fabric.
The Company is currently one of the largest customers of GORE-TEX
waterproof fabric for use in footwear. The Company's licensing agreement with
W.L. Gore & Associates, Inc. may be terminated by either party upon 90 days
written notice. Although other waterproofing techniques and materials are
available, the Company places a high value on its GORE-TEX waterproof breathable
fabric license because GORE-TEX has high brand name recognition and the GORE-TEX
waterproof fabric used in the manufacture of ROCKY footwear has a reputation for
quality and proven performance. Even though the Company does not believe that
its supply of GORE-TEX waterproof fabric will be interrupted in the future, no
assurance can be given in this regard. The Company's loss of its license to use
GORE-TEX waterproof breathable fabric could materially adversely affect the
Company's competitive position, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Suppliers."
The Company delivers a majority of shipments to its customers via
United Parcel Service ("UPS"). Possible interruptions of UPS's service in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations.
Changing Retailing Trends. Historically, the Company has chosen not to
sell products to discount mass merchandisers. A continued shift in the
marketplace from traditional independent retailers to large discount mass
merchandisers has increased the pressure on many footwear manufacturers to sell
products to large discount mass merchandisers at less favorable margins. Because
of competition from large discount mass merchandisers, a number of small
retailing customers of the Company have gone out of business, and in the future
more of such customers may go out of business, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although progressive independent retailers have attempted to improve
their competitive position by joining buying groups, stressing personal service
and stocking more products that address specific local needs, a continued shift
to discount mass merchandisers could have a material adverse effect on the
Company's business, Financial condition and results of operations and could
cause the Company to reevaluate its strategy. See "Business -- Sales, Marketing
and Advertising."
Reliance on Key Personnel. The development of the Company's business
has been, and will continue to be, highly dependent upon Mike Brooks, Chairman,
President and Chief Executive Officer, and David Fraedrich, Executive Vice
President and Chief Financial Officer. Each of these executive officers has an
at-will employment agreement with the Company. The employment agreements provide
that in the event of termination of employment with the Company, the employee
will receive a severance benefit and may not compete with the Company for a
period of one year. The Company has obtained key man life insurance on Messrs.
Brooks and Fraedrich in the amount of $1,146,022 and $1,143,602, respectively.
The loss of the services of any of these officers could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
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Reliance on Foreign Manufacturing. Most of the Company's rugged outdoor
and casual footwear uppers and some opening price point hunting boots are
produced in the Dominican Republic. Therefore, the Company's business is subject
to the risks of doing business offshore, such as: the imposition of additional
United States legislation and regulations relating to imports, including quotas,
duties, taxes or other charges or restrictions; weather conditions in the
Dominican Republic; foreign governmental regulation and taxation; fluctuations
in foreign exchange rates; changes in economic conditions; changes in the
political stability of the Dominican Republic; and changes in relationships
between the United States and the Dominican Republic. If any such factors were
to render the conduct of business in the Dominican Republic undesirable or
impracticable, the Company would have to locate new facilities for its
manufacturing operations. There can be no assurance that additional facilities
would be available to the Company or, if available, that such facilities could
be obtained on terms favorable to the Company. Such a development would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing and Sourcing."
Changes in Tax Rates. In past years, the Company's effective tax rate
typically has been substantially below the United States federal statutory
rates. The Company has paid minimal income taxes on income earned by its
subsidiary in Puerto Rico due to tax credits afforded the Company under Section
936 of the Internal Revenue Code and local tax abatements. However, Section 936
of the Internal Revenue Code has been repealed such that future tax credits
available to the Company will be capped beginning in 2002 and terminate in 2006.
In addition, the Company's local tax abatements in Puerto Rico are due to expire
in 2004. Prior to Fiscal 1996, the Company paid no foreign income tax on the
income generated by its subsidiary in the Dominican Republic. During the fourth
quarter of Fiscal 1996, the Company elected to repatriate future earnings of its
subsidiary in the Dominican Republic. The Company's future tax rate will vary
depending on many factors, including the level of relative earnings and tax
rates in each jurisdiction in which it operates and the repatriation of any
foreign income to the United States. Accordingly, since October 1, 1996, the
Company has accrued taxes on all amounts repatriated and will accrue taxes on
future earnings as they are no longer deemed permanently invested. The Company
cannot anticipate future changes in such laws. Increases in effective tax rates
or changes in tax laws may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Year 2000. The Company utilizes and is dependent upon its financial,
operational and planning information systems in all phases of its business
functions. Most of these systems were purchased as packaged applications from
external vendors. The Company has made a preliminary assessment of the
capabilities of its systems to recognize and process dates properly in the year
2000 and beyond. Based on the findings of this assessment, the Company
determined that, while some of its systems are year 2000 compliant,
modifications will be required to others. The Company has developed and is
implementing a plan to render its enterprise business systems year 2000
compliant. The Company is also seeking to obtain commitments of year 2000
compliance from external vendors, and to develop alternative solutions to
minimize the impact on the Company in the event such vendors do not meet their
year 2000 commitments. Management believes that the cost of completing this plan
will not have a material effect on the Company's current financial position,
liquidity or 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.
Concentration of Stock Ownership; Certain Corporate Governance
Measures. The directors, executive officers and principal shareholders of the
Company beneficially own approximately 19.1% of the Company's outstanding Common
Stock. As a result, these shareholders are able to exert significant influence
over all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may also have the effect of delaying or preventing a change in
control of the Company. The Company has also adopted certain corporate
governance measures which, individually or collectively, could delay or
frustrate the
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removal of incumbent directors and could make more difficult a merger, tender
offer or proxy contest involving the Company even if such events might be deemed
by certain shareholders to be beneficial to the interest of the shareholders.
Volatility of Market Price. From time to time, there may be significant
volatility in the market price of the Common Stock. The Company believes that
the current market price of its Common Stock reflects expectations that the
Company will be able to continue to market its products profitably and develop
new products with market appeal. If the Company is unable to market its products
profitably and develop new products at a pace that reflects the expectations of
the market, investors could sell shares of the Common Stock at or after the time
that it becomes apparent that such expectations may not be realized, resulting
in a decrease in the market price of the Common Stock.
In addition to the operating results of the Company, changes in
earnings estimates by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company or its
industry could cause the market price of the Common Stock to fluctuate
substantially. In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies, including the Company, for
reasons unrelated to their operating performance. See "Market for the
Registrant's Common Equity and Related Matters."
Accounting Standards. Changes in the accounting standards promulgated
by the Financial Accounting Standards Board or other authoritative bodies could
have an adverse affect on the Company's future reported operating results.
Environmental and Other Regulation. The Company is subject to various
environmental and other laws and regulations, which may change periodically.
Compliance with such laws or changes therein could have a negative impact on the
Company's future reported operating results.
Limited Protection of Intellectual Property. The Company regards
certain of its footwear designs as proprietary and relies on patents to protect
those designs. The Company believes that the ownership of the patents is a
significant factor in its business. Existing intellectual property laws afford
only limited protection of the Company's proprietary rights, and it may be
possible for unauthorized third parties to copy certain of the Company's
footwear designs or to reverse engineer or otherwise obtain and use information
that the Company regards as proprietary. The Company believes its patents
provide a measure of security against competition, and the Company intends to
enforce its patents against infringement by third parties. However, if the
Company's patents are found to be invalid, to the extent they have served, or
would in the future serve, as a barrier to entry to the Company's competitors,
such invalidity could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company owns United States federal registrations for a number of
its trademarks, trade names and designs. Additional trademarks, trade names and
designs are the subject of pending federal applications for registration. The
Company also uses and has common law rights in certain trademarks. During 1994,
the Company began to increase distribution of its goods in several foreign
countries. Accordingly, the Company has applied for trademark registrations in a
number of these countries. The Company intends to enforce its trademarks and
trade names against unauthorized use by third parties. However, existing
trademark and trade name laws afford only limited protection, and the laws of
countries other than the United States may not protect the Company's proprietary
rights to as great an extent as do the laws of the United States. Accordingly,
regardless of the legal rights of the Company, it may be possible for
unauthorized third parties to use the Company's trademarks, trade names or
designs and realize monetary gain at the Company's expense. Although such
unauthorized use may be illegal, the Company may be forced to expend substantial
resources to enforce its rights and nonetheless be divested of a portion of its
goodwill as a result of such unauthorized use. See "Business -- Patents,
Trademarks and Trade Names."
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS. This Annual Report on Form
10-K contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which are intended to be covered by the safe harbors created thereby.
Those statements include, but may not be limited to, all
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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.
ITEM 2. PROPERTIES.
The Company's executive offices and factory outlet store are located in
Nelsonville, Ohio in a two-story 25,000 square foot building adjacent to the
Company's Nelsonville manufacturing facility. The first floor of this building,
which consists of approximately 12,500 square feet, houses the Company's factory
outlet store which was opened in late 1994. The second floor houses the
Company's executive offices. The Company also owns a 5,000 square foot building,
in Nelsonville, Ohio, subject to a mortgage, which is used to house
administrative staff.
The Company owns a 98,000 square foot distribution warehouse in
Nelsonville, Ohio. This warehouse distributes the Company's finished goods.
Additionally, under a month-to-month lease, the Company leases 18,000 square
feet of warehouse space in Logan, Ohio, which it uses to store raw materials.
The Company intends to vacate the Logan facility in September 1999 and
consolidate its raw material storage into Company-owned facilities.
The Company leases a 41,000 square foot manufacturing facility in
Nelsonville, Ohio, from the William Brooks Real Estate Company, an entity owned
by certain members of the Brooks family, including Mike Brooks and Barbara
Brooks Fuller, who are also executive officers and directors of the Company. The
lease expires in April 2003 and is renewable for two five-year terms.
On a temporary basis the Company is leasing three buildings of 54,000,
16,000 and 24,000 square feet, respectively, in Newark, Ohio to store finished
goods inventory, rubber products and retail inventory. The Company intends to
vacate the Newark facilities in September 1999 and consolidate finished goods,
rubber products and retail inventory into Company-owned facilities.
