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, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-21026
ROCKY SHOES & BOOTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO NO. 31-1364046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
(Address of principal executive offices, including zip code)
(740) 753-1951
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
without par value
Preferred Stock
Purchase Rights
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. YES [X] NO []
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X}
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $28,011,583 on March 19,
2002.
There were 4,498,965 shares of the Registrant's Common Stock
outstanding on March 19, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2002 Annual
Meeting of Shareholders are incorporated by reference in Part III.
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business - Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
PART I
ITEM 1. BUSINESS.
Rocky Shoes & Boots, Inc. has two subsidiaries: Five Star Enterprises
Ltd. ("Five Star"), a Cayman Islands corporation, which operates a manufacturing
facility in La Vega, Dominican Republic, and Lifestyle Footwear, Inc.
("Lifestyle"), a Delaware corporation, which operates a manufacturing facility
in Moca, Puerto Rico. Unless the context otherwise requires, all references to
"Rocky" or the "Company" include Rocky Shoes & Boots, Inc. and its subsidiaries.
OVERVIEW
The Company is the successor to the business of The Wm. Brooks Shoe
Company, a company established in 1932 by William Brooks, who was later joined
by F. M. Brooks, the grandfather of the Company's current Chairman, President
and Chief Executive Officer, Mike Brooks. The business was sold in 1959 to a
company headquartered in Lancaster, Ohio. John W. Brooks, the father of Mike
Brooks, remained as an employee of the business when it was sold. In 1975, John
W. Brooks formed John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co.
("Rocky Co.")) as an Ohio corporation, reacquired the Nelsonville, Ohio
operating assets of the original company and moved the business's principal
executive offices back to Nelsonville, Ohio. In 1993, the Company, Rocky Co.,
Lifestyle and Five Star were parties to a reorganization, and in 1996, Rocky Co.
was merged with and into the Company, resulting in the Company's present
corporate structure.
Most of the Company's footwear is manufactured in the Company's
facilities located in the Dominican Republic and Puerto Rico, and the balance of
the footwear is sourced from factories in the Far East. The Company's footwear
is distributed nationwide and in Canada from the Company's finished goods
distribution facility located near Logan, Ohio.
In September 2001, the Board of Directors approved a plan to
consolidate and realign the Company's footwear manufacturing operations. Under
this plan, the Company moved the footwear manufacturing operations at the
Nelsonville, Ohio factory to the Company's factory in Puerto Rico. The
restructuring plan was completed in fourth quarter of 2001.
In the past, the Company has benefited from a relatively low effective
tax rate. Rocky Inc. and its wholly-owned subsidiary doing business in Puerto
Rico, Lifestyle, are subject to U.S. Federal income taxes; however, the
Company's income earned in Puerto Rico is allowed favorable tax treatment under
Section 936 of the Internal Revenue Code if conditions as defined therein are
met. Five Star is incorporated in the Cayman Islands and conducts its operations
in a "free trade zone" in the Dominican Republic and, accordingly, is currently
not subject to Cayman Islands or Dominican Republic income taxes. Thus, the
Company is not subject to foreign income taxes. As of December 31, 2001, a
provision has not been made for U.S. taxes on the accumulated undistributed
earnings of Five Star through December 31, 2001 of approximately $5,309,000 that
would become payable upon repatriation to the United States. It is the intention
of the Company to reinvest all such earnings of Five Star in operations and
facilities outside of the United States.
The Company operates in one financial reporting segment, footwear. The
footwear segment has several major product lines. Financial information,
including revenues, pre-tax income, and assets are included in the consolidated
financial statements.
ROCKY(R) is a federally registered trademark of Rocky Shoes & Boots,
Inc. This report also refers to trademarks of corporations other than the
Company. See "Business - Patents, Trademarks and Trade Names."
2
STRATEGY
The Company's objective is to design, supply and market innovative,
high performance, branded footwear and accessory products that enhance
shareholder value while improving the quality of life of our employees,
customers and the communities in which we operate. Key elements of the Company's
strategy are as follows:
Leverage the ROCKY Brand. The Company believes the ROCKY brand has
become a recognizable and established name for performance and quality conscious
consumers in the rugged outdoor and occupational segments of the men's footwear
market. The Company intends to continue leveraging ROCKY with emphasis on the
occupational shoe market and complementary products, such as socks and
accessories in an effort to increase brand recognition.
Build customer and consumer relationships. The Company believes it can
improve customer and consumer relationships through innovative sales and
marketing methods. These enhanced relationships will enable the Company to
better understand and satisfy our customer's and consumer's needs.
Maximize benefit of current infrastructure. The Company believes it
must more extensively utilize the recent significant investments made in
distribution and information systems. These systems will enable the Company to
better service its customers in a more cost efficient manner.
Focus future investment. The Company believes it needs to continue as
the leader in design and engineering of new and innovative products and to focus
future investments on achieving this goal.
Expand Product Sourcing. The Company's sourced products represented
approximately 41% of net sales in 2001. The Company sources products which are
manufactured to its specifications from independent manufacturers in the Far
East. This enables the Company to offer product for sale at price points that
cannot generally be achieved with products manufactured in its own plants.
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 MILITARY
-------------- ------------ ------ --------
TARGET MARKET......... Hunters and outdoorsmen Law enforcement and Retail customers of U.S. government
military personnel, premium casual wear
security guards, postal
workers, paramedics,
industrial workers and
construction workers
SUGGESTED RETAIL
PRICE RANGE........... $59 - 259 $69 - $179 $69 - $189 NA
DISTRIBUTION CHANNELS. Sporting goods stores, Retail uniform stores, Independent retail stores, U.S. government supply chain
outdoor specialty stores, mail order catalogs, sporting goods stores,
mail order catalogs, specialty safety stores mail order catalogs and
independent retail stores sporting goods stores
and mass merchandisers
Rugged Outdoor Footwear. Rugged outdoor footwear is the Company's
largest product line, representing $56.6 million, or 54.7%, of Fiscal 2001 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 camouflage knee boots, chest and hip
waders and insulated
3
cold weather pack boots. These products are designed to keep outdoorsmen
comfortable in extreme conditions. Most of the Company's rugged outdoor footwear
have outsoles which are designed to provide excellent cushioning and traction.
Although Rocky's rugged outdoor footwear is regularly updated to incorporate new
camouflage patterns, the Company believes its products in this category are
relatively insensitive to changing fashion trends.
Occupational Footwear. Occupational footwear, the Company's second
largest product line, represented $27.1 million, or 26.2%, of Fiscal 2001 net
sales. All occupational footwear styles are designed to be comfortable,
flexible, lightweight, slip resistant and durable and are typically worn by
people who are required to spend a majority of their time at work on their feet.
Several of the Company's occupational footwear products are similar in design to
certain of the Company's rugged outdoor footwear styles, except the Company's
occupational footwear is primarily black in color and features innersole support
systems. This product category includes work/steel toe footwear designed for
industrial, construction and manufacturing workers who demand leather work boots
that are durable, flexible and comfortable.
Military Footwear. Sales of military footwear were $8.9 million in
Fiscal 2001, accounting for 8.7% of net sales. The military footwear are sold
under contract to the U.S. government. While the Company may pursue future
government contracts for military footwear, the current contract will be
fulfilled during the first half of 2002.
Casual Footwear. Sales of the Company's casual footwear were $4.4
million in Fiscal 2001, accounting for 4.3% of net sales. The Company's casual
products target the upscale segment of the market and include well-styled,
comfortable leather shoes of a variety of constructions, including traditional
handsewn. Most of the Company's footwear in this segment is waterproof and
highly functional for outdoor activity. The Company reduced its emphasis on the
casual footwear segment beginning in Fiscal 2000. While continuing to offer high
performance rugged casual footwear, the emphasis is on marketing this line
through the traditional dealer base.
Factory outlet stores. During 2001, the Company operated factory outlet
stores in Nelsonville, Ohio and Westpoint, Mississippi. The Westpoint,
Mississippi store was closed in July, 2001. Products principally include factory
damaged goods and close-outs from the Company and Rocky licensed products. In
addition, related products from other manufacturers are sold in the stores. For
Fiscal 2001, net sales for factory outlet stores were $4.7 million, or 4.6% of
the Company's total net sales.
Other. The Company manufactures and/or markets a variety of
accessories, including GORE-TEX waterproof oversocks, GORE-TEX waterproof
booties, innersole support systems, foot warmers, laces and foot powder.
GORE-TEX waterproof oversocks are sold under the ROCKY brand and as private
label products. Sales of other products were $1.5 million in Fiscal 2001.
Net Sales Composition. The following table indicates the percentage of
net sales derived from each major product line and the factory outlet store for
the periods indicated. Historical percentages may not be indicative of the
Company's future product mix.
Fiscal Fiscal Fiscal
2001 2000 1999
---- ---- ----
Rugged outdoor .......................... 54.7% 60.4% 52.0%
Occupational ............................ 26.2 27.3 30.4
Military ................................ 8.7 - -
Casual .................................. 4.3 6.0 9.1
Factory outlet stores.................... 4.6 5.7 5.3
Other.................................... 1.5 0.6 3.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
4
PRODUCT DESIGN AND DEVELOPMENT
Product design and development are initiated both internally by the
Company's development staff and externally by customers and suppliers. The
Company's product development personnel, marketing personnel and sales
representatives work closely together to identify opportunities for new styles,
camouflage patterns, design improvements and the incorporation of new materials.
These opportunities are reported to the Company's development staff which
oversees the development and testing of the new footwear. The Company strives to
develop products which respond to the changing needs and tastes of consumers.
SALES, MARKETING AND ADVERTISING
The Company has developed comprehensive marketing and advertising
programs to gain national exposure and create brand awareness for the ROCKY
brand products in targeted markets. By creating strong brand awareness, the
Company seeks to increase the general level of retail demand for its products,
expand the customer base and increase brand loyalty. The Company's footwear is
sold by more than 3,000 retail and mail order companies in the United States and
Canada. No single customer accounted for more than 10% of the Company's revenues
in Fiscal 2001. The Company believes the loss of any single customer would not
have a material averse effect on the Company's financial position.
The Company's sales and marketing personnel are responsible for
developing and implementing all aspects of advertising and promotion of the
Company's products. In addition, the Company maintains a network of exclusive
sales representatives 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. Currently, the majority of the Company's sales force is
comprised of exclusive sales representatives.
The Company advertises and promotes the ROCKY brand through a variety
of methods, including product packaging, national print and television
advertising and a telemarketing operation. In addition, the Company attends
numerous tradeshows, which have historically been an important source of new
orders, and also works to establish the ROCKY brand within the trade industry.
The Company's marketing personnel have developed a product list, product catalog
and dealer support system which includes attractive point-of-sale displays and
co-op advertising programs.
The Company believes its long-term reputation for quality has increased
awareness of the ROCKY brand. To further increase the strength of its brand, the
Company has targeted the majority of its advertising efforts toward end
consumers. A key component of this strategy includes advertising through
cost-effective cable broadcasts and national print publications aimed at
audiences which share the demographic profile of the Company's typical
customers. The Company's print advertisements and television commercials
emphasize the waterproof nature of the Company's footwear as well as its high
quality, comfort, functionality and durability. Management believes that by
continuing to target consumers, the ROCKY brand will become more recognizable
and establish it as an overall leader in the industry leading to greater retail
demand for the product.
