UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K/A NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
--------------------
DATE OF REPORT: APRIL 15, 2003
--------------------
ROCKY SHOES & BOOTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------
Ohio 0-21026 31-1364046
- ----------- ---------------------- ----------
(STATE OR OTHER (COMMISSION FILE NO.) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
--------------------
39 East Canal Street
Nelsonville, Ohio 45764
(740) 753-1951
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
--------------------
Not Applicable
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
-------------------
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 15, 2003, Rocky Shoes & Boots, Inc., an Ohio corporation
("Rocky") completed the purchase of certain assets from Gates-Mills, Inc.
("Gates") pursuant to an Asset Purchase Agreement by and among Rocky as Buyer,
Gates as Seller, and Robert Gates and Elizabeth Gates Camarra, as shareholders
of Gates (the "Asset Purchase Agreement"). Under the terms of the Asset Purchase
Agreement, Rocky acquired all of the intellectual property of Gates, including
ownership of the Gates(R) trademark, selected raw material and finished goods
inventory, and certain records in connection with the Gates business in exchange
for $3,510,070 plus a deferred purchased price if sales by Rocky related to the
Gates product line from date of the purchase through December 31, 2003 reach
certain targets.
The transaction was accomplished through arms-length negotiations
between Rocky's management and Gates's management. There was no material
relationship between the stockholders of Gates and Rocky or any of the Rocky's
affiliates, any of Rocky's directors or officers, or any associate of any such
Rocky director or officer, prior to this transaction.
This Form 8-K/A amends Item 7 of the Current Report on Form 8-K dated
April 15, 2003, filed with the Securities and Exchange Commission on April 30,
2003, to include financial statements that were not available at the time of
filing of the Form 8-K. As a result of the above-described acquisition, Item 7
of Form 8-K and Rule 3-05 of Regulation S-X require that Rocky provide audited
financial information for Gates for 2001 and 2002, unaudited financial
information for Gates for the quarter ended March 31, 2003, and certain pro
forma financial information based upon the Gates financial information so
provided. Rocky has requested and Gates has been unable to provide audited
financial statements for 2002 due to the fact that Gates wound down its
operations in early 2003 during the 2002 audit. Furthermore, for this same
reason, Rocky is unable to obtain the unaudited financial statements for the
quarter ended March 31, 2003. Gates does have 2001 audited financial statements,
but Gates' independent public accountant will not give its consent to use of the
audited 2001 financial statements in this Form 8-K/A due to substantial payments
owed to it by Gates. Because Gates is no longer operational, Rocky is unable to
obtain the required audited 2001 and 2002 financial information and the
unaudited March 31, 2003 financial information without unreasonable effort and
expense. Therefore, pursuant to Rule 12b-21 of the Securities Exchange Act of
1934, as amended, Rocky is presenting in this Form 8-K/A the unaudited financial
information for 2001 and 2002 for Gates and the pro forma financial information
based upon the same. The unaudited 2001 and 2002 financial statements have been
derived from information furnished to Rocky in connection with its acquisition
of Gates. No financial statement information for Gates for 2003 has been
furnished to Rocky.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The following is a list of the financial information for Gates
filed with this report:
Unaudited Consolidated Balance Sheets as of December 31, 2001 and 2002.... F-1
Unaudited Consolidated Statements of Operations for the Years
Ended December 31, 2001 and 2002................................. F-2
Unaudited Consolidated Statements of Comprehensive Income (Loss)
for the Years Ended December 31, 2001 and 2002................... F-3
Unaudited Consolidated Statements of Changes in Equity for
the Years Ended December 31, 2001 and 2002....................... F-4
Unaudited Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001 and 2002................................. F-5
Notes to Unaudited Consolidated Financial Statements for the
Years Ended December 31, 2001 and 2002........................... F-6 - F-15
2
(B) PRO FORMA FINANCIAL INFORMATION.
The following is a list of the pro forma financial information
for Rocky and Gates filed with this report:
Introductory Notes to Pro Forma Consolidated
Financial Statements............................................. PF-1
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 2002................................................ PF-2
Unaudited Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 2002............................. PF-3
Footnotes to Unaudited Pro Forma Consolidated Financial
Information...................................................... PF-4 - PF-5
(C) EXHIBITS.
EXHIBIT NO. DESCRIPTION
2(a) Asset Purchase Agreement by and among
Rocky Shoes & Boots, Inc. as Buyer,
Gates-Mills, Inc. as Seller, Robert
Gates and Elizabeth Gates Camarra as
Shareholders of Seller (incorporated
by reference to Exhibit 2(a) to
Current Report on Form 8-K dated April
15, 2000, filed with the Securities
and Exchange Commission on April 30,
2003).