Lifestyle leases a 20,500 square foot manufacturing facility and a
22,700 square foot manufacturing facility and warehouse in Puerto Rico from the
Puerto Rico Industrial Development Company under net noncancellable operating
leases, one of which expired in 1998 and one of which expires in 2002. The
Company is currently on a month-to-month basis in the facility whose lease
expired in 1998 and is currently negotiating a new long-term lease for the
facility.
Five Star's manufacturing facility, consisting of three connected
buildings and a stand-alone building, is located in a tax-free trade zone in the
Dominican Republic. Five Star leases 82,600 square feet of this facility from
the Dominican Republic Corporation for Industrial Development (the "DRCID")
under a Consolidation of Lease Contract, dated as of December 13, 1993, the term
of which expires on February 1, 2003. Five Star leases an additional stand-alone
32,000 square feet from the DRCID under a temporary lease. The Company is
currently negotiating a permanent lease for the 32,000 square foot facility.
The Company leased a 3,900 square foot retail outlet store in
Westpoint, Mississippi in October of 1998, pursuant to a lease which expires
October 30, 2000.
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The Company began construction on a finished goods distribution center
near Nelsonville, Ohio in October of 1998. The building will contain 192,000
square feet and is situated on 17.9 acres of land. The Company has an option on
5 additional acres at this site for future development.
ITEM 3. LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation which arises
in the normal course of its business. Although the ultimate resolution of
pending proceedings cannot be determined, in the opinion of management, the
resolution of such proceedings in the aggregate will not have a material adverse
effect on the Company's financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "RCKY." The following table sets forth the range of high and low
sales prices for the Common Stock for the periods indicated, as reported by the
Nasdaq National Market:
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 1997......................................... 16.25 8.25
June 30, 1997.......................................... 17.38 12.63
September 30, 1997..................................... 19.38 15.88
December 31, 1997...................................... 21.50 14.38
March 31, 1998......................................... 19.00 14.38
June 30, 1998.......................................... 17.50 13.75
September 30, 1998..................................... 14.38 7.25
December 31, 1998...................................... 8.00 5.00
On March 12, 1999, the last reported sales price of the Common Stock on
the Nasdaq National Market was $5.75 per share. As of March 12, 1999, there were
approximately 189 shareholders of record of the Common Stock.
The Company presently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. Future dividend policy will depend upon the
earnings and financial condition of the Company, the Company's need for funds
and other factors. Presently, the Line of Credit (as defined below) restricts
the payment of dividends on the Common Stock. At December 31, 1998,
approximately $2,204,540 of retained earnings was available for distribution.
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ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(in thousands, except for per share data)
TWELVE
MONTHS SIX
ENDED MONTHS
YEARS ENDED 12/31/95 ENDED YEAR ENDED JUNE 30,
12/31/98 12/31/97 12/31/96 (UNAUDITED) 12/31/95 1995 1994
-------- -------- -------- ----------- -------- ---- ----
INCOME STATEMENT DATA
Net sales................................. $88,699 $95,027 $73,148 $60,384 $36,124 $60,227 $52,895
Net income (loss)......................... 2,262 $4,761 $2,806 $(537) $(490) $1,433 $1,820
BALANCE SHEET DATA
Total assets.............................. $96,598 $80,955 $58,090 $49,081 $49,081 $59,458 $51,943
Long-term debt, less current maturities... 26,878 13,407 19,520 16,554 16,554 15,503 17,357
Shareholders' equity...................... 59,635 59,197 26,375 23,569 23,569 24,059 22,627
PER SHARE
Net income (loss):
Basic............................... $0.42 $1.16 $0.77 $(0.15) $(0.13) $0.39 $0.49
Diluted............................. $0.41 $1.10 $0.74 $(0.15) $(0.13) $0.38 $0.48
Weighted average number of shares
outstanding:
Basic............................... 5,425 4,088 3,666 3,666 3,666 3,666 3,707
Diluted............................. 5,527 4,330 3,776 3,666 3,666 3,762 3,831
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
References to Fiscal 1998 and 1997 are to Fiscal years of the Company
ended December, 31 of the respective year.
PERCENTAGE OF NET SALES
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Net Sales 100.0% 100.0% 100.0%
Costs of Goods Sold 76.9 72.9 75.3
---- ---- ----
Gross Margin 23.1 27.1 24.7
Selling General and
Administrative Expenses 19.4 17.3 16.9
---- ---- ----
Income from Operations 3.7% 9.8% 7.8%
=== === ===
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales declined $6,327,373, or 6.7%, to $88,699,413 for Fiscal 1998
versus $95,026,786 for Fiscal 1997. Rugged outdoor footwear sales decreased
$2,145,547 in Fiscal 1998 versus Fiscal 1997. This decrease resulted from lower
sales of insulated rugged outdoor footwear due to retail carryover from the
prior years selling season and unusually mild weather during the final four
months of the year. These factors caused the Company to experience substantial
order cancellations and reductions of re-orders of rugged outdoor footwear
during the second half of Fiscal 1998. Although sales of rugged outdoor footwear
declined in Fiscal 1998 versus Fiscal 1997, the category benefited from the
introduction of ROCKY(R) rubber products. Occupational footwear sales increased
$750,506 in Fiscal 1998 compared to Fiscal 1997. Casual footwear sales rose
$331,047 in Fiscal 1998 versus Fiscal 1997. Average prices for the Company's
products were approximately 2% higher in Fiscal 1998 than the prior year.
Additionally, in Fiscal 1998 the Company discontinued a contract to manufacture
shoe uppers on a private label basis for a customer.
GROSS MARGIN
Gross margin declined $5,212,343, or 20.3%, to $20,514,372 for Fiscal
1998 versus $25,726,715 for Fiscal 1997. As a percentage of net sales, gross
margin declined to 23.1% for Fiscal 1998 from 27.1% for Fiscal 1997. The
reduction in gross margin was primarily a result of lower than expected sales,
which resulted in temporary manufacturing inefficiencies. The Company attempted
to respond promptly throughout Fiscal 1998 to changes in retail demand, unusual
weather conditions, and higher than planned inventories. However, some
manufacturing inefficiencies could not be avoided due to fluctuating demand for
the Company's products. Additionally, gross margin was negatively impacted by
increased expenses associated with hardware and software upgrades to enhance
inventory management systems.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses ("SG&A") increased $791,870,
or 4.8%, to $17,208,211 for Fiscal 1998 versus $16,416,341 for Fiscal 1997. As a
percentage of net sales, SG&A increased to 19.4% for Fiscal 1998, versus
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17.3% for Fiscal 1997. The increase in SG&A for Fiscal 1998 was due to the
addition of new product managers, higher employee benefit costs and increased
advertising expenditures.
INTEREST EXPENSE
Interest expense declined $818,121, or 32.0%, to $1,734,611 for Fiscal
1998 versus $2,552,732 for Fiscal 1997. This decrease was a result of lower
outstanding balances on the Company's credit facility during Fiscal 1998, and
more favorable interest rates due to re-negotiation of the Company's credit
facility during the second quarter of Fiscal 1998. The Company received net
proceeds of $26.9 million from a follow-on common stock offering during the
fourth quarter of Fiscal 1997. The proceeds were used to reduce outstanding debt
which resulted in lower interest expense for the fourth quarter of Fiscal 1997
and first nine months of Fiscal 1998.
INCOME TAXES
Income tax expense was $426 for Fiscal 1998 versus $2,105,000 for
Fiscal 1997. The current year tax expense resulted from taxes on the Company's
Puerto Rican subsidiary offset by a benefit generated from the net operating
losses incurred in the U.S. and the Dominican Republic. The Company's effective
tax rate in Fiscal 1997 was 30.7%, which reflected favorable tax treatment
afforded income earned by the Company's subsidiary in Puerto Rico and local tax
abatements available to the Company's subsidiary in Puerto Rico. The income of
this subsidiary is exempt from taxation under Section 936 of the Internal
Revenue Code. However, Section 936 of the Internal Revenue Code has been
repealed such that future tax credits available to the Company will be capped
beginning in 2002 and terminate in 2006. The Company receives abatements on its
commonwealth and municipal taxes on its subsidiary in Puerto Rico.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net sales increased $21,878,965, or 29.9%, to $95,026,786 for Fiscal
1997, versus $73,147,821 in Fiscal 1996. The increase in net sales was
principally due to increased sales of rugged outdoor footwear, which grew $7.5
million, increased sales of occupational footwear, which grew $6.1 million, and
to a lesser extent, sales of the Company's casual footwear which grew $3.6
million. During Fiscal 1997, the Company opened 440 new accounts and continues
to benefit from diversification of its customer base with sales to new accounts
in each of its product categories. The Company principally sells its products
through mail order catalogs, sporting goods stores, specialty safety stores,
department store chains and independent retail stores. Average selling prices
were approximately 3% higher across the Company's product categories in Fiscal
1997.
GROSS MARGIN
The Company's gross margin improved $7,682,472, or 42.6%, to
$25,726,715 for Fiscal 1997, compared with $18,044,243 for Fiscal 1996. As a
percentage of net sales, gross margin rose to 27.1% for Fiscal 1997, versus
24.7% for Fiscal 1996. The increase in gross margin as a percentage of net sales
is primarily the result of higher production levels in all of the Company's
manufacturing plants and increased sales of newer products with higher gross
margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased
$4,083,822, or 33.1%, to $16,416,341 for Fiscal 1997 versus $12,332,519 for
Fiscal 1996. As a percentage of net sales, SG&A expenses rose to 17.3% for
Fiscal 1997 from 16.9% for Fiscal 1996. The increase in SG&A expense for Fiscal
1997 resulted from higher sales commissions due to the growth in net sales,
additional selling and administrative salaries, and consulting expenses
associated with the implementation of new financial and production software
systems.
INTEREST EXPENSE
Interest expense rose $449,176, or 21.4%, to $2,552,732 for Fiscal
1997, versus $2,103,556 in Fiscal 1996. The increase in interest expense is
attributable primarily to higher outstanding balances during Fiscal 1997 on the
Company's credit facility. The credit facility is used to support increased
inventory and accounts receivable balances
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related to higher net sales. The Company benefited from lower interest expense
during the fourth quarter of Fiscal 1997 due to net proceeds of $26.9 million
from a follow-on stock offering which were used in part to reduce outstanding
debt.