MANUFACTURING AND SOURCING
The Company manufactures its products in the Company's facilities
located in the Dominican Republic and Puerto Rico utilizing a modular "Team
Pass-Through" manufacturing system. The Company believes that this system, which
allows each person to perform a number of different tasks, is superior to a
traditional assembly line approach, which requires each person to perform a
single repetitive task. This system increases the production per square foot of
manufacturing space, reduces work-in-process inventory and direct labor and
improves production yields. In addition, the Company believes that its
manufacturing process allows it to respond quickly to changes in product demand
and consumer preferences.
Quality control is stressed at every stage of the manufacturing process
and is monitored by trained quality assurance personnel at each of the Company's
manufacturing facilities. Every pair of ROCKY footwear, or its component parts,
produced at the Company's facilities is inspected at least five times during the
manufacturing process with some styles inspected up to nine times. Every
GORE-TEX waterproof fabric bootie liner is individually tested by filling it
with compressed air and submerging it in water to verify that it is waterproof.
Quality control personnel at the finished goods
5
distribution facility located near Logan, Ohio conduct quality control testing
on incoming sourced finished goods and raw materials and inspect random samples
from the finished goods inventory from each of the Company's manufacturing
facilities to ensure that all items meet the Company's high quality standards. A
portion of the manufacturing employees' compensation is based on the level of
product quality of their work group.
The majority of the Company's footwear is produced in its own
facilities in the Dominican Republic and Puerto Rico. Until the Company
discontinued production in its Nelsonville, Ohio facility in November 2001, the
Company also produced footwear in this facility. The Company also sources
footwear from manufacturers in the Far East, which accounted for approximately
41% of net sales in Fiscal 2001. A greater portion of the Company's products may
be sourced in the future since the Company can achieve higher initial gross
margins on sourced footwear. 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.
As part of the Company's quality control process, the Company uses
employees in its China office to visit foreign factories to conduct quality
control reviews of raw materials, work in process inventory, and finished goods.
In addition, upon arrival at the Company's Ohio distribution center, another
inspection of sourced footwear is conducted by the Director of Quality Control.
The Company does not use hedging instruments with respect to foreign sourced
products.
Compliance with federal, state and local regulations with respect to
the environment has not had any material effect on the earnings, manufacturing
process, capital expenditures or competitive position of the Company. Compliance
with such laws or changes therein could have a negative impact 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 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, with
the possible exception of GORE-TEX waterproof breathable fabric, there are
acceptable present alternatives to these suppliers and materials.
GORE-TEX waterproof fabric is purchased under license directly from W.
L. Gore & Associates, Inc. ("Gore"). A majority of the Company's footwear
incorporates GORE-TEX waterproof breathable fabric. The Company, which has been
a customer of Gore since 1980, was the first footwear manufacturer licensed by
Gore to manufacture, promote, sell and distribute footwear worldwide using
GORE-TEX waterproof breathable fabric. The Company is currently one of the
largest customers of GORE-TEX waterproof breathable fabric for footwear.
Although other waterproofing techniques or materials are available, the Company
places a high value on its GORE-TEX license because the GORE-TEX trade name has
high brand name recognition and the GORE-TEX waterproof breathable fabric used
in the manufacture of ROCKY footwear has a reputation for quality and proven
performance.
Under the Company's licensing agreement with Gore, a prototype or
sample of each style of shoe or boot designed and produced by the Company that
incorporates GORE-TEX waterproof breathable fabric must be tested and approved
by Gore before the Company is permitted to manufacture or sell commercial
quantities of that style of footwear. Gore's testing involves immersing the
Company's footwear prototype for days in a water exclusion tester and flexing
the prototype 500,000 times, simulating a 500-mile march through several inches
of water. The prototype is then placed in a sweat absorption and transmission
tester to measure "breathability," which is the amount of perspiration that can
escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be
waterproof for one year from the date of purchase. When a customer claims that a
product is not waterproof, the product is returned to the Company for further
testing. If the product fails this testing process, it is either replaced or
credit is given, at the customer's discretion. The Company believes that the
claims associated with this guarantee have been consistent with guarantee claims
in the footwear industry.
6
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal
fluctuations in the sale of rugged outdoor footwear. A majority of orders are
placed in January through April for delivery in July through October. In order
to meet demand, the Company must manufacture rugged outdoor footwear year round
to be in a position to ship advance orders during the last two quarters of each
calendar year. Accordingly, average inventory levels have been highest during
the second and third quarters of each calendar year and sales have been highest
in the last two quarters of each calendar year. Because of seasonal
fluctuations, there can be no assurance that the results for any particular
interim period will be indicative of results for the full year or for future
interim periods.
Many of the Company's products, particularly its rugged outdoor
footwear line, are used by consumers in cold or wet weather. Mild or dry weather
conditions can have a material adverse effect on sales of the Company's
products, particularly if they occur in broad geographical areas during late
fall or early winter. Also, due to variations in weather conditions from year to
year, results for any single quarter or year may not be indicative of results
for any future quarter or year.
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 December 31, 2001 and December 31, 2000, backlog was $9.7 million
and $6.7 million, respectively. Because a majority of the Company's orders are
placed in January through April for delivery in July through October, the
Company's backlog is lowest during the October through December period and peaks
during the April through June period. Factors other than seasonality could have
a significant impact on the Company's backlog and, therefore, the Company's
backlog at any one point in time may not be indicative of future results.
Generally, orders may be canceled by customers prior to shipment without
penalty.
PATENTS, TRADEMARKS AND TRADE NAMES
The Company owns numerous United States patents for shoe upper and shoe
sole designs. The Company is not aware of any infringement of its patents or
that it is infringing any patents owned by third parties.
The Company owns United States federal registrations for its marks
ROCKY(R), ROCKY BOOTS(R) (which claims a ram's head Design as part of the mark),
ROCKY BOOTS and Design(R) (which claims a ram's head Design as part of the
mark), AQUA GUARD(R), BEAR CLAW(R), CORNSTALKERS(R), FORMZ(R), LONGBEARD(R),
TAC-TEAM and Design(R), ROCKY 911 SERIES and Design(R), SNOW STALKER(R), 4 WAY
STOP and Design(R), ROCKY and Design(R) for cigars, ROCKY 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), ALPHAFORCE(TM), SAWBLADE(TM), WILDWOLF(TM),
SILENTHUNTER(TM), PRO-HIKER(TM), ROCKY ELIMINATOR(TM), PROHUNTER(TM),
RAMDRY(TM), and FIRSTMED(TM) are the subject of pending United States federal
applications for registration. In addition, the Company uses and has common law
rights in the marks ROCKY(R) MOUNTAIN STALKERS(R), and other ROCKY(R) marks.
During 1994, the Company began to increase distribution of its goods in several
countries, including countries in Western Europe, Canada and Japan. The Company
has applied for trademark registration of its ROCKY(R) mark in a number of
foreign countries.
The Company also uses in its advertising and in other documents the
following trademarks owned by corporations other than the Company: GORE-TEX(R)
and CROSSTECH(R) are registered trademarks of W.L. Gore & Associates, Inc.;
CORDURA(R) is a registered trademark of E.I. DuPont de Nemours and Company;
THINSULATE(R) is a registered trademark
7
of Minnesota Mining and Manufacturing Company; and CAMBRELLE(R) is a trademark
of Koppers Industries, Inc. The Company is not aware of any material conflicts
concerning its marks or its use of marks owned by other corporations.
COMPETITION
The Company operates in a very competitive environment. Product
function, design, comfort, quality, technological improvements, brand awareness,
timeliness of product delivery and pricing are all important elements of
competition in the markets for the Company's 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. 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 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, 2001, the Company had approximately 929 full-time
employees and 7 part-time employees. Approximately 783 of these full-time
employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 649 employees engaged in production and the balance in managerial
and administrative positions. Management considers its relations with all of its
employees to be good. The collective bargaining agreement between the Company
and the Union of Needletrades, Industrial and Textile Employees ("UNITE") was
cancelled with the closing of the Company's Nelsonville, Ohio manufacturing
facility.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
addition to the other information in this report, readers should carefully
consider that the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results of operations for Fiscal 2002
and beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Dependence on Sales Forecasts. The Company's investments in
infrastructure and product inventory are based on sales forecasts and are
necessarily made in advance of actual sales. The markets in which the Company
does business are highly competitive, and the Company's business is affected by
a variety of factors, including brand awareness, changing consumer preferences,
product innovations, susceptibility to fashion trends, retail market conditions,
weather conditions and economic and other factors. One of management's principal
challenges is to improve its ability to predict these factors, in order to
enable the Company to better match production with demand. In addition, the
Company's growth over the years has created the need to increase the investment
in infrastructure and product inventory and to enhance the Company's systems. To
the extent sales forecasts are not achieved, costs associated with the
infrastructure and carrying costs of product inventory would represent a higher
percentage of revenue, which would adversely affect the Company's financial
performance.
Changes in Consumer Demand. Demand for the Company's products,
particularly the Company's casual product line and certain styles within its
rugged outdoor and occupational product lines, may be adversely affected by
changing fashion trends. The future success of the Company will depend upon its
ability to anticipate and respond to changing consumer preferences and fashion
trends in a timely manner. The Company's failure to adequately anticipate or
respond to such changes could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, sales of
the Company's products may be negatively affected by weak consumer spending as a
result of adverse economic trends or uncertainties regarding the economy. See
"Business -- Competition."
8
Seasonality. The Company has historically experienced, and expects to
continue to experience, significant seasonal fluctuations in the sale of its
products. The Company's operating results have varied significantly in the past,
and may vary significantly in the future, partly due to such seasonal
fluctuations. A majority of the orders for the Company's rugged outdoor footwear
are placed in January through April for delivery in July through October. To
meet demand, the Company must manufacture its products year-round. Accordingly,
average inventory levels have been highest during the second and third quarters
of each calendar year, and sales have been highest in the last two quarters of
each calendar year. The Company believes that sales of its products will
continue to follow this seasonal cycle. Additionally, the Company does not have
long-term contracts with its customers. Accordingly, there is no assurance that
the results for any particular quarter will be indicative of results for the
full year or for the future. The Company believes that comparisons of its
interim results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the factors mentioned
above as well as factors discussed elsewhere in this Form 10-K, it is possible
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock will likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Seasonality and Weather."
Impact of Weather. Many of the Company's products, particularly its
rugged outdoor footwear 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 during late fall or early winter.
Also, due to variations in weather conditions from year to year, results for any
single quarter or year may not be indicative of results for any future period.
See "Business -- Seasonality and Weather."
Competition. The footwear industry is intensely competitive, and the
Company expects competition to increase in the future. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company's ability to succeed depends on its ability to remain
competitive with respect to the quality, design, price and timely delivery of
products. Competition could materially adversely affect the Company's business,
financial condition and results of operations. See "Business -- Competition."
Reliance on Suppliers. The Company purchases raw materials from a
number of domestic and foreign sources. The Company does not have any long-term
supply contracts for the purchase of its raw materials, except for limited
blanket orders on leather. The principal raw materials used in the production of
the Company's footwear, in terms of dollar value, are leather, GORE-TEX
waterproof breathable fabric, CORDURA nylon fabric and soling materials. The
Company currently believes there are acceptable alternatives to these suppliers
and materials, with the exception of the GORE-TEX waterproof breathable fabric.