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: June 27, 2003 By: /s/ James E. McDonald
----------------------------------------
James E. McDonald, Vice President and
Chief Financial Officer
4
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2(a) Asset Purchase Agreement by and among Rocky
Shoes & Boots, Inc. as Buyer, Gates-Mills, Inc.
as Seller, Robert Gates and Elizabeth Gates
Camarra as Shareholders of Seller (incorporated
by reference to Exhibit 2(a) to Current Report
on Form 8-K dated April 15, 2000, filed with
the Securities and Exchange Commission on April
30, 2003).
5
GATES-MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
CURRENT ASSETS:
Cash $ 407,462 $ 432,355
Accounts receivable 4,888,507 3,900,499
Inventory 4,625,352 7,292,449
Income taxes receivable 773,485
Deferred income taxes 192,916 575,548
Other current assets 153,135 124,357
------------ ------------
Total current assets 11,040,857 12,325,208
PROPERTY, PLANT AND EQUIPMENT--Net 1,612,723 1,392,355
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES 8,243 333,218
OTHER ASSETS 80,000 33,957
------------ ------------
TOTAL ASSETS $ 12,741,823 $ 14,084,738
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 200,268 $ 78,712
Current portion of non-qualified pension liabilities 32,865 9,716
Current portion of obligations under capital lease 95,864
Bank acceptances payable 2,767,315 3,920,760
Note payable--line of credit 3,098,000 1,105,000
Accounts payable 1,163,298 1,117,214
Accrued expenses and other liabilities 675,511 315,930
Income taxes payable 85,980 727,895
Due to Montgomery Leather Corporation 234,262 294,833
------------ ------------
Total current liabilities 8,353,363 7,570,060
LONG-TERM LIABILITIES:
Long-term debt 976,753 147,646
Long-term portion of non-qualified pension liabilities 720,060 191,549
Long-term portion of obligations under capital lease 158,677
------------ ------------
Total long-term liabilities 1,855,490 339,195
------------ ------------
Total liabilities 10,208,853 7,909,255
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 220,000 220,000
Additional paid-in capital 20,000 20,000
Retained earnings 2,624,453 6,267,397
Accumulated other comprehensive loss (17,280) (17,711)
------------ ------------
Total 2,847,173 6,489,686
Treasury stock--at cost (314,203) (314,203)
------------ ------------
Total shareholders' equity 2,532,970 6,175,483
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,741,823 $ 14,084,738
============ ============
See notes to consolidated financial statements.
F-1
GATES-MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
SALES $ 23,600,706 $ 24,005,521
LESS: Discounts, returns and allowances 3,711,901 2,647,208
------------ ------------
NET SALES 19,888,805 21,358,313
COST OF SALES 15,015,825 14,803,851
------------ ------------
GROSS PROFIT 4,872,980 6,554,462
LOSS ON ADJUSTMENT OF INVENTORY TO
MARKET VALUE 1,482,307
------------ ------------
GROSS PROFIT LESS ADJUSTMENT OF INVENTORY 3,390,673 6,554,462
------------ ------------
OPERATING EXPENSES:
Selling 2,623,577 2,224,187
General and administrative 2,405,814 1,380,647
Distribution 1,961,011 1,866,333
Depreciation 128,597 96,218
------------ ------------
Total operating expenses 7,118,999 5,567,385
------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,728,326) 987,077
------------ ------------
OTHER EXPENSES:
Interest 460,563 650,498
Non-operating 625,842 188,000
------------ ------------
Total other expenses 1,086,405 838,498
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (4,814,731) 148,579
INCOME TAX (BENEFITS) (1,171,787) (37,470)
------------ ------------
NET INCOME (LOSS) $ (3,642,944) $ 186,049
============ ============
See notes to consolidated financial statements.
F-2
GATES-MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, 2002 AND 2001
2002 2001
NET INCOME (LOSS) $(3,642,944) $186,049
OTHER COMPREHENSIVE INCOME (LOSS)--
Foreign currency translation adjustment 431 (9,914)
----------- --------
COMPREHENSIVE INCOME (LOSS) $(3,642,513) $176,135
=========== ========
See notes to consolidated financial statements.