INCOME TAXES
Income taxes were $2,105,000 for Fiscal 1997, versus $918,154 for
Fiscal 1996. The Company's effective tax rate was 30.7% for Fiscal 1997 versus
24.7% for Fiscal 1996. The relatively low effective tax rates result from
favorable income tax treatment afforded income earned by the Company's
subsidiary in Puerto Rico. The income of this subsidiary is exempt from taxation
under Section 936 of the Internal Revenue Code. However, Section 936 of the
Internal Revenue Code has been repealed such that future tax credits available
to the Company will be capped beginning in 2002 and terminate in 2006.
Additionally, the Company receives abatements on its commonwealth and municipal
taxes on its subsidiary in Puerto Rico. The increase in the effective tax rate
in Fiscal 1997 is due to a smaller portion of the Company's income being earned
in Puerto Rico and the Dominican Republic in Fiscal 1997 versus Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company principally funds its working capital requirements and
capital expenditures through net income, borrowings under its credit facility
and other indebtedness. In Fiscal 1997 the Company received net proceeds of
$26.9 million from a follow-on common stock offering which were used primarily
to reduce outstanding debt.
Working capital is primarily used to support changes in accounts
receivable and inventory as a result of the Company's seasonal business cycle
and business expansion. These requirements are generally lowest in the months of
January through March of each year and highest during the months of May through
October of each year. In addition, the Company requires capital to support
additions to machinery, equipment and facilities as well as the introduction of
new footwear styles. The Company had working capital of $67,468,343 and
$55,987,571 on December 31, 1998 and 1997, respectively.
The Company renegotiated its credit facility during the second quarter
of Fiscal 1998, which has reduced the Company's cost of borrowed funds. The
credit facility had a maximum borrowing limit of $42,000,000 as of December 31,
1998. The borrowing limit is adjusted during the year to match the Company's
seasonal requirements for working capital. The maximum borrowing limit decreased
to $25,000,000 as of January 28, 1999 and increases to $42,000,000 as of May 16,
1999 through January 27, 2000, when it decreases to $25,000,000. The credit
facility expires May 31, 2003. As of December 31, 1998, the Company had
$15,000,000 available under the credit facility.
Cash paid for capital expenditures during Fiscal 1998 was $6,817,108,
which was funded through operating cash flows, long-term debt, and proceeds from
the Company's follow-on common stock offering in October 1997. Capital
expenditures for Fiscal 1999 are expected to be approximately $7,000,000 for
completion of a finished goods distribution facility, additional equipment to
support manufacturing, as well as lasts, dies and patterns for new footwear
styles. The Company believes it will be able to finance such additions and meet
operating expenditure requirements in Fiscal 1999 through existing cash
balances, additional long-term borrowings, and operating cash flows.
INFLATION
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of raw materials, salaries
and employee benefits. The Company attempts to minimize or offset the effects of
inflation through increased selling prices, productivity improvements, and
reduction of costs.
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YEAR 2000
Company's State of Readiness:
The Year 2000 ("Y2K") issue refers to a condition in computer software
where a two-digit field instead of a four-digit field is used to distinguish a
calendar year. Unless corrected, date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations. Such uncorrected conditions could significantly interfere with the
conduct of the Company's business, could result in disruption of its operations
and could subject it to potentially significant legal liabilities.
The Company is preparing for the consequences that Y2K may have on its
ability to rely on data processing and other automated operational functions
which are date dependent. In addition, a questionnaire is being distributed to
the Company's vendors to obtain pertinent information and assurances that their
systems and products are Y2K compliant. Finally, the Company has internal
non-information technology systems comprised primarily of building security
systems that need to be assessed for compliance. It is expected that the
assessment of the impact of the Company's vendors' systems and the Company's
non-information technology system and its hardware will be complete by June
1999. The Company will initiate testing of its internal hardware and software
and upgrade or replace mission critical equipment as necessary to achieve
compliance by June 1999. Currently, the Company is replacing its manufacturing
and financial application software that is critical to the orderly conduct of
the business. The software upgrade is expected to be completed during the second
quarter of 1999. Management believes the Company has completed an adequate
assessment of Y2K dependencies relating to critical data processing. However,
there can be no assurance that the Company's plan functions, and assessments
have identified all existing Y2K expenses. Failure to identify all Y2K expenses
could result in a materially adverse impact to the Company, although the extent
of this impact is not believed to be reasonably estimable.
Costs to Address Year 2000 Issues:
The Company currently estimates that additional expenditures of
approximately $0.3 million, including hardware and software, will be made during
Fiscal 1999 to upgrade and enhance the Company's systems. As of December 31,
1998 the Company's aggregate costs to date are approximately $2.2 million
related to computer hardware and software upgrades which were funded from
current operations. The anticipated impact and costs of the project, as well as
the date on which the Company expects to complete the project, are based on
management's best estimates using information currently available and numerous
assumptions about future events. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
plans.
Risks of the Company's Year 2000 Issues:
There can be no guarantee that the Company's efforts will prevent a
material adverse impact on its results of operations, financial conditions and
cash flows, since the Company's Y2K compliance is dependent upon key third party
vendors also being Y2K compliant on a timely basis. The possible consequences to
the Company not being fully Y2K compliant include temporary plant closings,
delays in the delivery of finished products, delays in the receipt of key
materials and supplies, invoice and collection errors, and financing issues,
including payroll. These consequences could have a material adverse impact on
the Company's results of operations, financial condition and cash flows if the
Company is unable to conduct its business in the ordinary course.
The Company's Contingency Plans:
The Company is reviewing and plans to test all mission critical systems
and major system components for Y2K compliance. It is anticipated that these
efforts will be completed by June 1999. The Company plans to incorporate Y2K
issues into its business contingency plans within this same timeframe. Worst
case scenarios are being evaluated in relation to the Company's key business
needs. The Company has not yet adopted a formal contingency plan to address the
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possibility that internal, customer, or supplier systems may not become Y2K
compliant, management will develop such plans which may be required as Fiscal
1999 evolves and the risk of such exposure, if any, becomes better clarified.
Specific timetables and phases will be established for these contingency plans.
The Company cannot currently estimate the cost, if any, associated with
contingency planning efforts that may be necessary to complete the Y2K efforts.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which will require adoption by the first quarter of Fiscal 2000.
SFAS No. 133 requires that derivatives be reported on the balance sheet at fair
value. Changes in fair value are recognized in net income or, for derivatives
which are hedging market risk related to future cash flows, in the accumulated
other comprehensive income section of shareholders' equity. The cumulative
effect of adoption is reflected in net income and accumulated other
comprehensive income, as appropriate. SFAS No. 133 will be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company has
not yet determined the effect or timing of implementation of this Statement.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for The Costs of Computer
Software Developed or Obtained for Internal Use," which revises the accounting
for software development costs. SOP 98-1 will be effective for the Company
beginning in fiscal 1999.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding the intent, belief and expectations of the
Company and its management, such as statements concerning the Company's future
capital expenditures and compliance with Y2K issues. Investors are cautioned
that all forward-looking statements involve risks and uncertainties including,
without limitation, dependence on sales forecasts, changes in consumer demand,
seasonality, impact of weather, competition, reliance on suppliers, changing
retail trends, as well as other factors set forth under the caption "Business
Risks" in this Annual Report on Form 10-K and other factors detailed from time
to time in the Company's filings with the Securities and Exchange Commission.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the
forward-looking statements included herein will prove to be accurate. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk results from fluctuations in interest
rates. The Company is also exposed to changes in the price of commodities used
in its manufacturing operations. However, commodity price risk related to the
Company's current commodities is not material as price changes in commodities
are usually passed along to the final customer. The Company does not hold any
material market risk sensitive instruments for trading purposes. The Company has
the following three items that are market rate sensitive for interest rates: (1)
Long-term debt consists of a credit facility with a balance at December 31, 1998
of $27,000,000. Interest is payable monthly at the bank's LIBOR rate (plus 100
to 160 basis points) or prime. In order to minimize the effect of the interest
rate fluctuation, the Company has entered into two interest rate swap
arrangements with a major bank for a total notional amount of $25,000,000. Under
these agreements the Company pays a weighted average fixed rate of 6% (plus 100
to 160 basis points). (2) The Company also has equipment and other obligations
at December 31, 1998 that bear interest at fixed and variable rates ranging from
3% to 8%. (3) The Company has a real estate obligation at December 31, 1998 that
bears interest at a variable rate of 7.375%.
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Assuming a hypothetical 20% change in short-term interest rates,
interest expense would not change significantly, as the interest rate swap
agreement would offset the impact.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial balance sheets as of December 31,
1998 and 1997, and the related consolidated statements of income, shareholder's
equity, and cash flows for the years ended December 31, 1998, 1997, and 1996,
together with the independent auditors' report thereon appear on pages F-1
through F-19 hereof, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS" and "INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE
OFFICERS, AND PRINCIPAL SHAREHOLDERS - Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
the 1999 Annual Meeting of Shareholders (the "Proxy Statement") to be held on
May 18, 1999, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - Meetings, Committees, and Compensation of the Board of
Directors," "- Executive Compensation," and "Compensation Committee Interlocks
and Insider Participation" in the Company's Proxy Statement, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - Ownership of Common Stock by Management" and "- Ownership of
Common Stock by Principal Shareholders," in the Company's Proxy Statement, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - Compensation Committee Interlocks and Insider Participation" in
the Company's Proxy Statement, and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) The following Financial Statements are included in this Annual Report
on Form 10-K on the pages indicated below:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997..................................................................F-2 - F3
Consolidated Statements of Income for the fiscal years
ended December 31, 1998, December 31, 1997, and
December 31, 1996..................................................................F-4
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 31, 1998, December 31, 1997, and
December 31, 1996..................................................................F-5
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1998, December 31, 1997, and
December 31, 1996..................................................................F-6
Notes to Consolidated Financial Statements for the fiscal
years ended December 31, 1998, December 31, 1997, and
December 31, 1996..................................................................F-7 - F-19
(2) The following financial statement schedule for the fiscal years ended
December 31, 1998, December 31, 1997, and December 31, 1996 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.