The Company is currently one of the largest customers of GORE-TEX
waterproof fabric for use in footwear. The Company's licensing agreement with
W.L. Gore & Associates, Inc. may be terminated by either party upon advance
written notice to the other party by October 1 of the current year of the
agreement that the agreement will terminate, effective December 31 of that same
year. Although other waterproofing techniques and materials are available, the
Company places a high value on its GORE-TEX waterproof breathable fabric license
because GORE-TEX has high brand name recognition and the GORE-TEX waterproof
fabric used in the manufacture of ROCKY footwear has a reputation for quality
and proven performance. Even though the Company does not believe that its supply
of GORE-TEX waterproof breathable fabric will be interrupted in the future, no
assurance can be given in this regard. The Company's loss of its license to use
GORE-TEX waterproof breathable fabric could have a material adverse effect on
the Company's competitive position, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Suppliers."
Changing Retailing Trends. A continued shift in the marketplace from
traditional independent retailers to large discount mass merchandisers has
increased the pressure on many footwear manufacturers to sell products to large
discount mass merchandisers at less favorable margins. Because of competition
from large discount mass merchandisers, a number of small retailing customers of
the Company have gone out of business, and in the future more of these customers
may go out of business, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
progressive independent retailers have attempted to improve their competitive
position by joining buying groups, stressing personal service and stocking more
products that address specific local needs, a continued shift to discount mass
9
merchandisers could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company established the Wild
Wolf(R) by Rocky(R) brand in fiscal 2000 to offer rugged outdoor footwear for
sale in another segment of retail. This footwear is sold to the mass merchandise
channel of distribution at lower retail prices than historically available in
Rocky brand product. See "Business -- Sales, Marketing and Advertising."
Reliance on Key Personnel. The development of the Company's business
has been, and will continue to be, highly dependent upon Mike Brooks, Chairman,
President and Chief Executive Officer, David Fraedrich, Senior Vice President
and Treasurer, David Sharp, Senior Vice President-Sales & Operations, and James
McDonald, Vice President and Chief Financial Officer. Messrs. Brooks and
Fraedrich have an at-will employment agreement with the Company. The employment
agreements provide that in the event of termination of employment with the
Company, the employee will receive a severance benefit and may not compete with
the Company for a period of one year. The 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.
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 terminating in
2006. In addition, the Company's local tax abatements in Puerto Rico are due to
expire in 2004. The Company provided no U.S. income tax on the unrepatriated
income generated by its subsidiary in the Dominican Republic. Consequently, no
income taxes are provided on these cumulative earnings of approximately
$5,309,000. During fourth quarter Fiscal 1996 and through December 31, 1998, the
Company elected to repatriate future earnings of its subsidiary in the Dominican
Republic and provided taxes on the earnings during that period. In 1999, the
Company elected not to repatriate all 1999 and future earnings of its subsidiary
in the Dominican Republic.
The Company's future tax rate will vary depending on many factors,
including the level of relative earnings and tax rates in each jurisdiction in
which it operates and the repatriation of any foreign income to the United
States. The Company cannot anticipate future changes in such laws. Increases in
effective tax rates or changes in tax laws may have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Manufacturing. The Company currently plans to retain its internal
manufacturing capability in order to continue benefiting from expertise the
Company has gained with respect to footwear manufacturing methods conducted at
its manufacturing facilities. The Company continues to evaluate its
manufacturing facilities and independent manufacturing alternatives in order to
determine the appropriate size and scope of its manufacturing facilities. There
can be no assurance that the costs of products that continue to be manufactured
by the Company can remain competitive with sourced products. In an effort to
enhance its competitive position, during the first quarter of 2000 the Company
began to curtail manufacturing at its Nelsonville, Ohio plant and to consolidate
production at its plants in Puerto Rico and the Dominican Republic. As of
November 16, 2001, the Company has closed its Nelsonville, Ohio manufacturing
facility.
10
Concentration of Stock Ownership; Certain Corporate Governance
Measures. The directors, executive officers and principal shareholders of the
Company beneficially own approximately 11.6% of the Company's outstanding Common
Stock. As a result, these shareholders are able to exert significant influence
over all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may also have the effect of delaying or preventing a change in
control of the Company. The Company has also adopted certain corporate
governance measures which, individually or collectively, could delay or
frustrate the removal of incumbent directors and could make a merger more
difficult, tender offer or proxy contest involving the Company even if such
events might be deemed by certain shareholders to be beneficial to the interest
of the shareholders.
Volatility of Market Price. From time to time, there may be significant
volatility in the market price of the Common Stock. The Company believes that
the current market price of its Common Stock reflects expectations that the
Company will be able to continue to market its products profitably and develop
new products with market appeal. If the Company is unable to market its products
profitably and develop new products at a pace that reflects the expectations of
the market, investors could sell shares of the Common Stock at or after the time
that it becomes apparent that such expectations may not be realized, resulting
in a decrease in the market price of the Common Stock.
In addition to the operating results of the Company, changes in
earnings estimates by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company or its
industry could cause the market price of the Common Stock to fluctuate
substantially. In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies, including the Company, for
reasons unrelated to their operating performance. See "Market for the
Registrant's Common Equity and Related Matters."
Accounting Standards. Changes in the accounting standards promulgated
by the Financial Accounting Standards Board or other authoritative bodies could
have an adverse effect on the Company's future reported operating results.
Environmental and Other Regulation. The Company is subject to various
environmental and other laws and regulations, which may change periodically.
Compliance with such laws or changes therein could have a negative impact on the
Company's future reported operating results.
Limited Protection of Intellectual Property. The Company regards
certain of its footwear designs as proprietary and relies on patents to protect
those designs. The Company believes that the ownership of the patents is a
significant factor in its business. Existing intellectual property laws afford
only limited protection of the Company's proprietary rights, and it may be
possible for unauthorized third parties to copy certain of the Company's
footwear designs or to reverse engineer or otherwise obtain and use information
that the Company regards as proprietary. The Company believes its patents
provide a measure of security against competition, and the Company intends to
enforce its patents against infringement by third parties. However, if the
Company's patents are found to be invalid, to the extent they have served, or
would in the future serve, as a barrier to entry to the Company's competitors,
such invalidity could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company owns United States federal registrations for a number of
its trademarks, trade names and designs. Additional trademarks, trade names and
designs are the subject of pending federal applications for registration. The
Company also uses and has common law rights in certain trademarks. During 1994,
the Company began to increase distribution of its goods in several foreign
countries. Accordingly, the Company has applied for trademark registrations in a
number of these countries. The Company intends to enforce its trademarks and
trade names against unauthorized use by third parties. See "Business -- Patents,
Trademarks and Trade Names."
Risks Associated with Forward Looking Statements. This Annual Report on
Form 10-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which are intended to be covered by the safe harbors created
thereby. Those statements include, but may not be limited to, all statements
regarding the intent, belief and expectations of the Company and its management,
such as statements concerning the Company's future profitability and its
operating and growth strategy. Investors are cautioned that all forward-looking
statements involve risks
11
and uncertainties including, without limitation, the factors set forth under the
caption "Business Risks" in this Annual Report on Form 10-K and other factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate. Therefore, there can be no assurance
that the forward-looking statements included in this Annual Report on Form 10-K
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved. The
Company does not assume any obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
ITEM 2. PROPERTIES.
The Company owns, subject to a mortgage, executive offices and a
factory outlet store which are located in Nelsonville, Ohio in a two-story
25,000 square foot building. The first floor of this building, which consists of
approximately 12,500 square feet, houses the Company's factory outlet store
which was opened in late 1994. The second floor houses the Company's executive
offices. The Company also owns a 5,000 square foot office building in
Nelsonville, Ohio, subject to a mortgage, which is used to house administrative
staff. This office building is currently for sale.
The Company owns, subject to a mortgage, a 98,000 square foot
distribution warehouse in Nelsonville, Ohio. This facility is currently used to
warehouse raw materials. This distribution warehouse is currently for sale.
The Company leases a 41,000 square foot facility in Nelsonville, Ohio,
from the William Brooks Real Estate Company, which is 20% owned by Mike Brooks,
President and Chief Executive Officer of the Company. This building was used for
manufacturing and presently houses additional outlet store retail space. The
lease expires in April 2003 and is renewable for two five-year terms.
Lifestyle leases two manufacturing facilities, T-1236-0-78 which
contains 44,978 sq. ft. and T-1236-1-82 which contains 39,581 sq. ft. in Moca,
Puerto Rico. These buildings are leased from the Puerto Rico Industrial
Development Company under a net non-cancelable operating lease which expires in
2009.
Five Star's manufacturing facility, consisting of three connected
buildings and a stand-alone building, is located in a tax-free trade zone in the
Dominican Republic. Five Star leases 82,600 square feet of this facility from
the Dominican Republic Corporation for Industrial Development (the "DRCID")
under a Consolidation of Lease Contract, dated as of December 13, 1993, the term
of which expires on February 1, 2003. Five Star leases an additional stand-alone
32,000 square 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 owns, subject to a mortgage, a finished goods distribution
facility near Logan, Ohio. The building contains 192,000 square feet and is
situated on 17.9 acres of land. The finished goods distribution facility became
fully operational in the first quarter of 2000. The Company has an option on an
additional four acres of land adjacent to this property.
ITEM 3. LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation which arises
in the normal course of its business. Although the ultimate resolution of
pending proceedings cannot be determined, in the opinion of management, the
resolution of such 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.
12
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, 2000.................... $7.53 $3.69
June 30, 2000..................... $6.53 $4.88
September 30, 2000................ $5.47 $4.63
December 31, 2000................. $5.38 $3.75
March 31, 2001.................... $6.25 $3.81
June 30, 2001..................... $4.80 $2.98
September 30, 2001................ $6.90 $4.46
December 31, 2001................. $6.49 $4.58
On March 19, 2002, the last reported sales price of the Common Stock on
the Nasdaq National Market was $7.04 per share. As of March 19, 2002, there were
approximately 147 shareholders of record of the Common Stock.
The Company presently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. Future dividend policy will depend upon the
earnings and financial condition of the Company, the Company's need for funds
and other factors. Presently, the Line of Credit restricts the payment of
dividends on the Common Stock. At December 31, 2001 the Company had no retained
earnings available for distribution.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
FIVE YEAR FINANCIAL SUMMARY
---------------------------
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
Net sales $103,320 $103,229 $ 98,781 $ 89,316 $ 95,688
Gross margin % of sales 22.5% 23.8% 15.7% 23.6% 27.6%
Net income (loss) $ 1,531 $ 96 $ (5,130) $ 2,262 $ 4,761
BALANCE SHEET DATA
Inventories $ 27,714 $ 32,035 $ 32,573 $ 47,110 $ 32,894
Total assets 74,660 86,051 89,333 96,598 80,955
Working capital 44,267 50,201 48,468 67,468 55,988
Long-term debt, less current
maturities 16,976 26,445 25,177 26,878 13,407
Shareholders' equity 51,043 50,326 50,229 59,635 59,197
PER SHARE
Net income (loss):
Basic $ 0.34 $ 0.02 $ (1.09) $ 0.42 $ 1.16
Diluted $ 0.34 $ 0.02 $ (1.09) $ 0.41 $ 1.10
Weighted average number of common
shares outstanding:
Basic 4,489 4,489 4,710 5,425 4,088
Diluted 4,549 4,493 4,710 5,527 4,330
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to accounts receivable, inventories, pension benefits, income
taxes, and restructuring costs. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Management also records estimates for customer returns and discounts
offered to customers. Should a greater proportion of customers return goods and
take advantage of discounts than estimated by the Company, additional allowances
may be required.