F-3
GATES-MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
RETAINED EARNINGS--Beginning of year $ 6,267,397 $ 6,081,348
Net income (loss) for the year (3,642,944) 186,049
----------- -----------
RETAINED EARNINGS--End of year $ 2,624,453 $ 6,267,397
=========== ===========
ACCUMULATED OTHER COMPREHENSIVE LOSS--
Beginning of year $ (17,711) $ (7,797)
Other comprehensive income (loss) for the year 431 (9,914)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE LOSS--
End of year $ (17,280) $ (17,711)
=========== ===========
See notes to consolidated financial statements.
F-4
GATES-MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,642,944) $ 186,049
----------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 136,851 97,808
Loss on adjustment of inventory to market value 1,482,307
Deferred income taxes 383,063 (239,089)
Provision for legal settlement 188,000
Provision for IDA settlement 176,970
Provision for post-employment benefits 818,434
Provision for post-retirement benefits 568,642
Proceeds from life insurance--net (402,883)
(Increase) decrease in current assets:
Accounts receivable--net (988,008) 1,304,941
Inventories 1,184,790 (919,803)
Income taxes receivable (773,485)
Other current assets (28,778) (20,595)
Increase (decrease) in current liabilities:
Accounts payable 46,084 4,867
Accrued expenses and other liabilities 359,581 (148,011)
Income taxes payable (641,915) 196,038
Due to Montgomery Leather (60,571) (19,271)
----------- -----------
Total adjustments 2,261,082 444,885
----------- -----------
Net cash provided by (used in) operating activities (1,381,862) 630,934
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from life insurance 727,858
Purchase of property, plant and equipment (357,219) (74,620)
(Increase) in other assets (46,043) (850)
(Increase) in cash surrender value of life insurance (17,069)
----------- -----------
Net cash provided by (used in) investing activities 324,596 (92,539)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank acceptances payable (1,153,445) 1,458,471
Net borrowings (repayments) on line of credit 1,993,000 (1,855,000)
Proceeds from capital lease obligations 311,050
Payments on long-term debt (61,723) (58,603)
Payments on capital lease obligations (56,509)
----------- -----------
Net cash provided by (used in) financing activities 1,032,373 (455,132)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,893) 83,263
CASH AND CASH EQUIVALENTS--Beginning of year 432,355 349,092
----------- -----------
CASH AND CASH EQUIVALENTS--End of year $ 407,462 $ 432,355
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid (received) during the year for:
Interest $ 261,298 $ 362,132
=========== ===========
Income taxes $ (146,143) $ (5,581)
=========== ===========
Non-cash financing activities:
Long-term liability on provision for legal settlement $ -- $ 188,000
=========== ===========
Long-term liability provision for IDA settlement $ 176,970 $ --
=========== ===========
Long-term liability for post-employment benefits $ 818,434 $ --
=========== ===========
See notes to consolidated financial statements.
F-5
GATES-MILLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include
the accounts of Gates-Mills, Inc. and its wholly-owned
subsidiaries, The Daniel Hays Company, Inc. and Gates Gloves
(Canada), Inc. Inter-company investments, advances and
transactions have been eliminated.
NATURE OF OPERATIONS -- The Company is a wholesale distributor
of gloves to retailers throughout North America.
Substantially, the Company's entire inventory is manufactured
in China by independent contractors.
FOREIGN OPERATIONS -- Gates Gloves (Canada), Inc. operates as
a wholesale distributor of gloves in Canada. Foreign currency
translation adjustments are included as a component of
comprehensive income.
CASH -- For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash. The
Company maintains cash balances at various banks. The Federal
Deposit Insurance Corporation insures deposits at each bank,
up to $100,000; any excess is uninsured. At December 31, 2002
and 2001, cash balances in excess of depository insurance were
approximately $330,000 and $300,000, respectively.
ACCOUNTS RECEIVABLE -- Accounts receivable are stated net of
an allowance for doubtful accounts of $656,680 and $234,298 as
of December 31, 2002 and 2001, respectively (see Note 2).
INVENTORIES -- Inventories are stated at the lower of cost or
market on a first-in first-out basis (see Note 3).
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment
are recorded at cost. Renewals and betterments of property are
accounted for as additions to asset accounts. Repairs and
maintenance are expensed as incurred. Depreciation is provided
using either straight-line or accelerated methods for both
financial reporting and income tax purposes. Estimated useful
lives vary from 5 to 10 years for machinery, equipment,
furniture and fixtures, and from 10 to 40 years for buildings
and improvements.
ADVERTISING -- It is the Company's policy to expense
advertising costs as incurred. Advertising expenses were
$241,916 and $195,222 for the years ended December 31, 2002
and 2001, respectively.