Independent Auditors' Report
Schedule II -- Consolidated Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the Consolidated Financial Statements or
the notes thereto.
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(3) Exhibits:
Exhibit
Number Description
- ------ -----------
3.1 Second Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
3.2 Amended and Restated Code of Regulations of the Registrant
(incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-1, registration number 33-56118 (the "Registration
Statement").
4.1 Form of Stock Certificate for the Registrant (incorporated by reference
to Exhibit 4.1 to the Registration Statement).
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and
Thirteenth of the Registrant's Amended and Restated Articles of
Incorporation (see Exhibit 3.1).
4.3 Articles I and II of the Registrant's Code of Regulations (see Exhibit
3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for executive
officers (incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (the
"1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially similar to
Exhibit 10.1.
10.3 Deferred Compensation Agreement, dated May 1, 1984, between Rocky Shoes
& Boots Co. and Mike Brooks (incorporated by reference to Exhibit 10.3
to the Registration Statement).
10.4 Information concerning Deferred Compensation Agreements substantially
similar to Exhibit 10.3.
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to Exhibit
10.6 to the Registration Statement).
10.7 Revolving Credit Loan Agreement, dated January 28, 1997, among Rocky
Shoes & Boots, Inc., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., Bank One Columbus, N.A., The Huntington National Bank, and Bank
One, Columbus, N.A., as Agent (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 Form 10-K")).
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Exhibit
Number Description
- ------ -----------
10.8 Term Loan Agreement and First Amendment to Revolving Credit Loan
Agreement, dated as of April 18, 1997, between the Registrant, Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, Columbus,
N.A., the Huntington National Bank, and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.8 to Form S-2 filed
September 11, 1997, registration number 333-35391).
10.9 Second Amendment to Revolving Credit Loan Agreement dated May 29, 1998,
among the Registrant, Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., Bank One, N.A., The Huntington National Bank, and Bank One, N.A.,
as Agent (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 (the "June 30,
1998 Form 10-Q")).
10.10 Second Amended and Restated Master Business Loan Note, dated May 29,
1998, among the Registrant, Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and payable to Bank One, N.A. (incorporated by
reference to Exhibit 10.3 of the June 30, 1998 Form 10-Q).
10.11 Second Amended and Restated Master Business Loan Note, dated May 29,
1998, among the Registrant, Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and payable to The Huntington National Bank
(incorporated by reference to Exhibit 10.3 of the June 30, 1998 Form
10-Q).
10.12 Master Agreement, dated as of February 1, 1996, by and between Bank
One, Columbus, N.A., and Rocky Shoes & Boots Co. (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the transition period ended December 31, 1995).
10.13 Indemnification Agreement, dated December 21, 1992, between the
Registrant and Mike Brooks (incorporated by reference to Exhibit 10.10
to the Registration Statement).
10.14 Information concerning Indemnification Agreements substantially similar
to Exhibit 10.13 (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1993 (the "1993 Form 10-K")).
10.15 Trademark License Agreement and Manufacturing Certification Agreement,
each dated May 14, 1994, between Rocky Shoes & Boots Co. and W. L. Gore
& Associates, Inc. (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1994 (the "1994 Form 10-K")).
10.16 Decree of Tax Exemption from the Government of the Commonwealth of
Puerto Rico (incorporated by reference to Exhibit 10.13 to the
Registration Statement).
10.16A English Translation of Addendum to Exhibit 10.16 (incorporated by
reference to Exhibit 10.13A to the Registration Statement).
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Exhibit
Number Description
- ------ -----------
10.17 Lease Agreement, dated May 1, 1998, as amended, between Rocky Shoes &
Boots Co. and William Brooks Real Estate Company regarding Nelsonville
factory (incorporated by reference to Exhibit 10.3 of the June 30, 1998
Form 10-Q).
10.18 Lease Contract, dated August 31, 1988, between Lifestyle Footwear, Inc.
and The Puerto Rico Industrial Development Company regarding factory
location 1 (incorporated by reference to Exhibit 10.15 to the
Registration Statement).
10.19 Lease Contract, undated, between Lifestyle Footwear, Inc. and The
Puerto Rico Industrial Development company regarding factory location 2
(incorporated by reference to Exhibit 10.16 to the Registration
Statement).
10.19A English translation of Exhibit 10.19 (incorporated by reference to
Exhibit 10.16A to the Registration Statement).
10.20 Lease Agreement, dated December 13, 1993, between Five Star Enterprises
Ltd. and the Dominican Republic Corporation for Industrial Development
regarding buildings and annexes of a combined manufacturing surface of
75,526 square feet, located in the Industrial Free Zone of La Vega
(incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 (the
"September 30, 1995 Form 10-Q")).
10.20A English translation of Exhibit 10.20 (incorporated by reference to
Exhibit 10.2A to the September 30, 1995 Form 10-Q).
10.21 Continuing Security Agreement, dated January 28, 1997, among Rocky
Shoes & Boots, Inc., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and Bank One, Columbus, N.A., as Agent (incorporated by reference
to Exhibit 10.18 to the 1996 Form 10-K).
10.22 Loan Purchase, Assignment and Master Amendment Agreement, dated as of
February 1, 1996, among Bank One Columbus, N.A., NBD Bank, NBD Bank, as
Agent, Rocky Shoes & Boots, Inc., Rocky Shoes & Boots, Co., Five Star
Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the transition period ended December 31, 1995).
10.23 Installment Business Loan Note, dated August 19, 1993, among Rocky
Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference
to Exhibit 10.20 to the 1994 Form 10-K).
10.24 Second Amendment to Business Loan Note, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.21 to the 1996
Form 10-K).
10.25 Term Lease Master Agreement, dated April 27, 1993, between Rocky Shoes
& Boots, Inc. and IBM Credit Corporation (incorporated by reference to
Exhibit 10.22 to the 1993 Form 10-K).
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Exhibit
Number Description
- ------ -----------
10.26 Fourth Amendment to Promissory Note, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.23 to the 1996
Form 10-K).
10.27 Acceptance Credit Agreement, dated May 4, 1993, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to
Exhibit 10.24 to the 1994 Form 10-K).
10.28 Adjustable Rate Note, dated May 23, 1988, between Nelsonville Home and
Savings Association and Rocky Shoes & Boots Co. (incorporated by
reference to Exhibit 10.25 to the Registration Statement).
10.29 First Amendment to Acceptance Credit Agreement, dated October 20, 1993,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated
by reference to Exhibit 10.26 to the 1994 Form 10-K).
10.30 Form of Company's Amended and Restated 1995 Stock Option Plan
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-8, registration number 333-67357).
10.31 Form of Stock Option Agreement under the 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.28 to the 1995 Form 10-K).
10.32 Open-End Mortgage, Security Agreement and Assignment of Rents and
Leases, dated March 30, 1995, between Rocky Shoes & Boots Co. and NBD
Bank, as Agent (incorporated by reference to Exhibit No. 10.3 to the
March 31, 1995 Form 10-Q).
10.33 Installment Business Loan Note, dated May 11, 1994, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to
Exhibit 10.30 to the 1994 Form 10-K).
10.34 Construction and Term Loan Agreement, dated October 27, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated
by reference to Exhibit 10.31 to the 1994 Form 10-K).
10.35 Promissory Note, dated October 27, 1993, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.32 to the 1994 Form 10-K).
10.36 Open-End Mortgage, Security Agreement and Assignment of Rents and
Leases, dated October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.33 to the
1994 Form 10-K).
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Exhibit
Number Description
- ------ -----------
10.37 First Amendment to Construction and Term Loan Agreement, dated January
28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co.,
Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.34 to the 1994 Form 10-K).
10.38 First Amendment to Promissory Note, dated January 28, 1994, among Rocky
Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference
to Exhibit 10.35 to the 1994 Form 10-K).
10.39 First Amendment to Open-End Mortgage, Security Agreement and Assignment
of Rents and Leases, dated January 28, 1994, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.36 to the 1994 Form 10-K).
10.40 Letter Agreement between the Registrant and the Kravetz Group, dated
August 3, 1994 (incorporated by reference to Exhibit No. 10.6 to the
March 31, 1995 Form 10-Q).
10.41 Amended and Restated Master Business Loan Note, dated March 30, 1995,
among the Registrant, Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc. (incorporated by reference to Exhibit
No. 10.4 to the March 31, 1995 Form 10-Q).
10.42 Third Amendment to Construction and Term Loan Agreement, dated as of
March 30, 1995, among the Registrant, Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by
reference to Exhibit No. 10.5 to the March 31, 1995 Form 10-Q).
10.43 Loan Agreement, dated as of October 7, 1994, between the Director of
Development of the State of Ohio and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.43 to the 1995 Form 10-K).
10.44 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots Co. to
the Director of Development of the State of Ohio (incorporated by
reference to Exhibit 10.44 to the 1995 Form 10-K).
10.45 Security Agreement, dated as of October 7, 1994, between the Director
of Development of the State of Ohio and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.45 to the 1995 Form 10-K).
10.46 Form of Employment Agreement, dated September 7, 1995, for executive
officers (incorporated by reference to Exhibit 10.5 to the September
30, 1995 Form 10-Q).
10.47 Information covering Employment Agreements substantially similar to
Exhibit 10.46 (incorporated by reference to Exhibit 10.5 to the
September 30, 1995 Form 10-Q).
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Exhibit
Number Description
- ------ -----------
10.48 Termination of Buy-Sell Agreement, dated August 18, 1998, among the
Registrant, Mike Brooks, Barbara Brooks Fuller, Patricia H. Robey, Jay
W. Brooks, and Charles Stuart Brooks (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21
to Form S-2 filed September 11, 1997, registration number 333-35391).
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
The Registrant agrees to furnish to the Commission upon its request
copies of any omitted schedules or exhibits to any Exhibit filed herewith.
(B) REPORTS ON FORM 8-K
Form 8-K, dated December 22, 1998, regarding the resignation of William
S. Moore.
(C) EXHIBITS
The exhibits to this report begin immediately following the signature
page.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors' report
thereon are included on the following pages.
-28-
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Rocky Shoes & Boots, Inc.