Inventories:
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
any slow moving or obsolete inventories through the Company's factory clearance
center or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional
provisions may be required.
Pension benefits:
Management records an accrual for pension costs associated with the Company
sponsored noncontributory defined benefit pension plans covering the union and
non-union workers of the Company's operations. Future adverse changes in market
conditions or poor operating results of underlying plan assets could result in
losses or a higher accrual.
Income taxes:
Currently, management has not recorded a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. The Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, however in the event the Company were to determine that it would not
be able to realize all or part of its net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Likewise, should the Company determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Restructuring costs:
As disclosed in Note 2 of Notes to Consolidated Financial Statements, in 2001
management established an accrual for estimated restructuring and realignment
costs associated with the closing of its Nelsonville manufacturing facility. The
Company expects no additional restructuring and realignment costs associated
with this plan, however should the Company incur additional costs related to the
closing of the manufacturing facility, additional accruals may be required.
15
PERCENTAGE OF NET SALES
References to Fiscal 2001, 2000 and 1999 are to Fiscal years of the Company
ended December 31 of the respective year.
2001 2000 1999
---- ---- ----
Net sales.............................................................. 100.0% 100.0% 100.0%
Costs of goods sold.................................................... 77.5 76.2 84.8
----- ----- -----
Gross margin........................................................... 22.5 23.8 15.7
Selling, general and administrative expenses and plant closing costs... 19.0 20.7 21.0
----- ----- -----
Income (loss) from operations.......................................... 3.5% 3.1% (5.3%)
===== ===== =====
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES
Net sales rose 0.1% to $103,319,806 for Fiscal 2001 compared with
$103,228,987 for Fiscal 2000. This increase was primarily due to sales of
military footwear, initial shipments of which were made during second quarter
2001. To a lesser extent, sales of accessory items contributed to the increase.
Offsetting the increase were decreases in sales within each other major footwear
category for Fiscal 2001. The Company attributes these reduced sales to the
general softness within the economy, especially during the second half of Fiscal
2001, and milder than normal weather during its peak selling season. Average
list prices for the Company's product were approximately 7% higher in Fiscal
2001 than in 2000.
GROSS MARGIN
Gross margin decreased $1,359,955, or 5.5%, to $23,251,940 in Fiscal
2001 versus $24,611,895 in 2000. As a percentage of net sales, gross margin
decreased to 22.5% in Fiscal 2001 from 23.8% in 2000. Fiscal 2001 included sales
of Intermediate Cold Wet military boots with gross margins below the Company's
average rate. In addition, implementation of improved cost and reporting systems
allowed the Company to review its inventory costing methods and revise its costs
during fourth quarter 2001, which negatively impacted gross margin. Improved
pricing policies combined with an increase in sourced footwear to 41% of net
sales in Fiscal 2001 from 36% the prior year benefited gross margin for the year
ended December 31, 2001.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses decreased
$3,250,815, or 15.2%, to $18,175,943 in Fiscal 2001 compared to $21,426,758 in
2000. As a percentage of net sales, SG&A declined to 17.6% from 20.7% in Fiscal
2000. The most significant factors contributing to the reduction in SG&A
expenses for the Year 2001 were lower selling costs resulting from a
restructuring of the sales force and reduced bad debt expense. Salaries and
wages as well as advertising expenses were lower than the prior year, which
offset higher fringe benefits for increased pension accruals, anticipated
performance incentives, and additional professional fees. The Company continues
to seek additional cost reductions that will benefit long-term performance.
In addition, the Company announced plans to realign its manufacturing
operations on September 17, 2001, which included ceasing manufacturing
operations at the Nelsonville, Ohio factory during fourth quarter 2001. A
restructuring charge of $1.5 million was recorded in Fiscal 2001 for anticipated
expenses associated with the realignment of manufacturing operations. A summary
of the costs accrued includes: severance, pension and employee benefit costs,
equipment and relocation costs, and legal and other expenses.
16
INTEREST EXPENSE
Interest expense declined $860,855, or 25.7%, to $2,493,533 for Fiscal
2001 from $3,354,388 in Fiscal 2000. The Company benefited from lower
outstanding balances and lower interest rates during Fiscal 2001, which were
partially offset by a $295,000 reduction in second quarter 2000 interest expense
due to a gain on the termination of an interest rate swap agreement.
The Company's funded debt decreased 36.6% to $17,445,166 at December
31, 2001 versus $27,515,650 a year ago due to reductions to inventories,
accounts receivable and capital expenditures.
INCOME TAXES
The Company recognized income tax benefit of $93,438 for Fiscal 2001
compared with an income tax expense of $183,464 for Fiscal 2000. The current
year benefit resulted primarily from an abatement of Puerto Rico tollgate taxes
on all earnings subsequent to June 30, 1994. This resulted in a deferred tax
benefit of $408,000.
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES
Net sales rose 4.5% to $103,228,987 for Fiscal 2000 compared with
$98,781,223 for Fiscal 1999. This increase was due to higher sales in the rugged
outdoor category, especially Wild Wolf(R) by Rocky(R) footwear, initial
shipments of which were made during third quarter 2000. This new line increased
the availability of ROCKY branded footwear in an additional segment of the
rugged outdoor category. Occupational sales for Fiscal 2000 were $1.6 million
below the prior year. This was primarily due to more sales of footwear at lower
price points than during the prior year. The Company reduced its emphasis on
casual footwear sales during the second half of Fiscal 2000. As a result, these
net sales were $2.7 million below the prior year. Average list prices for the
Company's product were approximately 2% higher in Fiscal 2000 than in 1999.
GROSS MARGIN
Gross margin increased $9,087,440, or 58.5%, to $24,611,895 in Fiscal
2000 versus $15,524,455 in 1999. As a percentage of net sales, gross margin
improved to 23.8% in Fiscal 2000 from 15.7% in 1999. This gross margin
improvement was attributable to changing product mix, a significant shift in
production during Fiscal 2000 to the Company's lower wage rate factories in the
Caribbean, and an inventory reduction program implemented during fourth quarter
1999. Net sales of sourced footwear grew to 36% of net sales in Fiscal 2000 from
26% the prior year.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative ("SG&A") expenses increased $724,362,
or 3.5%, to $21,426,758 in Fiscal 2000 compared to $20,702,396 in 1999. As a
percentage of net sales, SG&A decreased slightly to 20.7% from 21.0% in Fiscal
1999. SG&A compared to the prior year included increased commissions from the
higher net sales and costs associated with the finished goods distribution
center, which began operations in first quarter 2000. During the fourth quarter
of Fiscal 2000 the Company reorganized the sales force, reduced its emphasis on
casual footwear, and achieved productivity improvements in the finished goods
distribution facility.
17
INTEREST EXPENSE
Interest expense rose $938,706, or 38.9%, to $3,354,388 for Fiscal 2000
from $2,415,682 in Fiscal 1999, principally due to higher rates of interest that
prevailed during Fiscal 2000 compared to the prior year. On September 18, 2000,
the Company entered into a revolving line of credit agreement with another
lender, which also includes a higher borrowing limit, subject to certain levels
of collateralized assets of the Company.
INCOME TAXES
The Company recognized income tax expense of $183,464 for Fiscal 2000
compared with an income tax benefit of $2,227,579 for Fiscal 1999. The current
year expense resulted from income generated in Rocky Shoes & Boots, Inc. and the
Dominican Republic offset by losses in the Company's Puerto Rican subsidiary.
The Company's effective tax rate of 65.5% reflects permanent differences, prior
year rate reconcilement adjustments and favorable tax treatment in Puerto Rico
and the Dominican Republic. Effective in 2000, the Company decided to reinvest
accumulated undistributed earnings of Five Star, which amounted to $5,109,000 as
of December 2000, in the Dominican Republic. As a result of this decision, no
taxes were provided on the 2000 earnings of the Company's Dominican Republic
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company principally funds its working capital requirements and
capital expenditures through net income, borrowings under its credit facility
and other indebtedness. During Fiscal 2001 the Company principally relied upon
borrowings under its revolving credit facility. Working capital is primarily
used to support changes in accounts receivable and inventory as a result of the
Company's seasonal business cycle and business expansion. These requirements are
generally lowest in the months of January through March of each year and highest
during the months of May through October of each year. The Company had working
capital of $44,266,895 and $50,200,965 at December 31, 2001 and 2000,
respectively.
Inventory declined by $4,321,573 or 13.5% to $27,713,664 at December
31, 2001 compared with $32,035,237 on the same date of the prior year. This
decrease resulted from improved forecasting and scheduling systems that allowed
footwear to be manufactured closer to actual delivery dates. In addition, the
Company's product lines included fewer styles for the Year 2001, and there was
also an increase in port of entry sales during the year, which are shipped
directly to the customer. The Company believes it has adequate inventory to meet
anticipated demand.
Capital expenditures were $1,172,365 for the Year 2001 versus
$3,113,529 for the Year 2000. The Company's increased use of sourced
manufacturing significantly reduced the need for capital expenditures compared
to the Year 2000. Capital expenditures for the foreseeable future are expected
to be similar to Fiscal 2001, as sourced manufacturing continues to increase as
a percentage of products sold.
On September 18, 2000, the Company completed a revolving line of credit
and term loan agreement with maximum borrowing limits of $50,000,000 subject to
certain levels of accounts receivable and inventory, which is $8,000,000 higher
than the previous agreement. The agreement expires September 17, 2003. As of
December 31, 2001, the Company had borrowed $11,000,000 and $616,500 against its
revolving line of credit and term loan agreements respectively, against its
available borrowings of $20,118,320. At December 31, 2001, the Company did not
comply with certain lender covenants, due in large part to the $1.5 million
charge for the manufacturing realignment. On February 22, 2002, the Company
obtained a waiver from the lender with respect to such events of noncompliance
and amended these covenants through 2002.
During first quarter 2000, the Company completed mortgage financing for
three of its facilities totaling $6,300,000, with monthly payments of $63,100 to
2014. Proceeds from the financing were used to pay down borrowings under the
revolving credit facility.
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. Future minimum
lease payments under non-cancelable operating leases are $652,000, $579,000,
$696,000, $743,000, and $472,000 for fiscal years 2002 through 2006,
respectively, and $823,000 for all years after 2006, or $3,965,000 in total.
18
The Company's financing activities during Fiscal 2001 and 2000 were to
support future growth. No single activity represented a significant amount of
the total expenditures. The Company believes it will be able to finance capital
additions and meet operating expenditure requirements for Fiscal 2002 through
net income, borrowings under its credit facility and other indebtedness.