INCOME TAXES -- Income taxes have been provided for all income
reported in the financial statements. Financial statement
income differs from income reported for taxation purposes
mainly due to differences in accounting for bad debts,
merchandise returns and inventory capitalization.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Management considers past experience and current market
conditions when estimating sales returns. Because of the
inherent uncertainties in estimating returns, it is at least
reasonably possible that the estimates used will change in the
near term.
F-6
Management considers past experience and current conditions
when estimating allowance for doubtful accounts. Because of
the inherent uncertainties in estimating this allowance, it is
at least reasonably possible the estimate used will change in
the near term.
RECLASSIFICATIONS -- Certain reclassifications of expenses
have been made to the prior year's financial statements in
order to enhance comparability with the current year. These
reclassifications have no effect on net income or retained
earnings.
2. ACCOUNTS RECEIVABLE
Accounts receivable are uncollateralized customer obligations
due within 30 days from the invoice date. Interest is not
charged on delinquent accounts. Payments on accounts
receivable are allocated to the customer's specific invoices
identified on the customer's remittance advice or, if
unspecified, are applied to the earliest unpaid invoices.
The carrying amount of accounts receivable is reduced by a
valuation allowance that reflects management's best estimate
of the amounts that will ultimately not be collected.
Management individually reviews all accounts receivable
balances that exceed 90 days from invoice date and based on an
estimate of current credit worthiness estimates the portion,
if any, of the outstanding balance that will not be collected.
Additionally, management reserves 100% of accounts receivable
balances less anticipated proceeds from credit insurance, if
applicable, for all customers who have declared bankruptcy.
Finally, management applies a varying percentage of each
30-day aging increment to estimate a general allowance for
uncollectible accounts.
Accounts receivable consist of the following as of December
31, 2002:
Customer receivables $ 7,145,128
Allowance for estimated returns (1,600,000)
Allowance for uncollectible accounts (656,621)
-----------
Net $ 4,888,507
===========
3. INVENTORY
A schedule of inventory as of December 31 is as follows:
2002 2001
Raw materials $ 2,323,322 $ 2,638,825
Finished goods--in warehouse or transit 1,262,030 3,125,264
Finished goods--estimated returns 1,040,000 1,528,360
----------- -----------
Total $ 4,625,352 $ 7,292,449
=========== ===========
Raw material inventory includes approximately $2,131,000 and
$2,030,000 as of December 31, 2002 and 2001, respectively,
which is located in China.
Finished goods inventory at December 31, 2002 is shown net of
a $1,482,307 adjustment to reduce the value of inventory to
its estimated market value less a reasonable gross profit
margin allowance.
F-7
FINISHED GOODS -- Estimated returns are valued by management
at 65% of estimated sales returns.
4. PROPERTY, PLANT AND EQUIPMENT
A schedule of property, plant and equipment as of December 31
is as follows:
2002 2001
Land $ 67,400 $ 67,400
Building and improvements 1,902,171 1,902,171
Machinery and equipment 635,902 616,696
Computer equipment 533,485 203,731
Vehicles 10,980 10,980
---------- ----------
Total 3,149,938 2,800,978
Less: accumulated depreciation 1,537,215 1,408,623
---------- ----------
Property, plant and equipment-net $1,612,723 $1,392,355
========== ==========
Depreciation expense was $128,597 and $96,218 for the years
ended December 31, 2002 and 2001, respectively.
5. CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES
A schedule of net cash surrender value by insured at December
31 is as follows:
INSURED 2002 2001
W. B. Gates $ -- $324,974
J. D. Gates 7,604
Others 8,243 640
-------- --------
Total $ 8,243 $333,218
======== ========
W. B. Gates died during 2002. The Company received $727,858 in
proceeds on W. B. Gates' life insurance policies and
recognized income of $402,883, net of the cash value of the
policies, upon the death of Mr. Gates.
6. OTHER ASSETS
Other assets consist of the following at December 31:
F-8
2002 2001
Intangible assets-net $ 23,094 $ 29,451
Deposits 56,906 4,506
-------- --------
Total $ 80,000 $ 33,957
======== ========
7. LINE OF CREDIT/BANKERS' ACCEPTANCES
The Company had a $15 million revolving total credit line from
Fleet Bank of NY, including notes payable, letters of credit,
and bankers' acceptances.
The note bears interest at prime plus 1/4% (4.75% at December
31, 2002) and is secured by the Company's accounts receivable,
inventory, chattel paper, contract rights, instruments and
general intangibles, and is guaranteed by all subsidiary
companies.