We have audited the consolidated financial statements of Rocky Shoes & Boots,
Inc. and subsidiaries as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and have issued our report
thereon dated March 12, 1999; such financial statements and report are included
in your 1998 Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the consolidated financial statement
schedule of Rocky Shoes & Boots, Inc. and subsidiaries, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statement taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
March 12, 1999
Columbus, Ohio
-29-
31
ROCKY SHOES & BOOTS, INC. SCHEDULE II
AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS DECEMBER 31, 1998,
1997 and 1996
Column A Column B Column C Column D Column E
Additions Charged To
--------------------
Balance at Balance at
DESCRIPTION Beginning of Costs and Other Deductions End of
Period Expenses Accounts Period
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1998 $490,000 $281,500 $(165,795) $605,705
Year ended December 31, 1997 $291,000 $413,678 $(214,678) $490,000
Year ended December 31, 1996 $156,000 $384,813 $(249,813) $291,000
RESERVE FOR OBSOLETE INVENTORY:
Year ended December 31, 1998 $291,000 $350,000 $(291,000) $350,000
Year ended December 31, 1997 $642,000 $291,000 $(642,000) $291,000
Year ended December 31, 1996 $ 0 $642,000 $ 0 $642,000
-30-
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: March 26, 1999 By: /s/ Dave Fraedrich
------------------------------------
Dave Fraedrich, Executive Vice
President, Treasurer, and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
Signature Title Date
--------- ----- ----
* Mike Brooks Chairman, President and Chief March 26, 1999
- ----------------------------------- Executive Officer (Principal
Mike Brooks Executive Officer)
/s/ Dave Fraedrich Executive Vice President, Treasurer, March 26, 1999
- ----------------------------------- Chief Financial Officer and Director
Dave Fraedrich (Principal Financial and Accounting
Officer)
* Curtis A. Loveland Secretary and Director March 26, 1999
- -----------------------------------
Curtis A. Loveland
* Leonard L. Brown Director March 26, 1999
- -----------------------------------
Leonard L. Brown
* Barbara Brooks Fuller Director March 26, 1999
- -----------------------------------
Barbara Brooks Fuller
* Stanley I. Kravetz Director March 26, 1999
- -----------------------------------
Stanley I. Kravetz
* James L. Stewart Director March 26, 1999
- -----------------------------------
James L. Stewart
* Robert D. Stix Director March 26, 1999
- -----------------------------------
Robert D. Stix
*By: /s/ Dave Fraedrich
--------------------------------
Dave Fraedrich, Attorney-in-Fact
-31-
33
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2 - F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 -F-19
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Rocky Shoes & Boots, Inc.:
We have audited the accompanying consolidated balance sheets of Rocky Shoes &
Boots, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rocky Shoes & Boots, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 12, 1999
35
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 7,232,876 $ 8,556,883
Accounts receivable - trade, net 15,595,483 17,789,329
Other receivables 1,654,471
475,593
Inventories 47,110,011 32,894,236
Deferred income taxes 1,735,699
1,474,799
Other current assets
871,533 850,018
----------- -----------
Total current assets 74,200,073 62,040,858
FIXED ASSETS, AT COST:
Property, plant and equipment 37,346,300 30,557,770
Less - accumulated depreciation (16,842,446) (12,949,316)
----------- -----------
Total fixed assets - net 20,503,854 17,608,454
DEFERRED PENSION ASSET
884,268 216,260
OTHER ASSETS 1,010,274 1,089,266
----------- -----------
TOTAL ASSETS $ 96,598,469 $ 80,954,838
============ ============
See notes to consolidated financial statements.
F-2
36
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------------
1998 1997
CURRENT LIABILITIES:
Accounts payable $ 2,194,026 $ 2,414,936
Current maturities - long-term debt 2,927,625 1,173,840
Accrued taxes - other 479,211 593,248
Accrued income taxes 66,694
Accrued salaries and wages 511,916 1,118,331
Accrued other 618,952 686,238
----------- -----------
Total current liabilities 6,731,730 6,053,287
LONG-TERM DEBT - Less current maturities 26,877,509 13,406,962
DEFERRED LIABILITIES:
Deferred compensation 173,535 241,673
Deferred income taxes 2,298,863 2,049,256
Deferred pension liability 881,761 7,130
----------- -----------
Total deferred liabilities 3,354,159 2,298,059
----------- -----------
Total liabilities 36,963,398 21,758,308
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated value; outstanding
1998 - 0 shares; 1997 - 90,000 shares 5,400
Common stock, no par value; 10,000,000 shares authorized; outstanding
1998 - 5,172,815 shares; 1997 - 5,359,668 shares 39,560,343 42,604,658
Stock held in treasury, at cost (1,226,059)
Retained earnings 20,074,728 17,812,531
----------- -----------
Total shareholders' equity 59,635,071 59,196,530
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $96,598,469 $80,954,838
=========== ===========
See notes to consolidated financial statements.
F-3
37
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
NET SALES $ 88,699,413 $ 95,026,786 $ 73,147,821
COST OF GOODS SOLD 68,185,041 69,300,071 55,103,578
------------ ------------- ------------
GROSS MARGIN 20,514,372 25,726,715 18,044,243
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 17,208,211 16,416,341 12,332,519
------------ ------------- ------------
INCOME FROM OPERATIONS 3,306,161 9,310,374 5,711,724
------------ ------------- ------------
OTHER INCOME AND (EXPENSES):
Interest expense (1,734,611) (2,552,732) (2,103,556)
Other - net 691,073 108,688 115,945
------------ ------------- ------------
Total other - net (1,043,538) (2,444,044) (1,987,611)
------------ ------------- ------------
INCOME BEFORE INCOME TAXES 2,262,623 6,866,330 3,724,113
INCOME TAX EXPENSE 426 2,105,000 918,154
------------ ------------- ------------
NET INCOME $ 2,262,197 $ 4,761,330 $ 2,805,959
============ ============= ============
NET INCOME PER COMMON SHARE:
Basic $ 0.42 $ 1.16 $ 0.77
============ ============= ============
Diluted $ 0.41 $ 1.10 $ 0.74
============ ============= ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 5,425,026 4,087,682 3,665,548
============ ============= ============
Diluted 5,526,863 4,329,907 3,776,045
============ ============= ============
See notes to consolidated financial statements.
F-4
38
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TOTAL
PREFERRED COMMON TREASURY RETAINED SHAREHOLDERS'
STOCK STOCK STOCK EARNINGS EQUITY
BALANCE, DECEMBER 31, 1995 $ 6,000 $ 14,543,947 $ (1,226,059) $ 10,245,242 $ 23,569,130
Net income - 1996 2,805,959 2,805,959
-------- ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1996 6,000 14,543,947 (1,226,059) 13,051,201 26,375,089
YEAR ENDED DECEMBER 31, 1997:
Net income 4,761,330 4,761,330
Shares issued (1,570,000) pursuant to public
offering, net of costs of $453,483 26,895,917 26,895,917
Stock options exercised 1,020,794 1,020,794
Tax benefit related to stock options 143,400 143,400
Preferred stock converted to common stock (600) 600
-------- ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1997 5,400 42,604,658 (1,226,059) 17,812,531 59,196,530
YEAR ENDED DECEMBER 31, 1998:
Net income 2,262,197 2,262,197
Treasury stock retired (124,095 shares) (1,226,059) 1,226,059
Treasury stock purchased and retired (292,600 shares) (2,038,118) (2,038,118)
Stock options exercised 214,462 214,462
Preferred stock converted to common stock (5,400) 5,400
-------- ------------ ------------- ------------ ------------
BALANCE, DECEMBER 31, 1998 $ $ 39,560,343 $ $ 20,074,728 $ 59,635,071
======== ============ ============= ============ ============
See notes to consolidated financial statements.
F-5
39
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,262,197 $ 4,761,330 $ 2,805,959
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 4,226,313 2,925,932 2,392,716
Deferred income taxes (11,293) 156,247 62,375
Deferred compensation and pension - net 138,485 (13,227) (587,852)
Loss on sale of fixed assets 837 1,213 94,614
Change in assets and liabilities:
Receivables 1,014,968 (5,176,709) (1,780,457)
Inventories (14,215,775) (7,504,334) (7,053,010)
Other current assets (21,515) (143,921) (72,212)
Other assets 58,811 78,951 198,674
Accounts payable (506,171) (711,792) 1,665,330
Accrued liabilities (854,432) (740,704) 2,105,676
-------------- -------------- -----------------
Net cash used in operating activities (7,907,575) (6,367,014) (168,187)
-------------- -------------- -----------------
CASH FLOWS FROM INVESTING
ACTIVITIES - Purchase of fixed assets (6,817,108) (4,462,236) (3,302,761)
-------------- -------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 79,835,000 77,050,000 34,913,394
Payments on long-term debt (64,610,668) (86,073,615) (32,946,783)
Proceeds from issuance of stock (net of
offering expenses) 26,895,917
Purchase of treasury stock (2,038,118)
Proceeds from exercise of stock options, including
related tax benefit 214,462 1,164,194
-------------- -------------- -----------------
Net cash provided by financing activities 13,400,676 19,036,496 1,966,611
-------------- -------------- -----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,324,007) 8,207,246 (1,504,337)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,556,883 349,637 1,853,974
-------------- -------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,232,876 $ 8,556,883 $ 349,637
============== ============== =================
See notes to consolidated financial statements.
F-6
40
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Rocky Shoes & Boots, Inc. ("Rocky
Inc.") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc.
("Lifestyle") and Five Star Enterprises Ltd. ("Five Star"), collectively
referred to as the "Company." All significant intercompany transactions
have been eliminated.
BUSINESS ACTIVITY - The Company designs, manufactures, and markets high
quality men's and women's footwear primarily under the registered
trademark, ROCKY(R). The Company maintains a nationwide network of
independent and Company sales representatives who sell the Company's
products primarily through independent shoe, sporting goods, specialty,
and uniform stores and catalogs throughout the United States. The Company
did not have any customers that accounted for more than 10% of
consolidated net sales in 1998, 1997 and 1996.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents. The Company's cash and cash equivalents are primarily held in
four banks.