INFLATION
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of raw materials, salaries
and employee benefits. The Company attempts to minimize or offset the effects of
inflation through increased selling prices, productivity improvements, and
reduction of costs.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding the intent, belief and expectations of the
Company and its management, such as statements concerning the Company's future
capital expenditures. Investors are cautioned that all forward-looking
statements involve risks and uncertainties including, without limitation,
dependence on sales forecasts, changes in consumer demand, seasonality, impact
of weather, competition, reliance on suppliers, changing retail trends, economic
changes, as well as other factors set forth under the caption "Business Risks"
in this Annual Report on Form 10-K and other factors detailed from time to time
in the Company's filings with the Securities and Exchange Commission. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. The Company assumes no obligation to update any
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk results from fluctuations in interest
rates. The Company is also exposed to changes in the price of commodities used
in its manufacturing operations. However, commodity price risk related to the
Company's current commodities is not material as price changes in commodities
are usually passed along to the retail 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, 2001 of $11,000,000. Interest is payable monthly
at the lender's LIBOR rate plus 250 basis points or prime plus 25 basis points;
(2) The Company also has equipment and other obligations totaling $616,500 at
December 31, 2001, that bear interest at a variable rate of Prime plus
one-quarter percent (0.25%); and (3) The Company has a real estate obligations
of $5,827,541 at December 31, 2001, that bear interest at fixed rates of 7.625%
and 8.275%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial balance sheets as of December 31,
2001 and 2000 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 2001,
2000, and 1999, together with the independent auditors' report thereon appear on
pages F-1 through F-22 hereof, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
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 2002 Annual Meeting of Shareholders (the "Proxy Statement") to be held on
May 15, 2002, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"
in the Company's Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - OWNERSHIP OF COMMON STOCK BY MANAGEMENT" and "- OWNERSHIP OF
COMMON STOCK BY PRINCIPAL SHAREHOLDERS," in the Company's Proxy Statement, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in
the Company's Proxy Statement, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) The following Financial Statements are included in this Annual
Report on Form 10-K on the pages indicated below:
Independent Auditors' Report......................................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000......................... F-2 - F-3
Consolidated Statements of Operations for the fiscal years ended
December 31, 2001, 2000, and 1999................................................. F-4
Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 2001, 2000, and 1999..................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 2001, 2000, and 1999................................................. F-6
Notes to Consolidated Financial Statements for the fiscal years ended
December 31, 2001, 2000, and 1999................................................. F-7 - F-22
20
(2) The following financial statement schedule for the fiscal years
ended December 31, 2001, 2000, and 1999 is included in this
Annual Report on Form 10-K and should be read in conjunction with
the Consolidated Financial Statements contained in the Annual
Report.
Schedule II -- Consolidated Valuation and Qualifying Accounts.
Independent Auditors' Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the Consolidated Financial Statements or the notes thereto.
21
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Second Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.2 Amended and Restated Code of Regulations of the Company
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-1, registration number 33-56118 (the
"Registration Statement").
4.1 Form of Stock Certificate for the Company (incorporated by
reference to Exhibit 4.1 to the Registration Statement).
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh,
Twelfth, and Thirteenth of the Company's Amended and Restated
Articles of Incorporation (see Exhibit 3.1).
4.3 Articles I and II of the Company's Code of Regulations (see
Exhibit 3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for executive
officers (incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 (the "1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially
similar to Exhibit 10.1 (incorporated by reference to Exhibit
10.2 to the 1995 Form 10-K).
10.3 Deferred Compensation Agreement, dated May 1, 1984, between
Rocky Shoes & Boots Co. and Mike Brooks (incorporated by
reference to Exhibit 10.3 to the Registration Statement).
10.4 Information concerning Deferred Compensation Agreements
substantially similar to Exhibit 10.3 (incorporated by
reference to Exhibit 10.4 to the Registration Statement).
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated
by reference to Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to
Exhibit 10.6 to the Registration Statement).
10.7 Indemnification Agreement, dated December 21, 1992, between the
Company and Mike Brooks (incorporated by reference to Exhibit
10.10 to the Registration Statement).
10.8 Information concerning Indemnification Agreements substantially
similar to Exhibit 10.7 (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993 (the "1993 Form 10-K")).
10.9 Trademark License Agreement and Manufacturing Certification
Agreement, each dated May 14, 1994, between Rocky Shoes & Boots
Co. and W. L. Gore & Associates, Inc. (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994 (the "1994
Form 10-K")).
10.10 Decree of Tax Exemption from the Government of the Commonwealth
of Puerto Rico
22
EXHIBIT
NUMBER DESCRIPTION
------ -----------
(incorporated by reference to Exhibit 10.13 to the
Registration Statement).
10.10A English Translation of Addendum to Exhibit 10.16 (incorporated
by reference to Exhibit 10.13A to the Registration Statement).
10.11 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 Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
10.12 Lease Contract, dated August 31, 1988, between Lifestyle
Footwear, Inc. and The Puerto Rico Industrial Development
Company regarding factory location 1 (incorporated by reference
to Exhibit 10.15 to the Registration Statement).
10.13 Lease Contract, undated, between Lifestyle Footwear, Inc. and
The Puerto Rico Industrial Development company regarding
factory location 2 (incorporated by reference to Exhibit 10.16
to the Registration Statement).
10.13A English translation of Exhibit 10.13 (incorporated by reference
to Exhibit 10.16A to the Registration Statement).
10.14 Lease Agreement, dated December 13, 1993, between Five Star
Enterprises Ltd. and the Dominican Republic Corporation for
Industrial Development regarding buildings and annexes of a
combined manufacturing surface of 75,526 square feet, located
in the Industrial Free Zone of La Vega (incorporated by
reference to Exhibit 10.17 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 (the
"September 30, 1995 Form 10-Q")).
10.14A English translation of Exhibit 10.20 (incorporated by reference
to Exhibit 10.2A to the September 30, 1995 Form 10-Q).
10.15 Term Lease Master Agreement, dated April 27, 1993, between the
Company and IBM Credit Corporation (incorporated by reference
to Exhibit 10.22 to the 1993 Form 10-K).
10.16 Adjustable Rate Note, dated May 23, 1988, between Nelsonville
Home and Savings Association and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.25 to the Registration
Statement).
10.17 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).
10.18 Form of Stock Option Agreement under the 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.28 to the 1995 Form
10-K).
10.19 Letter Agreement between the Company and the Kravetz Group,
dated August 3, 1994 (incorporated by reference to Exhibit No.
10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995).
10.20 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).
10.21 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots
Co. to the Director of
23
EXHIBIT
NUMBER DESCRIPTION
------ -----------
Development of the State of Ohio (incorporated by reference
to Exhibit 10.44 to the 1995 Form 10-K).
10.22 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).
10.23 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).
10.24 Information covering Employment Agreements substantially
similar to Exhibit 10.23 (incorporated by reference to Exhibit
10.5 to the September 30, 1995 Form 10-Q).
10.25 Termination of Buy-Sell Agreement, dated August 18, 1998, among
the Company, Mike Brooks, Barbara Brooks Fuller, Patricia H.
Robey, Jay W. Brooks, and Charles Stuart Brooks (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
10.26 [Reserved].
10.27 Promissory Note, dated December 30, 1999, in favor of General
Electric Capital Business Asset Funding Corporation in the
amount of $1,050,000 (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the quarter ended June
30, 2000 (the "June 30, 2000 Form 10-Q")).
10.28 Promissory Note, dated December 30, 1999, in favor of General
Electric Capital Business Asset Funding Corporation in the
amount of $1,500,000 (incorporated by reference to Exhibit 10.2
to the June 30, 2000 Form 10-Q).
10.29 Promissory Note, dated December 30, 1999, in favor of General
Electric Capital Business Asset Funding Corporation in the
amount of $3,750,000 (incorporated by reference to Exhibit 10.3
to the June 30, 2000 Form 10-Q).
10.30 Limited Waiver and Modification Agreement, dated May 14, 2000,
by and among the Company, Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., Bank One, NA, The Huntington National Bank, and
Bank One, NA, as agent (incorporated by reference to Exhibit
10.4 to the June 30, 2000 Form 10-Q).
10.31 Extension of Limited Waiver and Modification Agreement, dated
June 30, 2000, by and among the Company, Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., Bank One, NA, The Huntington
National Bank, and Bank One, NA, as agent (incorporated by
reference to Exhibit 10.5 to the June 30, 2000 Form 10-Q).
10.32 Loan and Security Agreement, dated September 18, 2000, among
the Company, Lifestyle Footwear, Inc., and GMAC Business
Credit, LLC (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed on September 20, 2000).
24
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.33 First Amendment to Loan and Security Agreement, dated November
20, 2000, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit
10.33 to the Annual Report on Form 10-K for the year ended
December 31, 2001).
10.34 Second Amendment to Loan and Security Agreement, dated March
27, 2001, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC (incorporated by reference to Exhibit
10.34 to the Annual Report on Form 10-K for the year ended
December 31, 2001).
10.35 Third Amendment to Loan and Security Agreement, dated July 9,
2001, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC.
10.36 Fourth Amendment to Loan and Security Agreement, dated February
22, 2002, among the Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC.
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Registration Statement on Form S-2 filed
September 11, 1997, registration number 333-35391).
23 Independent Auditors' Consent and Report on Schedules of
Deloitte & Touche LLP.
24 Powers of Attorney.
99.1 Independent Auditors' Report of Deloitte & Touche LLP on
Schedules (incorporated by reference to Exhibit 23).
99.2 Financial Statement Schedule.
The Registrant agrees to furnish to the Commission upon its request copies of
any omitted schedules or exhibits to any Exhibit filed herewith.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
The exhibits to this report begin immediately following the F-pages.
(d) FINANCIAL STATEMENT SCHEDULES
The Independent Auditors' Report and financial statement schedule are
included in this Annual Report on Form 10-K as Exhibit 99.1 and Exhibit 99.2,
respectively.
25
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 28, 2002 By: /s/ James E. McDonald
------------------------------------------
James E. McDonald, Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* MIKE BROOKS Chairman, President, Chief March 28, 2002
- ------------------------------ Executive Officer and Director (Principal
Mike Brooks Executive Officer)
* DAVID FRAEDRICH Senior Vice President, Treasurer, March 28, 2002
- ------------------------------ and Director
David Fraedrich
/s/ JAMES E. McDONALD Vice President and Chief Financial Officer March 28, 2002
- ------------------------------ (Principal Financial and Accounting Officer)
James E. McDonald
* CURTIS A. LOVELAND Secretary and Director March 28, 2002
- ------------------------------
Curtis A. Loveland
* LEONARD L. BROWN Director March 28, 2002
- ------------------------------
Leonard L. Brown
* STANLEY I. KRAVETZ Director March 28, 2002
- ------------------------------
Stanley I. Kravetz
* JAMES L. STEWART Director March 28, 2002
- ------------------------------
James L. Stewart
* ROBERT D. ROCKEY Director March 28, 2002
- ------------------------------
Robert D. Rockey
* GLENN E. CORLETT Director March 28, 2002
- ------------------------------
Glenn E. Corlett
* By: /s/ Curtis A. Loveland
- ------------------------------
Curtis A. Loveland, Attorney-in-Fact
26
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------------
Independent Auditors' Report F - 1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F - 2 - F - 3
Consolidated Statements of Operations for the Years Ended December 31, 2001,
2000 and 1999 F - 4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999 F - 5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 F - 6
Notes to Consolidated Financial Statements F - 7 - F - 22
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, 2001 and 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rocky Shoes & Boots, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
March 25, 2002
F-1
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------
2001 2000
CURRENT ASSETS:
Cash and cash equivalents $ 2,954,935 $ 2,117,994
Accounts receivable - trade, net 15,091,100 18,055,881
Other receivables 2,225,498 2,956,900
Inventories 27,713,664 32,035,237
Deferred income taxes - current 615,609 536,012
Other current assets 1,053,192 1,295,287
------------ ------------
Total current assets 49,653,998 56,997,311
FIXED ASSETS, AT COST:
Property, plant and equipment 43,024,219 47,401,015
Less - accumulated depreciation (22,258,125) (23,070,696)
------------ ------------
Total fixed assets - net 20,766,094 24,330,319
DEFERRED PENSION ASSET 1,802,922 2,526,603
DEFERRED INCOME TAXES 295,784
OTHER ASSETS 2,141,016 2,196,939
------------ ------------
TOTAL ASSETS $ 74,659,814 $ 86,051,172
============ ============
See notes to consolidated financial statements.