The Company purchases a substantial amount of its raw
materials from overseas suppliers. These purchases are
financed by Fleet Bank through the issuance of bankers'
acceptances. These bankers' acceptances are issued for
six-month maturities and bear interest at rates ranging from
1.88% to 3.42%.
As of December 31, a breakdown of the Company's short-term
indebtedness is as follows:
2002 2001
Bankers' acceptances $ 2,767,315 $ 3,920,760
Borrowed on line of credit 3,098,000 1,105,000
----------- -----------
Total $ 5,865,315 $ 5,025,760
=========== ===========
During June 2002, the shareholders of the Company gave the
bank $5,000,000 in personal guarantees and collateralized
$750,000 of their personal assets as additional security for
the bank debt.
During January 2003, Fleet Bank notified the Company of its
intention to terminate its lending relationships with the
Company (see Note 17).
8. LONG-TERM DEBT
As of December 31, long-term debt consists of the following:
F-9
2002 2001
---- ----
Current Long-Term Current Long-Term
Installment note payable to Fleet Bank in
monthly installments of $2,585, including
interest at 8.91%. Final payment is due
April 2003. Secured by computer
equipment $ 9,664 $ -- $ 28,694 $ 9,664
Present value (using a 5% imputed interest
rate) of the Company's liability to a
former employee for the settlement of a
lawsuit. Payable in varying installments
of $5,000 to $40,000 per annum. Final
payment is due April 2010 34,591 124,584 50,018 137,982
Present value (using a 5% imputed interest
rate) of the Company's liability to a
former shareholder for a non-compete
agreement. Payable in 78 monthly
installments of $5,000, beginning February
2005. Final payment is due July 2011 300,773
Present value (using a 5% imputed interest
rate) of the Company's liability to a
former shareholder for a non-compete
agreement. 91 monthly payments of
$4,167 remain to be made as of
December 31, 2002. Final payment is due
July 2010 36,317 280,006
Present value (assuming a 5% imputed
interest rate) of the Company's liability
to a former shareholder for a severance
agreement. 25 monthly payments of
$9,000 remain to be made as of
December 31, 2002. Final payment is due
January 2005 100,458 113,657
Present value (assuming a 5% imputed
interest rate) of the Company's estimated
liability to the Johnstown IDA for prior
years' real estate taxes. Payable in 8
annual installments of $20,000, with a
final balloon payment of $63,335. Final
payment to be made February 2011 19,238 157,733
-------- -------- -------- --------
Total $200,268 $976,753 $ 78,712 $147,646
======== ======== ======== ========
F-10
Maturities of long-term debt as of December 31, 2002 are as
follows:
2004 $ 187,432
2005 116,271
2006 116,630
2007 122,598
2008 and thereafter 433,822
---------
Total $ 976,753
=========
Interest expense on all long-term borrowings was $272,758 and
$362,132 for the years ended December 31, 2002 and 2001,
respectively.
9. LEASE OBLIGATIONS
OPERATING LEASES -- The Company has a lease on space in New
York City used as a sales office. The lease expires in March
2006, and has been accounted for as an operating lease. Future
minimum lease payments are as follows:
2003 $ 44,400
2004 44,800
2005 44,800
2006 11,200
--------
Total $145,200
========
Rent expense was $51,139 and $56,431 for the years ended
December 31, 2002 and 2001, respectively.
CAPITAL LEASES -- The Company is the lessee of computer
equipment and software under various capital leases. The asset
and related liability under the capital lease are recorded at
the present value of the minimum lease payments. The assets
are being depreciated over their estimated useful lives of
five years. Depreciation of the assets under the capital lease
is included in depreciation expense for the year ended
December 31, 2002.