TRADE RECEIVABLES - Trade receivables are presented net of the related
allowance for doubtful accounts of approximately $606,000 and $490,000 at
December 31, 1998 and 1997, respectively.
CONCENTRATION OF CREDIT RISK - The Company's exposure to credit risk is
impacted by the economic climate affecting its industry. The Company
manages this risk by performing ongoing credit evaluations of its
customers and maintains reserves for potential uncollectible accounts.
SUPPLIER AND LABOR CONCENTRATIONS - The Company purchases raw materials
from a number of domestic and foreign sources. The Company currently buys
all of its waterproof fabric, a component used in a significant portion of
the Company's shoes and boots, from one supplier (GORE-TEX(R)). The
Company has had a relationship with this supplier for over 18 years and
has no reason to believe that such relationship will not continue.
A significant portion of the Company's shoes and boots are produced in the
Company's Dominican Republic operations. The Company has conducted
operations in the Dominican Republic since 1987 and is not aware of any
governmental or economic restrictions that would alter its current
operations.
F-7
41
INVENTORIES - Inventories are valued at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
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 5-12
Furniture and fixtures 8-12
Lasts, dies, and patterns 7-12
Effective January 1, 1998, the Company changed the estimated useful life of
certain computer software costs. This change decreased 1998 net income by
$447,600, or $.08 per diluted share. This change was made to better reflect how
the asset is expected to be used over time and to provide a better matching of
revenues and expenses.
For income tax purposes the Company generally computes depreciation utilizing
accelerated methods.
ADVERTISING - The Company expenses advertising costs as incurred. Advertising
expense was $2,323,372, $1,334,034 and $1,399,398 for the years ended December
31, 1998, 1997 and 1996, respectively.
REVENUE RECOGNITION - Revenue is recognized at the time footwear product is
shipped to the customer and is recorded net of estimated sales discounts and
returns.
PER SHARE INFORMATION - Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share",
which requires retroactive adoption for all periods presented. Under SFAS No.
128, 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 effect of the Company's
Series A preferred stock and stock options. A reconciliation of the shares used
in the basic and diluted income per share computations is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
Basic - Weighted average shares outstanding 5,425,026 4,087,682 3,665,548
Dilutive securities:
Preferred stock 7,365 85,549 92,857
Stock options 94,472 156,676 17,640
--------- --------- ---------
Diluted - Weighted average shares outstanding 5,526,863 4,329,907 3,776,045
========= ========= =========
No adjustments to net income were required for purposes of computing diluted per
share amounts.
F-8
42
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is required to be adopted for the
Company's 2000 annual financial statements. The Company has not yet determined
what, if any, impact the adoption of this standard will have on its financial
statements.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which will require adoption in
1999. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company has not yet
determined what, if any, impact the adoption of this statement will have on its
financial statements.
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company is managed in one operating segment, footwear.
Within their one operating segment, the Company has identified three product
groups; Rugged Outdoor, Occupational, and Handsewn Casual. The following is
supplemental information on net sales by product group:
RUGGED HANDSEWN
OUTDOOR OCCUPATIONAL CASUAL TOTAL
------------ ------------ ----------- ------------
1998 $ 53,097,608 $ 26,594,865 $ 9,006,940 $ 88,699,413
1997 58,661,798 27,232,590 9,132,398 95,026,786
1996 48,693,814 19,616,520 4,837,487 73,147,821
RECLASSIFICATIONS - Certain reclassifications have been made to prior years'
amounts to conform with the classifications of such amounts for 1998.
2. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
--------------------------------------
1998 1997
------------ ------------
Raw materials $ 7,917,557 $ 6,210,161
Work-in-process 5,184,591 3,348,275
Finished goods 31,532,217 21,140,951
Factory outlet finished goods 2,475,646 2,194,849
------------ ------------
Total $ 47,110,011 $ 32,894,236
============ ============
F-9
43
3. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
--------------------------------------
1998 1997
------------ ------------
Land $ 544,816 $ 224,115
Building and improvements 6,346,976 5,769,949
Machinery and equipment 19,622,714 17,187,561
Furniture and fixtures 2,959,471 2,303,893
Lasts, dies and patterns 5,157,100 4,482,705
Construction work-in-progress 2,715,223 589,547
------------ ------------
Total 37,346,300 30,557,770
Less - accumulated depreciation (16,842,446) (12,949,316)
------------ ------------
Net fixed assets $ 20,503,854 $ 17,608,454
============ ============
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
-----------------------------
1998 1997
------------ ------------
Bank - revolving credit facility $ 27,000,000 $ 10,600,000
Equipment and other obligations 2,495,129 3,388,242
Real estate obligations 70,741 83,634
Other 239,264 508,926
------------ ------------
Total long-term debt 29,805,134 14,580,802
Less current maturities 2,927,625 1,173,840
------------ ------------
Net long-term debt $ 26,877,509 $ 13,406,962
============ ============
The Company has a loan agreement with a bank, as amended, with maximum
borrowings that range from $25,000,000 (from January 28 to May 15 annually) to
$42,000,000 (from May 16 through January 27 annually). Interest on the revolving
credit facility is payable monthly at the bank's LIBOR rate (plus 100 to 160
basis points) or prime, and the principal is due May 31, 2003. The weighted
average interest rate for the outstanding balance at December 31, 1998 was
6.63%. At December 31, 1998, $2,000,000 was classified as current based on the
scheduled reduction in the maximum borrowings that occurs on January 28, 1999.
Any amounts borrowed under the agreement are secured by the accounts receivable,
inventories, and equipment of the Company. The agreement contains restrictive
covenants which, among others, require the Company to maintain a certain level
of tangible net worth, as defined. At December 31, 1998 approximately $2,204,540
of retained earnings are available for distribution.
F-10
44
Equipment and other obligations at December 31, 1998 bear interest at fixed and
variable rates ranging from 3% to 8% and are payable in monthly installments to
2002. The obligations are secured by equipment and are subject to the security
agreement and covenants applicable to the revolving credit facility.
Real estate obligation at December 31, 1998 bear interest at a variable rate of
7.375% and is payable in monthly installments through 2003. The obligation is
secured by real estate and is subject to the security agreement and covenants
applicable to the revolving credit facility.
The Company entered into two interest rate swap agreements with a major bank for
a total notional amount of $25,000,000 with average maturities of seven years to
reduce the impact of changes in interest rates on its variable rate long-term
debt. The Company is exposed to credit loss only in the event of nonperformance
by the bank on the interest rate swap agreements, which the Company does not
anticipate. The fair value of the interest rate swaps at December 31, 1998 is an
unrealized loss of $1,105,676, that represents the amount at which they could be
settled, based on estimates obtained from dealers.
At December 31, 1998 essentially all trade accounts receivable, inventories and
property are held as collateral for the Company's long-term debt.
Long-term debt matures as follows for the years ended December 31:
1999 $ 2,927,625
2000 1,691,372
2001 158,908
2002 18,556
2003 8,673
Thereafter 25,000,000
-----------
Total $29,805,134
===========
The estimated fair value of the Company's long-term obligations approximated
their carrying amount at December 31, 1998 and 1997, based on current market
prices for the same or similar issues or on debt available to the Company with
similar rates and maturities.
5. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $840,000, $643,000, $541,000, in rent expense under
operating lease arrangements for the years ended December 31, 1998, 1997 and
1996, respectively.
Included in total rent expense above are monthly payments of $7,000 for 1998 and
$6,000 for 1997 and 1996, respectively, for the Company's Ohio manufacturing
facility leased from an entity in which the owners are also shareholders of the
Company.
F-11
45
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
1999 $ 647,000
2000 287,000
2001 162,000
2002 133,000
2003 30,000
-----------
Total $ 1,259,000
===========
6. INCOME TAXES
Rocky Inc. and its wholly-owned subsidiary doing business in Puerto Rico,
Lifestyle, are subject to U.S. Federal income taxes; however, the Company's
income earned in Puerto Rico is allowed favorable tax treatment under Section
936 of the Internal Revenue Code if conditions as defined therein are met. Five
Star is incorporated in the Cayman Islands and conducts its operations in a
"free trade zone" in the Dominican Republic and, accordingly, is currently not
subject to Cayman Islands or Dominican Republic income taxes.
At December 31, 1998 a provision has not been made for U.S. taxes on the
accumulated undistributed earnings of Five Star through the third quarter of
1996 of approximately $3,079,000 that would become payable upon repatriation to
the United States. In addition, the Company has not provided any U.S. tollgate
taxes on approximately $2,257,000 of accumulated undistributed earnings of
Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if
such earnings were repatriated to the United States. It is the intention of the
Company to reinvest all such earnings. If the Five Star and Lifestyle
undistributed earnings were distributed to the Company in the form of dividends,
the related taxes on such distributions would be approximately $1,047,000 and
$226,000, respectively.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Accordingly, deferred
income taxes have been provided for the temporary differences between the
financial reporting and the income tax basis of the Company's assets and
liabilities by applying enacted statutory tax rates applicable to future years
to the basis differences.
F-12
46
Income taxes (benefits) are summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
Federal:
Current $ (76,294) $1,556,631 $ 640,053
Deferred 10,357 146,143 115,883
---------- ---------- ----------
Total Federal (65,937) 1,702,774 755,936
---------- ---------- ----------
State and local:
Current 88,013 392,122 215,726
Deferred (21,650) 10,104 (53,508)
---------- ---------- ----------
Total state and local 66,363 402,226 162,218
---------- ---------- ----------
Total $ 426 $2,105,000 $ 918,154
========== ========== ==========
A reconciliation of recorded Federal income tax expense (benefit) to the
expected expense computed by applying the Federal statutory rate of 34% for all
periods to income before income taxes follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
Expected expense at statutory rate $ 769,286 $ 2,334,552 $ 1,266,198
Decrease in income taxes resulting from:
Exempt income from operations in
Puerto Rico, net of tollgate taxes (802,791) (476,493) (279,414)
Exempt income from Dominican
Republic operations (158,075)
State and local income taxes (22,563) (136,757) (55,154)
Other - net (9,869) (18,528) (17,619)
----------- ----------- -----------
Total $ (65,937) $ 1,702,774 $ 755,936
=========== =========== ===========
F-13
47
Deferred income taxes recorded in the consolidated balance sheets at December
31, 1998 and 1997 consist of the following:
DECEMBER 31,
-----------------------------
1998 1997
Deferred tax assets:
State and local income taxes $ 47,546 $ 55,644
Asset valuation allowances 454,494 398,959
Pension and deferred compensation 197,535 296,952
Net operating loss carryforwards 215,445 287,260
Inventories 1,131,231 812,437
----------- -----------
Total deferred tax assets 2,046,251 1,851,252
----------- -----------
Deferred tax liabilities:
Fixed assets (1,499,613) (1,706,586)
Prepaid assets (34,173)
Tax on Five Star earnings (64,339) (64,339)
Tollgate tax on Lifestyle earnings (1,011,290) (654,784)
----------- -----------
Total deferred tax liabilities (2,609,415) (2,425,709)
----------- -----------
Net deferred tax liability $ (563,164) $ (574,457)
=========== ===========
At December 31, 1998, the Company has approximately $634,000 of net
operating loss carryforwards for Federal income tax purposes with annual
utilization limitations over the next three years and expiring in 2010.