F-2
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------
2001 2000
CURRENT LIABILITIES:
Accounts payable $ 1,559,444 $ 3,502,296
Current maturities - long-term debt 469,143 1,070,374
Accrued expenses:
Taxes - other 991,295 560,537
Salaries and wages 985,992 369,925
Plant closing costs 903,291
Co-op advertising 231,862 520,019
Interest 121,417 272,882
Other 124,659 500,313
------------ ------------
Total current liabilities 5,387,103 6,796,346
LONG-TERM DEBT - Less current maturities 16,976,023 26,445,276
DEFERRED LIABILITIES:
Compensation 155,564 187,959
Pension 1,097,791 2,295,919
------------ ------------
Total deferred liabilities 1,253,355 2,483,878
------------ ------------
Total liabilities 23,616,481 35,725,500
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated value;
none outstanding 2001 and 2000
Common stock, no par value; 10,000,000 shares authorized;
outstanding 2001 - 4,492,215 and 2000 - 4,489,215 shares 35,302,159 35,284,159
Accumulated other comprehensive loss (831,161)
Retained earnings 16,572,335 15,041,513
------------ ------------
Total shareholders' equity 51,043,333 50,325,672
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,659,814 $ 86,051,172
============ ============
See notes to consolidated financial statements.
F-3
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
NET SALES $ 103,319,806 $ 103,228,987 $ 98,781,223
COST OF GOODS SOLD 80,067,866 78,617,092 83,256,768
------------- ------------- -------------
GROSS MARGIN 23,251,940 24,611,895 15,524,455
------------- ------------- -------------
OTHER OPERATING EXPENSES:
Selling, general and
administrative expenses 18,175,943 21,426,758 20,702,396
Plant closing costs 1,500,000
------------- ------------- -------------
Total other operating expenses 19,675,943 21,426,758 20,702,396
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 3,575,997 3,185,137 (5,177,941)
------------- ------------- -------------
OTHER INCOME AND (EXPENSES):
Interest expense (2,493,533) (3,354,388) (2,415,682)
Other - net 354,920 449,257 236,287
------------- ------------- -------------
Total other - net (2,138,613) (2,905,131) (2,179,395)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 1,437,384 280,006 (7,357,336)
INCOME TAX EXPENSE (BENEFIT) (93,438) 183,464 (2,227,579)
------------- ------------- -------------
NET INCOME (LOSS) $ 1,530,822 $ 96,542 $ (5,129,757)
============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted $ 0.34 $ 0.02 $ (1.09)
============= ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,489,322 4,489,215 4,710,039
============= ============= =============
Diluted 4,548,632 4,493,304 4,710,039
============= ============= =============
See notes to consolidated financial statements.
F-4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ACCUMULATED OTHER TOTAL
COMMON COMPREHENSIVE RETAINED SHAREHOLDERS'
STOCK LOSS EARNINGS EQUITY
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 $ 39,560,343 $ 20,074,728 $ 59,635,071
YEAR ENDED DECEMBER 31, 1999:
Net loss (5,129,757) (5,129,757)
Treasury stock purchased and retired (685,100 shares) (4,285,184) (4,285,184)
Stock options exercised 9,000 9,000
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 35,284,159 14,944,971 50,229,130
YEAR ENDED DECEMBER 31, 2000:
Net income 96,542 96,542
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 35,284,159 15,041,513 50,325,672
YEAR ENDED DECEMBER 31, 2001:
Net income 1,530,822 1,530,822
Minimum pension liability, net of tax of $323,229 $ (831,161) (831,161)
------------
Comprehensive income 699,661
Stock options exercised 18,000 18,000
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 $ 35,302,159 $ (831,161) $ 16,572,335 $ 51,043,333
============ ============ ============ ============
See notes to consolidated financial statements.
F-5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,530,822 $ 96,542 $ (5,129,757)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,409,361 4,698,554 3,836,586
Deferred income taxes (52,152) (46,954) (1,052,222)
Deferred compensation and pension - net (1,661,232) (468,522) 254,769
Loss on sale of fixed assets 353,681 32,116 9,048
Change in assets and liabilities:
Receivables 3,696,183 2,927,201 (6,690,028)
Inventories 4,321,573 537,830 14,536,944
Other current assets 242,095 (72,373) (378,992)
Other assets 14,731 (469,514) (749,720)
Accounts payable (1,936,064) 1,551,745 162,705
Accrued expenses 1,134,840 335,969 277,628
------------- ------------- -------------
Net cash provided by operating activities 12,053,838 9,122,594 5,076,961
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,172,365) (3,113,529) (9,675,010)
Proceeds from sale of fixed assets 7,952 39,770
------------- ------------- -------------
Net cash used in investing activities (1,164,413) (3,073,759) (9,675,010)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 96,926,759 106,607,246 57,527,000
Payments on long-term debt (106,997,243) (112,868,411) (53,555,319)
Purchase of treasury stock (4,285,184)
Proceeds from exercise of stock options 18,000 9,000
------------- ------------- -------------
Net cash used in financing activities (10,052,484) (6,261,165) (304,503)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 836,941 (212,330) (4,902,552)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,117,994 2,330,324 7,232,876
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,954,935 $ 2,117,994 $ 2,330,324
============= ============= =============
See notes to consolidated financial statements.
F-6
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
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 Company
sales representatives who sell the Company's products primarily through
independent shoe, sporting goods, specialty, uniform stores and catalogs,
and through mass merchandisers throughout the United States. The Company
did not have any customers that accounted for more than 10% of
consolidated net sales in 2001, 2000 and 1999.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents. The Company's cash and cash equivalents are primarily held in
four banks.
TRADE RECEIVABLES - Trade receivables are presented net of the related
allowance for doubtful accounts of approximately $345,000 and $503,000 at
December 31, 2001 and 2000, respectively.
CONCENTRATION OF CREDIT RISK - The Company has significant transactions
with a large number of customers. Accounts receivable from one customer
represented 16% and 12% of the Company's total accounts receivable - trade
balance as of December 31, 2001 and 2000, respectively. The Company's
exposure to credit risk is impacted by the economic climate affecting its
industry. The Company manages this risk by performing ongoing credit
evaluations of its customers and maintains reserves for potential
uncollectible accounts.
SUPPLIER AND LABOR CONCENTRATIONS - The Company purchases raw materials
from a number of domestic and foreign sources. The Company currently buys
the majority of its waterproof fabric, a component used in a significant
portion of the Company's shoes and boots, from one supplier (GORE-TEX(R)).
The Company has had a relationship with this supplier for over 20 years
and has no reason to believe that such relationship will not continue.
F-7
A significant portion of the Company's shoes and boots are produced in the
Company's Dominican Republic operations. The Company has conducted
operations in the Dominican Republic since 1987 and is not aware of any
governmental or economic restrictions that would alter its current
operations.
The Company sources a significant portion of its footwear from
manufacturers in the Far East, primarily China. The Company has had
sourcing operations in China since 1993 and is not aware of any
governmental or economic restrictions that would alter its current
sourcing operations.
INVENTORIES - Inventories are valued at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market. Reserves are established for
inventories when the net realizable value (NRV) is deemed to be less than
its cost based on management's periodic estimates of NRV.
FIXED ASSETS - The Company records fixed assets at historical cost and
generally utilizes the straight-line method of computing depreciation for
financial reporting purposes over the estimated useful lives of the assets
as follows:
YEARS
-----
Building and improvements 5-40
Machinery and equipment 8-12
Furniture and fixtures 8-12
Lasts, dies, and patterns 8-12
Management periodically evaluates the future economic benefit of its
long-term assets when events or circumstances indicate potential
recoverability concerns. This evaluation is based on consideration of
expected future undiscounted cash flows and other operating factors.
Carrying amounts are adjusted appropriately when determined to have been
impaired.
For income tax purposes, the Company generally computes depreciation
utilizing accelerated methods.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expense was $1,962,783, $2,532,671 and $2,997,462 for 2001,
2000 and 1999, respectively.
REVENUE RECOGNITION - Revenue and related cost of goods sold are
recognized at the time footwear product is shipped to the customer and
title transfers. Revenue is recorded net of estimated sales discounts and
returns based upon historical trends. All sales are considered final upon
shipment.
SHIPPING AND HANDLING COSTS - The emerging issues task force ("EITF" of
the Financial Accounting Standards Board) issued EITF No. 00-10
"Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF
00-10 addresses the accounting for shipping and handling costs billed to
customers and prohibits the netting of such revenue against related costs.
The adoption of EITF 00-10 had no impact on the Company's net income and
all applicable expenses have been reclassified from selling general and
administrative expenses to net sales for all years presented to conform
with the new presentation requirements.
F-8
PER SHARE INFORMATION - Basic net income (loss) per common share is
computed based on the weighted average number of common shares outstanding
during the period. Diluted net income per common share is computed
similarly but includes the dilutive effect of stock options. A
reconciliation of the shares used in the basic and diluted income per
share computations is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
Basic - Weighted average shares outstanding 4,489,322 4,489,215 4,710,039
Dilutive securities - stock options 59,310 4,089
--------- --------- ---------
Diluted - Weighted average shares outstanding 4,548,632 4,493,304 4,710,039
========= ========= =========
In 1999, no adjustments to net loss were required for purposes of
computing diluted per share amounts. Stock options of 30,236 were not used
to compute diluted weighted average common shares outstanding since the
loss the Company incurred in 1999 makes these stock options anti-dilutive.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, is effective for all fiscal years beginning after
June 15, 2000. SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under
SFAS 133 certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. Adoption of SFAS 133 did not
have a significant impact on the financial position, results of
operations, or cash flows of the Company. The Company occasionally uses
interest rate swaps to hedge a portion of its variable rate debt. There
were no swaps outstanding at December 31, 2001 and 2000. The Company's
policy requires that swap contracts be used as hedges and be effective at
reducing risk associated with the exposure being hedged. Such contracts
are designated at the inception of the contract.
In June, 2001, the Financial Accounting Standards Board (FASB) approved
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS No. 141 improves the transparency of the accounting
and reporting for business combinations by requiring that all business
combinations be accounted for under a single method - the purchase method.
This Statement is effective for all business combinations initiated after
June 30, 2001.
In June, 2001, the FASB approved SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 applies to intangibles and goodwill
acquired after June 30, 2001, as well as goodwill and intangibles
previously acquired. Under this Statement goodwill as well as other
intangibles determined to have an infinite life will no longer be
amortized; however, these assets will be reviewed for impairment on a
periodic basis. This Statement is effective for the Company for the first
quarter in the fiscal year ended December 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Because SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a
F-9
discontinued operation under Opinion 30, two accounting models existed for
long-lived assets to be disposed of. The Board decided to establish a
single accounting model, based on the framework established in Statement
No. 121, for long-lived assets to be disposed of by sale. This Statement
is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years.
The Company is currently assessing the impact of these Statements but
management does not believe that these Statements will have a material
effect on the Company's consolidated financial statements.