Following is a summary of property held under capital leases
at December 31, 2002:
Computer equipment $311,050
Less: accumulated depreciation 33,860
--------
Total $277,190
========
F-11
Future minimum payments for assets under capital lease are as
follows:
2003 $ 118,429
2004 118,429
2005 53,660
---------
Total 290,518
Less: amount representing imputed interest 35,977
---------
Present value of future minimum lease payments $ 254,541
=========
Present values of future minimum payments for assets under
capital lease are shown as follows:
Current portion of obligations under capital lease $ 95,864
Long-term portion of obligations under capital lease 158,677
--------
Total $254,541
========
10. COMMON STOCK
The details of consolidated common stock are summarized below:
SHARES SHARES TOTAL
AUTHORIZED ISSUED PAR VALUE VALUE
Gates-Mills, Inc. 3,000 2,200* $ 100 $ 220,000
The Daniel Hays Company, Inc. 500 500 100 50,000
Gates Gloves (Canada), Inc. 100 100 100 10,000
Eliminations (600) (600) (200) (60,000)
----- ----- ------ ---------
Consolidated 3,000 2,200* $ 100 $ 220,000
===== ===== ====== =========
* The consolidated common stock includes 866 shares held as treasury
stock recorded at cost. There are 1,334 shares of consolidated common
stock outstanding at December 31, 2002 and 2001
F-12
11. INCOME TAXES
A summary of the Company's tax provision for the years ended
December 31 is as follows:
2002 2001
Federal and foreign:
Current $(1,552,034) $ 192,995
Deferred 270,321 (203,412)
----------- ---------
Total federal (1,281,713) (10,417)
----------- ---------
State:
Current (2,816) 4,321
Deferred 112,742 (70,356)
----------- ---------
Total state 109,926 (66,035)
----------- ---------
Adjustment of prior period taxes 38,982
----------- ---------
Total $(1,171,787) $ (37,470)
=========== =========
The adjustment of prior period taxes represents the net
differences between taxes accrued for a December 31 year-end
and taxes paid for the Company's fiscal year of June 30.
For income tax purposes, the Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred income taxes
reflect the impact of temporary differences between amounts of
assets and liabilities for financial statement purposes and
such amounts as measured by tax laws and regulations. The
principle sources of temporary differences are different
methods of recording bad debts, capitalizing overhead costs
into inventory, recording credits for sales returns used for
financial accounting and tax purposes, and recording
liabilities for non-qualified pensions. The Company expects to
utilize all of its deferred tax benefit in future years;
accordingly, no allowance has been recorded.
12. PENSION PROGRAMS
QUALIFIED PLANS -- The Company participates in a
multi-employer pension plan that provides benefits to
unionized employees of the Company. Contributions to the Plan
amounted to $2,400 and $46,654 for the years ended December
31, 2002 and 2001, respectively.
The Company maintains a defined contribution plan for all
non-union employees over 21 years of age with more than one
year of service. Contributions are based on an employee's age
and years of service and are split between a tax allowance
contribution and a bonus. The maximum payment for any employee
is $2,000 per year. Contributions were $0 and $26,185 for the
years ended December 31, 2002 and 2001, respectively.
F-13
NON-QUALIFIED PLANS -- The Company also enters into
non-qualified pension agreements with certain key employees
providing post-retirement benefits for various terms up to
lifetime joint and survivor benefits. During 2002, the Company
entered into an agreement with the wife of a former key
executive to pay a benefit of $5,000/month until her death.
The Company recognized approximately $568,000 expense during
2002; this represents the estimated present value of the
post-retirement benefit, assuming a discount rate of 6.75%.
The Company's estimated liability, including liabilities
previously incurred, is:
Present value of unfunded liability $ 752,925
Less: Current portion 32,865
---------
Long-term portion $ 720,060
=========
Non-qualified pension expense was $616,166 and $29,746 for the
years ended December 31, 2002 and 2001, respectively.
13. CONTINGENCIES AND COMMITMENTS
The Company was contingently liable for unused letters of
credit of $91,706 and $461,264 at December 31, 2002 and 2001,
respectively.
The Company has entered into a consulting agreement with a
former shareholder. This agreement requires the consultant to
assist the Company in computer issues. The compensation to the
former shareholder under this agreement is $40,000 per year.
The agreement terminates upon the earliest of a material
breach of the non-competition agreement, the death of the
consultant, or July 2010.
The Company is a defendant in a patent infringement suit that
has been decided in the Company's favor by the Federal
District Court. The plaintiff's appeal rights have not yet
been exhausted. The Company believes it will not experience
any loss.
14. CONCENTRATION OF CREDIT
The Company is a manufacturer and distributor of gloves to
retailers throughout North America. The Company grants credit
to those retailers and generally has a diversified portfolio
of trade receivables; however, approximately 42% (22% and 20%)
of the Company's sales are derived from two unrelated
companies, and approximately 24% of its accounts receivable at
December 31, 2002 are from these customers. During 2001,
approximately 27% (15% and 12%) of the Company's sales were
derived from two unrelated customers and approximately 5% of
its accounts receivable at December 31, 2001 were from these
customers.