Effective during 1996 the Company began to provide U.S. income taxes on
the earnings of Five Star based on the Company's intention to repatriate
these earnings in the future.
7. RETIREMENT PLANS
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits", which standardizes the disclosure
requirements for pensions and other postretirement benefits. The
disclosures that follow are in accordance with the requirements of SFAS
No. 132.
The Company sponsors separate noncontributory defined benefit pension
plans covering the union and non-union workers of the Company's Ohio and
Puerto Rico operations. Benefits under the union plan are primarily based
upon negotiated rates and years of service. Benefits under the non-union
plan are based upon years of service and highest compensation levels as
defined. Annually, the Company contributes to the plans at least the
minimum amount required by regulation.
F-14
48
Net pension cost of the Company's plans is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
Service cost $ 273,091 $ 215,263 $ 182,955
Interest 317,725 284,420 231,140
Actual loss (return) on plan assets 42,745 (953,212) (306,853)
Amortization and deferral (327,398) 781,589 177,854
--------- --------- ---------
Net pension cost $ 306,163 $ 328,060 $ 285,096
========= ========= =========
The funded status of the Company's plans and reconciliation of accrued pension
cost at December 31, 1998 and 1997 are presented below (information with respect
to benefit obligations and plan assets is as of September 30):
DECEMBER 31,
-----------------------------
1998 1997
Change in benefit obligation:
Benefit obligation at beginning of the year $ 4,486,537 $ 4,082,414
Service cost 273,091 215,263
Interest cost 317,725 284,420
Actuarial gain 186,659 0
Amendments 233,278 0
Exchange (gain)/loss 130,596 50,503
Benefits paid (163,972) (146,063)
----------- -----------
Benefit obligation at end of year $ 5,463,914 $ 4,486,537
=========== ===========
Change in plan assets:
FV of plan assets at beginning of year $ 3,897,093 $ 2,669,944
Actual return on plan assets (42,745) 953,212
Employer contribution 216,000 420,000
Benefits paid (163,972) (146,063)
----------- -----------
FV of plan assets at end of year $ 3,906,376 $ 3,897,093
=========== ===========
Funded status $(1,557,538) $ (589,444)
Remaining unrecognized benefit obligation existing 288,146 316,039
Unrecognized prior service costs due to plan amendments 748,678 562,859
Unrecognized net loss (gain) 423,221 (296,784)
Adjustment required to recognize minimum liability (884,268) (216,260)
Additional contributions (September 30-December31) 100,000 216,460
----------- -----------
Accrued pension cost $ (881,761) $ (7,130)
=========== ===========
The assets of the plans consist primarily of common stocks, bonds, and cash
equivalents. The assets of the plans include 43,400 and 31,900 shares of the
Company's common stock with a market value of
F-15
49
$254,975 and $576,210 at September 30, 1998 and 1997, respectively. The
Company's unrecognized benefit obligations existing at the date of transition
for the union and non-union plans are being amortized over 23 and 21 years,
respectively. Actuarial assumptions used in the accounting for the plans were as
follows:
DECEMBER 31,
---------------------
1998 1997
Discount rate 6.75 % 7.00 %
Average rate of increase in compensation levels
(non-union only) 3.0 % 3.0 %
Expected long-term rate of return on plan assets 9.0 % 9.0 %
SFAS No. 87, "Employers' Accounting for Pensions," generally requires the
Company to recognize a minimum liability in instances in which a plan's
accumulated benefit obligation exceeds the fair value of plan assets. In
accordance with the Statement, the Company has recorded in the
accompanying financial statements a non-current pension liability and a
non-current intangible asset of $884,268, and $216,260 as of December 31,
1998 and 1997, respectively.
8. CAPITAL STOCK
The Company has authorized 250,000 shares of voting preferred stock
without par value. No shares are issued or outstanding. Also, the Company
has authorized 250,000 shares of non-voting preferred stock without par
value. Of these, 125,000 shares have been designated Series A non-voting
convertible preferred stock with a stated value of $.06 per share, of
which 0 and 90,000 shares are issued and 0 and 82,857 shares are
outstanding at December 31, 1998 and 1997, respectively. In accordance
with its terms, all of the outstanding Series A preferred stock was
converted into common shares of the Company on a one for one basis on
February 3, 1998.
In November 1997, the Company's Board of Directors adopted a Rights
Agreement which provides for one preferred share purchase right to be
associated with each share of the Company's outstanding common stock.
Shareholders exercising these rights would become entitled to purchase
shares of Series B Junior Participating Cumulative Preferred Stock. The
rights may be exercised after the time when a person or group of persons
without the approval of the Board of Directors acquire beneficial
ownership of 20 percent or more of the Company's common stock or announce
the initiation of a tender or exchange offer which if successful would
cause such person or group to beneficially own 20 percent or more of the
common stock. Such exercise may ultimately entitle the holders of the
rights to purchase for $80 per right, common stock of the Company having a
market value of $160. The person or groups effecting such 20 percent
acquisition or undertaking such tender offer will not be entitled to
exercise any rights. These rights expire November 2007 unless earlier
redeemed by the Company under circumstances permitted by the Rights
Agreement.
The Company reacquired 124,095 and 292,600 shares of common stock in 1994
and 1998 for $1,226,059 and $2,038,118, respectively. In December 1998,
the Board of Directors approved the retirement of all shares held in
treasury (total of 416,695 shares).
On January 28, 1999, the Board of Directors increased the number of shares
that may be purchased by the Company under its share repurchase program
from 300,000 to 600,000. On February 2, 1999, the
F-16
50
Company purchased for treasury under this program 245,000 shares for
$1,347,504 in a negotiated private transaction.
The Company adopted a Stock Option Plan in 1992 which provides for the
issuance of options to purchase up to 400,000 common shares of the
Company. On October 11, 1995, the Company adopted the 1995 Stock Option
Plan which provides for the issuance of options to purchase up to an
additional 400,000 common shares of the Company. In May 1998, the Company
adopted the Amended and Restated 1995 Stock Option Plan which provides for
the issuance of options to purchase up to an additional 500,000 common
shares of the Company. All employees, officers, directors, consultants and
advisors providing services to the Company are eligible to receive options
under the Plans. In addition, the Plans provide for the annual issuance of
options to purchase 5,000 (3,000 prior to January 1, 1998) shares of
common stock to each non-employee director of the Company. The plans
generally provide for grants with the exercise price equal to fair value
on the date of grant, graduated vesting periods of up to 5 years, and
lives not exceeding 10 years. The following summarizes all stock option
transactions from January 1, 1996 through December 31, 1998:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at December 31, 1995 384,900 $ 9.34
Issued 93,000 6.25
Forfeited (30,000) 8.81
------- ---------
Outstanding at December 31, 1996 447,900 8.74
Issued 85,500 9.37
Exercised (114,120) 8.94
Forfeited (11,320) 8.28
------- ---------
Outstanding at December 31, 1997 407,960 8.82
Issued 210,000 14.44
Exercised (22,890) 9.37
Forfeited (34,660) 9.47
------- ---------
Outstanding at December 31, 1998 560,410 $ 10.86
======= =========
Options exerciseable at December 31:
1996 240,253 $ 9.62
1997 235,140 $ 9.24
1998 359,785 $ 10.01
F-17
51
The following table summarizes information about options outstanding at
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------ -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$5.625 - $6.50 90,250 4.9 $ 5.97 65,000 $ 5.91
$7.50 - $8.875 135,750 5.2 $ 8.56 86,875 $ 8.57
$9.50 - $10.125 133,910 2.8 $ 9.81 132,410 $ 9.81
$13.125 - $20.00 200,500 6.8 $ 15.33 75,500 $ 15.55
------- -------
Total 560,410 5.2 $ 10.86 359,785 $ 10.01
======= =======
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation costs for
the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123, the Company's net income and net income per
share would have resulted in the amounts as reported below. In determining
the estimated fair value of each option granted on the date of grant the
Company uses the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the years ended December
31, 1998, 1997, and 1996, respectively; dividend yield of 0%; expected
volatility of 48%, 40% and 47%; risk-free interest rates of 5.29%, 6.40%,
and 6.50%; and expected life of 6 years. The weighted average grant date
fair value of options issued during the years ended December 31, 1998, 1997
and 1996 was $8.55, $4.62, and $3.39, respectively.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
Net income:
As reported $ 2,262,197 $ 4,761,330 $ 2,805,959
Pro forma $ 1,301,976 $ 4,498,370 $ 2,561,260
Income per share:
As reported:
Basic $ 0.42 $ 1.16 $ 0.77
Diluted $ 0.41 $ 1.10 $ 0.74
Pro forma:
Basic $ 0.24 $ 1.10 $ 0.70
Diluted $ 0.24 $ 1.04 $ 0.68
The pro forma amounts are not representative of the effects on reported net
income for future years.