Segment Information - The Company is managed in one operating segment,
footwear. Within their one operating segment, the Company has identified
four product groups; Rugged Outdoor, Occupational-Work, Military and
Handsewn Casual. The following is supplemental information on net sales by
product group:
% OF % OF % OF
2001 SALES 2000 SALES 1999 SALES
Rugged Outdoor $ 56,596,762 54.7% $ 62,297,449 60.4% $ 51,384,731 52.0%
Occupational 27,054,015 26.2% 28,204,383 27.3% 30,054,531 30.4%
Military 8,948,426 8.7%
Casual 4,446,109 4.3% 6,225,130 6.0% 8,989,091 9.1%
Factory Outlet Store 4,741,326 4.6% 5,916,952 5.7% 5,235,405 5.3%
Other 1,533,168 1.5% 585,073 0.6% 3,117,465 3.2%
------------ ----- ------------ ----- ------------ -----
Total $103,319,806 100.0% $103,228,987 100.0% $ 98,781,223 100.0%
============ ===== ============ ===== ============ =====
Net sales to foreign countries, primarily Canada, represented
approximately 1% of net sales in 2001, 2000, and 1999.
Reclassifications - Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with 2001
presentation.
2. CLOSURE OF MANUFACTURING OPERATIONS
In September 2001, the Board of Directors approved a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations.
Under this plan, the Company moved the footwear manufacturing operations
at its Nelsonville, Ohio factory to the Company's factory in Puerto Rico.
The restructuring plan was completed in the fourth quarter of 2001.
The execution of this plan, which started in September 2001, resulted in
the elimination of 67 employees at the Company's Nelsonville, Ohio
facility, and a transfer of a significant amount of machinery and
equipment located at the Nelsonville facility to the Moca, Puerto Rico
facility.
F-10
A reconciliation of the plant closing costs and accrual during fiscal year
2001 is as follows:
TOTAL ACCRUED BALANCE
EXPENSES DECEMBER 31, 2001
------------ -----------------
Severance:
Union $ 292,653
Non-union 71,668 $ 71,668
Curtailment of pension plan benefits 690,000 690,000
Employee benefits 34,223 33,000
Factory lease 90,000 85,000
Equipment and relocation costs 260,626 5,000
Legal and other costs 60,830 18,623
---------- ----------
Total $1,500,000 $ 903,291
========== ==========
The Company expects no additional restructuring and realignment costs
associated with this plan.
3. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
-----------------------------
2001 2000
Raw materials $ 4,537,865 $ 5,043,839
Work-in-process 1,578,107 1,288,960
Finished goods 20,077,999 23,604,593
Factory outlet finished goods 1,680,693 2,438,398
Less reserve for obsolescence or lower of
cost or market (161,000) (340,553)
------------ ------------
Total $ 27,713,664 $ 32,035,237
============ ============
F-11
4. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
------------------------------
2001 2000
Land $ 572,838 $ 572,838
Building and improvements 13,387,497 13,892,507
Machinery and equipment 20,415,510 23,021,226
Furniture and fixtures 1,685,485 3,854,503
Lasts, dies and patterns 6,739,027 6,029,904
Construction work-in-progress 223,862 30,037
------------ ------------
Total 43,024,219 47,401,015
Less - accumulated depreciation (22,258,125) (23,070,696)
------------ ------------
Net fixed assets $ 20,766,094 $ 24,330,319
============ ============
5. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
--------------------------
2001 2000
Bank - revolving credit facility $11,000,000 $20,491,101
Equipment and other obligations 616,500 896,408
Real estate obligations 5,827,541 6,108,661
Other 1,125 19,480
----------- -----------
Total debt 17,445,166 27,515,650
Less current maturities 469,143 1,070,374
----------- -----------
Net long-term debt $16,976,023 $26,445,276
=========== ===========
On September 18, 2000, the Company entered into a three-year loan and
security agreement with GMAC Business Credit, LLC (GMAC) refinancing its
former bank revolving line of credit based on the collateral value of its
accounts receivable and inventory. This loan and security agreement has
the Company's borrowing base at a maximum of $50,000,000. Interest on the
revolving credit facility is payable monthly at one-quarter percent
(0.25%) per annum in excess of the GMAC's Prime rate, and the entire
principal is due September 17, 2003. Under terms of the agreement, the
Company has the option to borrow up to half of their outstanding
obligation at LIBOR plus two and one-half percent (2.50%). The interest
rate for the outstanding balance at December 31, 2001 was 4.64% (9.75% at
December 31, 2000).
Amounts borrowed under the agreement are secured by accounts receivable,
inventory, equipment, intangible assets of the Company and its
wholly-owned domestic subsidiary, Lifestyle Footwear, Inc. Additional
security includes 65% of the capital stock of the Company's wholly-owned
foreign subsidiary, Five Star Enterprises, Ltd., and 100% of the capital
stock of the Company's wholly-owned domestic subsidiary.
F-12
The loan and security agreement contains certain restrictive covenants,
which among other things, requires the Company to maintain a certain level
of EBITDA (earnings before interest, taxes, and depreciation and
amortization), net worth, and fixed charge coverage. At December 31, 2001,
the Company was not in compliance with certain of these bank covenant
requirements. In February 2002, the Company obtained a waiver from GMAC
with respect to such events of noncompliance and amended the loan
covenants for 2002. Management believes the Company will be in compliance
with the revised 2002 covenants.
Equipment and other obligations at December 31, 2001 bear interest at a
variable rate of prime plus one-quarter percent (.25%) and are payable in
monthly installments to 2003. The equipment is held as collateral against
the outstanding obligations.
In January 2000, the Company completed a mortgage financing facility with
GE Capital Corp. for three of its facilities totaling $6,300,000. The
facility bears interest at 8.275%, with total monthly principal and
interest payments of $63,100 to 2014. The proceeds of the financing were
used to pay down borrowings under a former revolving credit facility.
In 1998, the Company entered into two interest rate swap agreements with a
major bank for a total notional amount of $25,000,000 with average
maturities of seven years to reduce the impact of changes in interest
rates on its variable rate long-term debt. One interest rate swap
agreement for a notional amount of $10,000,000 was terminated in 1999 and
resulted in a gain of $103,000. The remaining interest rate swap agreement
for a notional amount of $15,000,000 was terminated during the second
quarter 2000 and resulted in a gain of $294,000. At December 31, 2001 and
2000 the Company has no interest rate swap agreements.
Long-term debt matures as follows for the years ended December 31:
2002 $ 469,143
2003 486,034
2004 503,796
2005 491,871
2006 400,254
Thereafter 15,094,068
------------
Total $ 17,445,166
============
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 2001 and 2000, based on
current market prices for the same or similar issues or on debt available
to the Company with similar rates and maturities.
F-13
6. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $1,096,000, $1,161,000, and $1,069,000 in rent
expense under operating lease arrangements for 2001, 2000 and 1999,
respectively.
Included in total rent expense above are monthly payments of $7,000 for
2001, 2000 and 1999, respectively, for the Company's former Ohio
manufacturing and clearance center facility leased from an entity in which
the owners are also shareholders of the Company.
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
2002 $ 652,000
2003 579,000
2004 696,000
2005 743,000
2006 472,000
Thereafter 823,000
-----------
Total $ 3,965,000
===========
7. INCOME TAXES
Rocky Inc. and its wholly-owned subsidiary doing business in Puerto Rico,
Lifestyle, are subject to U.S. Federal income taxes; however, the
Company's income earned in Puerto Rico is allowed favorable tax treatment
under Section 936 of the Internal Revenue Code if conditions as defined
therein are met. Five Star is incorporated in the Cayman Islands and
conducts its operations in a "free trade zone" in the Dominican Republic
and, accordingly, is currently not subject to Cayman Islands or Dominican
Republic income taxes. Thus, the Company is not subject to foreign income
taxes.
At December 31, 2001, a provision has not been made for U.S. taxes on the
accumulated undistributed earnings of Five Star through December 31, 2001
of approximately $5,309,000 that would become payable upon repatriation to
the United States. It is the intention of the Company to reinvest all such
earnings of Five Star in operations and facilities outside of the United
States. In addition the Company has provided Puerto Rico tollgate taxes on
approximately $3,684,000 of accumulated undistributed earnings of
Lifestyle prior to the fiscal year ended June 30, 1994, that would be
payable if such earnings were repatriated to the United States. If the
Five Star and Lifestyle undistributed earnings were distributed to the
Company in the form of dividends, the related taxes on such distributions
would be approximately $1,805,000 and $368,000, respectively. In 2001, the
Company received an abatement for Puerto Rico tollgate taxes on all
earnings subsequent to June 30, 1994. This resulted in the Company
reducing its deferred tax liability by $408,000.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes.
Accordingly, deferred income taxes have been provided for the temporary
F-14
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.
Income taxes (benefits) are summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
Federal:
Current $ 112,508 $ (115,262) $(1,273,033)
Deferred (174,636) 263,071 (1,007,542)
----------- ----------- -----------
Total Federal (62,128) 147,809 (2,280,575)
----------- ----------- -----------
State and local:
Current (153,794) 345,680 97,676
Deferred 122,484 (310,025) (44,680)
----------- ----------- -----------
Total state and local (31,310) 35,655 52,996
----------- ----------- -----------
Total $ (93,438) $ 183,464 $(2,227,579)
=========== =========== ===========
A reconciliation of recorded Federal income tax expense (benefit) to the
expected expense (benefit) computed by applying the Federal statutory rate
of 34% for all periods to income (loss) before income taxes follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
Expected expense (benefit) at statutory rate $ 488,711 $ 95,202 $(2,501,494)
Increase (decrease) in income taxes
resulting from:
Exempt (income) loss from operations in
Puerto Rico, net of tollgate taxes (97,344) 77,938 563,663
Exempt income from Dominican
Republic operations (67,967) (74,034) (625,978)
State and local income taxes (benefit) (20,628) 23,532 (18,019)
Revision of prior year taxes (12,123) 56,229
Alternative minimum tax 118,829
Abatement of Puerto Rico taxes (408,000)
Other - net 23,913 4,597 182,424
----------- ----------- -----------
Total $ (93,438) $ 183,464 $(2,280,575)
=========== =========== ===========
F-15
Deferred income taxes recorded in the consolidated balance sheets at
December 31, 2001 and 2000 consist of the following:
DECEMBER 31,
2001 2000
----------- -----------
Deferred tax assets:
Alternative minimum tax carryforward - Rocky $ 118,829 $ 118,829
Alternative minimum tax carryforward - Lifestyle 283,200 188,800
Asset valuation allowances 288,317 648,577
Plant closing costs and prepaid assets 257,342
Pension and deferred compensation 148,004 202,291
Net operating loss carryforwards 1,616,901 1,657,782
Inventories 201,832 318,267
----------- -----------
Total deferred tax assets 2,914,425 3,134,546
----------- -----------
Deferred tax liabilities:
Fixed assets (1,580,872) (1,497,685)
State and local income taxes (53,725) (47,425)
Prepaid assets (276,989)
Tollgate tax on Lifestyle earnings (368,435) (776,435)
----------- -----------
Total deferred tax liabilities (2,003,032) (2,598,534)
----------- -----------
Net deferred tax asset $ 911,393 $ 536,012
=========== ===========
At December 31, 2001, the Company has approximately $4,293,000 of net
operating loss carryforwards for Federal income tax purposes. The net
operating loss carryforward expires in 2019 and 2020.
8. RETIREMENT PLANS
The Company sponsors separate noncontributory defined benefit pension
plans covering the union and non-union workers of the Company's Ohio and
Puerto Rico operations. Benefits under the union plan are primarily based
upon negotiated rates and years of service. Benefits under the non-union
plan are based upon years of service and highest compensation levels as
defined. Annually, the Company contributes to the plans at least the
minimum amount required by regulation.