F-14
15. RELATED PARTY TRANSACTIONS
The Company's shareholders control, through common ownership,
Montgomery Leather Corporation, which provides leather to the
Company. Transactions with the related company are as follows:
2002 2001
Purchases $ 990,132 $1,536,501
========= ==========
Account payable $ 234,262 $ 294,833
========= ==========
16. RISKS AND UNCERTAINTIES
The accompanying balance sheet includes assets of
approximately $2,131,000 and $2,030,000 located in China at
December 31, 2002 and 2001, respectively. In addition,
substantially all the Company's production takes place in
China through independent contractors. Although China is
considered politically and economically stable, it is always
possible that unanticipated events in China or the United
States could disrupt the Company's ability to obtain gloves.
Substantially all of the Company's non-management and
non-administrative employees are covered by a collective
bargaining agreement with the Union of Needle Trades
Industrial and Textile Employers, AFL-CIO, CLC, Glove
Cities/Upper Hudson District. The agreement is scheduled to
expire in 2003.
17. SUBSEQUENT EVENTS
During January 2003, Fleet Bank notified the Company of its
intention to terminate its lending relationship with the
Company. The Company is currently in the process of
negotiating a new lending facility with a finance company.
Upon completion of negotiations and closure of the new lending
facility, the Fleet Bank debt will be repaid.
The lending facility currently being negotiated is not
expected to include financing for raw materials purchased
outside of the United States. The Company's current suppliers
in China do not have the necessary capital to finance raw
materials' purchases. Accordingly, the Company is currently
negotiating terms with different manufacturers in China to
purchase substantially all of the finished goods necessary to
meet anticipated 2003 sales requirements.
18. GOING CONCERN
The Company lost a substantial proportion of its retained
earnings during 2002 and the bank withdrew its credit support
in January 2003 (see Note 17). Therefore, there is substantial
doubt that the Company can continue operating as a going
concern through 2003 without replacing the credit facility and
finding suppliers who can meet the Company's purchasing
requirements (see Note 17).
Management is presently negotiating with both potential new
financers and suppliers. Should negotiations fail, it is
likely that the Company will cease operations and be forced to
liquidate. The estimated liquidation value of the Company's
assets has not been determined by management.
F-15
ROCKY SHOES & BOOTS, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 15, 2003, Rocky Shoes & Boots, Inc. announced the purchase of
substantially all of the assets, consisting primarily of inventory, goodwill and
other intangibles of Gates-Mills, Inc. pursuant to the terms of the Purchase
Agreement dated April 14, 2003 (the "Purchase Agreement"). The unaudited pro
forma consolidated financial statements have been prepared from and should be
read in conjunction with the consolidated financial statements and notes thereto
for Rocky Shoes & Boots, Inc. for the year ended December 31, 2002, included in
Rocky's report on Form 10-K, and the financial statements of Gates-Mills, Inc.
as of December 31, 2002 and 2001 and for the years then ended, which are
included in this Current Report on Form 8-K.
The pro forma consolidated balance sheet assumes that the acquisition
took place on December 31, 2002, and consolidates Rocky's December 31, 2002
consolidated balance sheet and Gates's December 31, 2002 unaudited consolidated
balance sheet.
The pro forma consolidated statement of operations assumes that the
acquisition took place as of the beginning of the year presented (January 1,
2002). The pro forma consolidated statement of operations for the year ended
December 31, 2002 consolidates Rocky's consolidated statement of income for the
year ended December 31, 2002 and Gates' unaudited consolidated statement of
operations for the year ended December 31, 2002.
In management's opinion, the pro forma results of operations are not
indicative of the actual results that would have occurred had the acquisition
been consummated at the beginning of the year presented and is not intended to
be a projection of future results. Pro forma adjustments that give effect to
actions taken by management or other efficiencies expected to be realized as a
result of the transactions are not reflected in the following pro forma results
of operations. Rocky has not completed the allocation of the purchase price for
this acquisition. Rocky is continuing to assess the components, including
trademarks, patents and goodwill, of the net intangible assets acquired.
Additionally, the transactions expenses are yet to be finalized. Therefore the
purchase price allocated based of the fair value of the assets acquired could be
adjusted once these items are finalized.
PF-1
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
ROCKY SHOES AND GATES-MILLS, INC.