F-18
52
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
Interest $ 1,756,078 $ 2,619,374 $ 2,066,365
=========== =========== ===========
Federal, state and local
income taxes - net of refunds $ 1,210,445 $ 2,306,150 $ (813,225)
=========== =========== ===========
The Company entered into no capital lease arrangements during the year
ended December 31, 1998. During the years ended December 31, 1997 and 1996,
the Company entered into capital lease arrangements for certain equipment
which had a present value of $474,743 and $216,832, respectively. Accounts
payable at December 31, 1998, 1997 and 1996 include a total of $418,278,
$133,017 and $42,994, respectively, relating to the purchase of fixed
assets.
* * * * * *
F-19
53
ROCKY SHOES & BOOTS, INC.
------------------------
EXHIBIT INDEX
TO
ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
---------------------------
54
Exhibit
Number Description
- ------ -----------
3.1 Second Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
3.2 Amended and Restated Code of Regulations of the Registrant
(incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-1, registration number 33-56118 (the "Registration
Statement").
4.1 Form of Stock Certificate for the Registrant (incorporated by reference
to Exhibit 4.1 to the Registration Statement.
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and
Thirteenth of the Registrant's Amended and Restated Articles of
Incorporation (see Exhibit 3.1).
4.3 Articles I and II of the Registrant's Code of Regulations (see Exhibit
3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for executive
officers (incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (the
"1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially similar to
Exhibit 10.1.
10.3 Deferred Compensation Agreement, dated May 1, 1984, between Rocky Shoes
& Boots Co. and Mike Brooks (incorporated by reference to Exhibit 10.3
to the Registration Statement).
10.4 Information concerning Deferred Compensation Agreements substantially
similar to Exhibit 10.3.
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to Exhibit
10.6 to the Registration Statement).
10.7 Revolving Credit Loan Agreement, dated January 28, 1997, among Rocky
Shoes & Boots, Inc., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., Bank One Columbus, N.A., The Huntington National Bank, and Bank
One, Columbus, N.A., as Agent (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 Form 10-K")).
10.8 Term Loan Agreement and First Amendment to Revolving Credit Loan
Agreement, dated as of April 18, 1997, between the Registrant, Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, Columbus,
N.A., the Huntington National Bank, and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.8 to Form S-2 filed
September 11, 1997, registration number 333-35391).
55
Exhibit
Number Description
- ------ -----------
10.9 Second Amendment to Revolving Credit Loan Agreement dated May 29, 1998,
among the Registrant, Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., Bank One, N.A., The Huntington National Bank, and Bank One, N.A.,
as Agent (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 (the "June 30,
1998 Form 10-Q")).
10.10 Second Amended and Restated Master Business Loan Note, dated May 29,
1998, among the Registrant, Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and payable to Bank One, N.A. (incorporated by
reference to Exhibit 10.3 of the June 30, 1998 Form 10-Q).
10.11 Second Amended and Restated Master Business Loan Note, dated May 29,
1998, among the Registrant, Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and payable to Bank One, N.A. (incorporated by
reference to Exhibit 10.3 of the June 30, 1998 Form 10-Q).
10.12 Master Agreement, dated as of February 1, 1996, by and between Bank
One, Columbus, N.A., and Rocky Shoes & Boots Co. (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the transition period ended December 31, 1995).
10.13 Indemnification Agreement, dated December 21, 1992, between the
Registrant and Mike Brooks (incorporated by reference to Exhibit 10.10
to the Registration Statement).
10.14 Information concerning Indemnification Agreements substantially similar
to Exhibit 10.13 (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1993 (the "1993 Form 10-K")).
10.15 Trademark License Agreement and Manufacturing Certification Agreement,
each dated May 14, 1994, between Rocky Shoes & Boots Co. and W. L. Gore
& Associates, Inc. (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1994 (the "1994 Form 10-K")).
10.16 Decree of Tax Exemption from the Government of the Commonwealth of
Puerto Rico (incorporated by reference to Exhibit 10.13 to the
Registration Statement).
10.16A English Translation of Addendum to Exhibit 10.16 (incorporated by
reference to Exhibit 10.13A to the Registration Statement).
10.17 Lease Agreement, dated May 1, 1998, as amended, between Rocky Shoes &
Boots Co. and William Brooks Real Estate Company regarding Nelsonville
factory (incorporated by reference to Exhibit 10.3 of the June 30, 1998
Form 10-Q).
10.18 Lease Contract, dated August 31, 1988, between Lifestyle Footwear, Inc.
and The Puerto Rico Industrial Development Company regarding factory
location 1 (incorporated by reference to Exhibit 10.15 to the
Registration Statement).
56
Exhibit
Number Description
- ------ -----------
10.19 Lease Contract, undated, between Lifestyle Footwear, Inc. and The
Puerto Rico Industrial Development company regarding factory location 2
(incorporated by reference to Exhibit 10.16 to the Registration
Statement).
10.19A English translation of Exhibit 10.19 (incorporated by reference to
Exhibit 10.16A to the Registration Statement).
10.20 Lease Agreement, dated December 13, 1993, between Five Star Enterprises
Ltd. and the Dominican Republic Corporation for Industrial Development
regarding buildings and annexes of a combined manufacturing surface of
75,526 square feet, located in the Industrial Free Zone of La Vega
(incorporated by reference to Exhibit 10.17 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 (the
"September 30, 1995 Form 10-Q")).
10.20A English translation of Exhibit 10.20 (incorporated by reference to
Exhibit 10.2A to the September 30, 1995 Form 10-Q).
10.21 Continuing Security Agreement, dated January 28, 1997, among Rocky
Shoes & Boots, Inc., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and Bank One, Columbus, N.A., as Agent (incorporated by reference
to Exhibit 10.18 to the 1996 Form 10-K).
10.22 Loan Purchase, Assignment and Master Amendment Agreement, dated as of
February 1, 1996, among Bank One Columbus, N.A., NBD Bank, NBD Bank, as
Agent, Rocky Shoes & Boots, Inc., Rocky Shoes & Boots, Co., Five Star
Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the transition period ended December 31, 1995).
10.23 Installment Business Loan Note, dated August 19, 1993, among Rocky
Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference
to Exhibit 10.20 to the 1994 Form 10-K).
10.24 Second Amendment to Business Loan Note, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.21 to the 1996
Form 10-K).
10.25 Term Lease Master Agreement, dated April 27, 1993, between Rocky Shoes
& Boots, Inc. and IBM Credit Corporation (incorporated by reference to
Exhibit 10.22 to the 1993 Form 10-K).
10.26 Fourth Amendment to Promissory Note, dated January 28, 1997, among
Rocky Shoes & Boots, Inc., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.23 to the 1996
Form 10-K).
10.27 Acceptance Credit Agreement, dated May 4, 1993, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to
Exhibit 10.24 to the 1994 Form 10-K).
57
Exhibit
Number Description
- ------ -----------
10.28 Adjustable Rate Note, dated May 23, 1988, between Nelsonville Home and
Savings Association and Rocky Shoes & Boots Co. (incorporated by
reference to Exhibit 10.25 to the Registration Statement).
10.29 First Amendment to Acceptance Credit Agreement, dated October 20, 1993,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated
by reference to Exhibit 10.26 to the 1994 Form 10-K).
10.30 Form of Company's Amended and Restated 1995 Stock Option Plan
(incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-8, registration number 333-67357).
10.31 Form of Stock Option Agreement under the 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.28 to the 1995 Form 10-K).
10.32 Open-End Mortgage, Security Agreement and Assignment of Rents and
Leases, dated March 30, 1995, between Rocky Shoes & Boots Co. and NBD
Bank, as Agent (incorporated by reference to Exhibit No. 10.3 to the
March 31, 1995 Form 10-Q).
10.33 Installment Business Loan Note, dated May 11, 1994, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to
Exhibit 10.30 to the 1994 Form 10-K).
10.34 Construction and Term Loan Agreement, dated October 27, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated
by reference to Exhibit 10.31 to the 1994 Form 10-K).
10.35 Promissory Note, dated October 27, 1993, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.32 to the 1994 Form 10-K).
10.36 Open-End Mortgage, Security Agreement and Assignment of Rents and
Leases, dated October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.33 to the
1994 Form 10-K).
10.37 First Amendment to Construction and Term Loan Agreement, dated January
28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co.,
Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.34 to the 1994 Form 10-K).
10.38 First Amendment to Promissory Note, dated January 28, 1994, among Rocky
Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference
to Exhibit 10.35 to the 1994 Form 10-K).
58
Exhibit
Number Description
- ------ -----------
10.39 First Amendment to Open-End Mortgage, Security Agreement and Assignment
of Rents and Leases, dated January 28, 1994, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.36 to the 1994 Form 10-K).
10.40 Letter Agreement between the Registrant and the Kravetz Group, dated
August 3, 1994 (incorporated by reference to Exhibit No. 10.6 to the
March 31, 1995 Form 10-Q).
10.41 Amended and Restated Master Business Loan Note, dated March 30, 1995,
among the Registrant, Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc. (incorporated by reference to Exhibit
No. 10.4 to the March 31, 1995 Form 10-Q).
10.42 Third Amendment to Construction and Term Loan Agreement, dated as of
March 30, 1995, among the Registrant, Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by
reference to Exhibit No. 10.5 to the March 31, 1995 Form 10-Q).
10.43 Loan Agreement, dated as of October 7, 1994, between the Director of
Development of the State of Ohio and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.43 to the 1995 Form 10-K).
10.44 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots Co. to
the Director of Development of the State of Ohio (incorporated by
reference to Exhibit 10.44 to the 1995 Form 10-K).
10.45 Security Agreement, dated as of October 7, 1994, between the Director
of Development of the State of Ohio and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.45 to the 1995 Form 10-K).
10.46 Form of Employment Agreement, dated September 7, 1995, for executive
officers (incorporated by reference to Exhibit 10.5 to the September
30, 1995 Form 10-Q).
10.47 Information covering Employment Agreements substantially similar to
Exhibit 10.46 (incorporated by reference to Exhibit 10.5 to the
September 30, 1995 Form 10-Q).
10.48 Termination of Buy-Sell Agreement, dated August 18, 1998, among the
Registrant, Mike Brooks, Barbara Brooks Fuller, Patricia H. Robey, Jay
W. Brooks, and Charles Stuart Brooks (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21
to Form S-2 filed September 11, 1997, registration number 333-35391).
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.