In April 2000, the Company announced that certain union and non-union
employees were eligible to participate in voluntary early retirement
plans. As part of the plans, employees who accepted the offers received
increased retiree benefits that are to be paid from plan assets over the
employees established retirement period. The effect of the union and
non-union plan amendments increased the Company's benefit obligation
$1,907,868 in 2000.
F-16
In September, 2001 the Company announced a restructuring plan to
consolidate and realign the Company's footwear manufacturing operations.
As part of the plan, 67 employees were eliminated and their balances paid
directly from plan assets (a total of approximately $293,000). As a result
of the curtailment of certain retiree benefits and future employee service
periods, $690,570 is included in the calculation of 2001 net pension
expense as a curtailment loss. Also, benefits under the Company's union
plan were frozen at September 30, 2001.
The funded status of the Company's plans and reconciliation of accrued
pension cost at December 31, 2001 and 2000 is presented below (information
with respect to benefit obligations and plan assets is as of September
30):
DECEMBER 31,
-----------------------------
2001 2000
----------- -----------
Change in benefit obligation:
Projected benefit obligation at beginning of the year $ 7,985,007 $ 5,422,818
Service cost 316,572 303,748
Interest cost 571,295 403,542
Actuarial (gain) (93,218)
Amendments 1,907,868
Exchange (gain) 115,396 248,684
Benefits paid (652,587) (301,653)
----------- -----------
Projected benefit obligation at end of year $ 8,242,465 $ 7,985,007
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,570,688 $ 4,387,026
Actual return (loss) on plan assets (721,643) 185,315
Employer contribution 1,870,000 300,000
Benefits paid (652,587) (301,653)
----------- -----------
Fair value of plan assets at end of year $ 5,066,458 $ 4,570,688
=========== ===========
Unfunded deficit $(3,176,007) $(3,414,319)
Remaining unrecognized benefit obligation existing
at transition 105,993 232,362
Unrecognized prior service costs due to plan amendments 1,696,929 2,473,620
Unrecognized net loss 1,542,036 289,021
Adjustment required to recognize minimum liability (2,957,312) (2,526,603)
Additional contributions (September 30-December 31) 1,000,000 650,000
Curtailment charge included in plant closing costs 690,570
----------- -----------
Accrued pension cost $(1,097,791) $(2,295,919)
=========== ===========
F-17
Net pension cost of the Company's plans is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
Service cost $ 316,572 $ 303,748 $ 323,726
Interest 571,295 403,542 356,194
Expected loss on assets (509,194) (393,877) (404,283)
Amortization of unrecognized transition obligation 27,892 27,892 27,892
Amortization of unrecognized prior service cost 184,598 122,508 124,481
Curtailment charge 690,570
----------- ----------- -----------
Net pension cost $ 1,281,733 $ 463,813 $ 428,010
=========== =========== ===========
The assets of the plans consist primarily of common stocks, bonds, and
cash equivalents. The assets of the plans include 81,400 and 61,400 shares
of the Company's common stock with a market value of $416,768 and $314,675
at September 30, 2001 and 2000, respectively. The Company's unrecognized
benefit obligations existing at the date of transition for the non-union
plan is being amortized over 21 years. Actuarial assumptions used in the
accounting for the plans were as follows:
DECEMBER 31,
-----------------
2001 2000
Discount rate 7.25% 7.25%
Average rate of increase in compensation levels
(non-union only) 3.0% 3.0%
Expected long-term rate of return on plan assets 8.0% 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 consolidated financial statements a non-current deferred
pension asset of $1,802,922 and $2,526,603 as of December 31, 2001 and
2000, respectively. In addition, under SFAS No. 87, if the minimum
liability exceeds the unrecognized prior service cost and the remaining
unrecognized benefit obligation at transition, the excess is reported in
other comprehensive income (loss) ($831,161, net of a deferred tax benefit
of $323,229).
The Company also sponsors a 401(k) savings plan for substantially all of
its union and non-union employees. The Company only matches contributions
for non-union employees. Funding for non-union employees electing to
contribute a percentage of their compensation is matched by the Company,
subject to certain limitations. No Company contribution was made for 2001,
2000 and 1999.
F-18
9. CAPITAL STOCK
The Company has authorized 250,000 shares of voting preferred stock
without par value. No shares are issued or outstanding. Also, the Company
has authorized 250,000 shares of non-voting preferred stock without par
value. Of these, 125,000 shares have been designated Series A non-voting
convertible preferred stock with a stated value of $.06 per share, of
which no shares are issued and none are outstanding at December 31, 2001
and 2000, respectively.
In November 1997, the Company's Board of Directors adopted a Rights
Agreement which provides for one preferred share purchase right to be
associated with each share of the Company's outstanding common stock.
Shareholders exercising these rights would become entitled to purchase
shares of Series B Junior Participating Cumulative Preferred Stock. The
rights may be exercised after the time when a person or group of persons
without the approval of the Board of Directors acquire beneficial
ownership of 20 percent or more of the Company's common stock or announce
the initiation of a tender or exchange offer which if successful would
cause such person or group to beneficially own 20 percent or more of the
common stock. Such exercise may ultimately entitle the holders of the
rights to purchase for $80 per right, common stock of the Company having a
market value of $160. The person or groups effecting such 20 percent
acquisition or undertaking such tender offer will not be entitled to
exercise any rights. These rights expire November 2007 unless earlier
redeemed by the Company under circumstances permitted by the Rights
Agreement.
The Company reacquired 124,095 and 292,600 shares of common stock in 1994
and 1998 for $1,226,059 and $2,038,118, respectively. In December 1998,
the Board of Directors approved the retirement of all shares held in
treasury (total of 416,695 shares). During 1999, the Company purchased and
retired 685,100 shares for $4,285,184 under its share repurchase program.
At December 31, 2001, the Company's Board of Directors has not authorized
any additional share repurchase. There were no treasury stock purchases in
2001 and 2000, respectively.
The Company adopted a Stock Option Plan in 1992 which provides for the
issuance of options to purchase up to 400,000 common shares of the
Company. On October 11, 1995, the Company adopted the 1995 Stock Option
Plan which provides for the issuance of options to purchase up to an
additional 400,000 common shares of the Company. In May 1998, the Company
adopted the Amended and Restated 1995 Stock Option Plan which provides for
the issuance of options to purchase up to an additional 500,000 common
shares of the Company. All employees, officers, directors, consultants and
advisors providing services to the Company are eligible to receive options
under the Plans. In addition, the Plans provide for the annual issuance of
options to purchase 5,000 shares of common stock to each non-employee
director of the Company.
F-19
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, 1999 through December 31, 2001:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at January 1, 1999 560,410 $10.86
Issued 247,000 5.82
Exercised (1,500) 6.00
Forfeited (112,160) 10.61
-------- -----
Outstanding at December 31, 1999 693,750 9.12
Issued 221,000 6.87
Forfeited (232,250) 8.40
-------- -----
Outstanding at December 31, 2000 682,500 8.64
Issued 283,750 4.04
Exercised (3,000) 6.00
Forfeited (51,250) 7.60
-------- -----
Outstanding at December 31, 2001 912,000 $ 7.27
-------- -----
Options exercisable at December 31:
1999 386,035 $ 9.27
2000 444,250 $ 9.37
2001 604,000 $ 8.45
The following table summarizes information about options outstanding at
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------------
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICES CONTRACTUAL EXERCISE EXERCISE
NUMBER LIFE PRICE NUMBER PRICE
$3.875 - $5.00 314,750 7.8 $ 4.14 90,250 $ 4.02
$5.25 - $7.50 219,750 5.7 $ 5.93 185,250 $ 5.92
$7.625 - $9.50 200,500 5.2 $ 8.05 152,750 $ 8.19
$9.75 - $9.875 51,500 0.7 $ 9.76 51,000 $ 9.75
$13.125 - $16.875 125,500 4.0 $15.22 124,750 $15.22
-------- --------
Total 912,000 5.8 $ 7.27 604,000 $ 8.45
======== ========
F-20
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation costs for
the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have resulted in the amounts as reported below. In
determining the estimated fair value of each option granted on the date of
grant the Company uses the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2001, 2000 and
1999, respectively; dividend yield of 0%; expected volatility of 44%, 45%
and 41%; risk-free interest rates of 4.21%, 6.70% and 6.66%; and expected
life of 6 years. The weighted average grant date fair value of options
issued during 2001, 2000 and 1999 was $4.04, $3.09 and $3.40,
respectively.
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
Net income (loss):
As reported $1,530,822 $ 96,542 $(5,129,757)
Pro forma $1,096,952 $(99,255) $(5,201,230)
Income (loss) per share:
As reported:
Basic and diluted $ 0.34 $ 0.02 $ (1.09)
Pro forma:
Basic and diluted $ 0.24 $ (0.02) $ (1.10)
The pro forma amounts are not representative of the effects on reported
net income for future years.
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) plus the results
of certain non-shareholders' equity changes not reflected in the Statement
of Operations. The components of comprehensive income (loss), net of tax,
are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
Net income (loss) $ 1,530,822 $ 96,542 $(5,129,757)
Minimum pension liability, net of tax benefit (831,161)
----------- ----------- -----------
Comprehensive income (loss) $ 699,661 $ 96,542 $(5,129,757)
=========== =========== ===========
The 2001 minimum pension liability is net of a deferred tax benefit of
$323,229.
F-21
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
Interest $ 2,644,998 $ 3,279,905 $ 2,547,104
=========== =========== ===========
Federal, state and local
income taxes - net of refunds $ (36,309) $(3,450,000) $ 2,370,588
=========== =========== ===========
Non Cash Transaction - Increase (decrease) in additional minimum pension
liability as follows:
Deferred pension asset $ 1,154,390
Deferred tax benefit (323,229)
-----------
Total $ 831,161
===========
Accounts payable at December 31, 2001, 2000 and 1999 include a total of
$5,310, $12,098 and $189,659, respectively, relating to the purchase of
fixed assets.
12. SUBSEQUENT PURCHASE OF LICENSING RIGHTS
On January 4, 2002, the Company re-acquired the licensing rights to
ROCKY(R) Kids. The rights to ROCKY(R) Kids were purchased from Philip's
Kids, LLC ("Philip's"), an entity owned by a member of the Company's Board
of Directors. The purchase price for the licensing rights was
approximately $500,000. An additional purchase price is contingent based
upon future sales of these products.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2001 and 2000:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL YEAR
2001
Net sales $ 16,063,895 $ 22,006,132 $ 38,490,267 $ 26,759,512 $103,319,806
Gross margin 3,167,074 6,152,129 9,804,424 4,128,313 $ 23,251,940
Net income (loss) (906,094) 702,339 1,479,694 254,883 $ 1,530,822
Net income (loss) per
common share:
Basic $ (0.20) $ 0.16 $ 0.33 $ 0.06 $ 0.34
Diluted $ (0.20) $ 0.16 $ 0.32 $ 0.06 $ 0.34
2000
Net sales $ 15,131,033 $ 23,114,100 $ 37,230,069 $ 27,753,785 $103,228,987
Gross margin 3,532,682 5,471,727 8,744,165 6,863,321 $ 24,611,895
Net income (loss) (1,615,568) 343,288 1,262,972 105,850 $ 96,542
Net income (loss) per
common share:
Basic and diluted $ (0.36) $ 0.08 $ 0.28 $ 0.02 $ 0.02
No cash dividends were paid during 2001 and 2000.
F-22