BOOTS, INC. DECEMBER 31, 2002
DECEMBER 31, 2002 (UNAUDITED) ADJUSTMENTS TOTAL
----------------- ----------- ----------- -----
ASSETS
Cash and cash equivalents $ 4,276,722 $ 407,462 $ (407,462){A} 4,276,722
Trade receivables - net 15,282,618 4,888,507 (4,888,507){A} 15,282,618
Other receivables 1,173,714 773,485 (773,485){A} 1,173,714
Inventories 23,181,989 4,625,352 (2,585,282){C} 25,222,059
Deferred income taxes 584,511 192,916 (192,916){A} 584,511
Prepaid expenses & other current assets 1,267,097 153,135 (153,135){A} 1,267,097
------------ ------------ ------------ ------------
Total current assets 45,766,651 11,040,857 (9,000,787) 47,806,721
Fixed assets - net 19,049,287 1,612,723 (1,612,723){A} 19,049,287
Deferred pension asset 1,651,222 1,651,222
Deferred income taxes 153,495 153,495
Other assets 1,796,359 88,243 1,381,757 {A}{D} 3,266,359
------------ ------------ ------------ ------------
TOTAL ASSETS $ 68,417,014 $ 12,741,823 $ (9,231,753) $ 71,927,084
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current Liabilities
Accounts payable $ 1,642,306 $ 1,163,298 $ (1,163,298){A} $ 1,642,306
Current maturities - long term debt 486,161 6,161,447 (6,161,447){A} 486,161
Accrued taxes - other 346,168 85,980 (85,980){A} 346,168
Accrued salaries and wages 807,611 807,611
Accrued plant closing costs 210,000 210,000
Accrued other 523,118 942,638 (942,638){A} 523,118
------------ ------------ ------------ ------------
Total current liabilities 4,015,364 8,353,363 (8,353,363) 4,015,364
Long-term debt - less current maturities 10,488,388 976,753 2,533,317 {A}{B} 13,998,458
Deferred liabilities 1,520,338 878,737 (878,737){A} 1,520,338
------------ ------------ ------------ ------------
Total liabilities 16,024,090 10,208,853 (6,698,783) 19,534,160
SHAREHOLDERS' EQUITY:
Common stock - no par value, 10,000,000
shares authorized; issued and outstanding:
December 31, 2002 - 4,489,065 35,289,038 220,000 (220,000){A} 35,289,038
Additional paid-in capital 20,000 (20,000){A} --
Accumulated other comprehensive loss (2,311,749) (17,280) 17,280 {A} (2,311,749)
Retained earnings 19,415,635 2,624,453 (2,624,453){A} 19,415,635
Treasury stock - At cost (314,203) 314,203 {A} --
------------ ------------ ------------ ------------
Total Shareholders' equity 52,392,924 2,532,970 (2,532,970) 52,392,924
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,417,014 $ 12,741,823 $ (9,231,753) $ 71,927,084
============ ============ ============ ============
PF-2
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
ROCKY SHOES AND GATES-MILLS, INC.
BOOTS, INC. (UNAUDITED) ADJUSTMENTS TOTAL
----------- ----------- ----------- -----
NET SALES $ 88,958,721 $ 19,888,805 $ 108,847,526
COST OF SALES 65,528,213 16,498,132 82,026,345
------------- ------------- ------------- -------------
GROSS MARGIN 23,430,508 3,390,673 -- 26,821,181
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 18,661,730 7,118,999 (128,597){G} 25,652,132
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INTEREST AND TAXES 4,768,778 (3,728,326) 128,597 1,169,049
OTHER INCOME AND (EXPENSES)
Interest expense (1,404,496) (460,563) 324,372 {E} (1,540,687)
Other - net 432,018 (625,842) (193,824)
------------- ------------- ------------- -------------
Total other - net (972,478) (1,086,405) 324,372 (1,734,511)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 3,796,300 (4,814,731) 452,969 (565,462)
TOTAL INCOME TAXES (BENEFIT) 953,000 (1,171,787) 48,787 {F} (170,000)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 2,843,300 $ (3,642,944) $ 404,182 $ (395,462)
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE $ 0.63 $ (0.09)
============= =============
Basic $ 0.62 $ (0.09)
============= =============
Diluted
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 4,499,741 4,499,741
============= =============
Diluted 4,590,095 4,499,741
============= =============
PF-3
FOOTNOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
{A} Adjustment to reflect Gates assets not acquired and Gates liabilities
not assumed by Rocky Shoes & Boots, Inc. as part of the acquisition.
{B} This adjustment to reflect the cash borrowed of $3,510,070 because the
purchase was funded via borrowings under Rocky's revolving credit
facility.
{C} Adjustment to reflect the inventory acquired at its estimated fair
value.
{D} Adjustment to reflect the excess of acquisition cost over the estimated
fair value of the net assets acquired. The purchase price and
preliminary purchase price allocation are summarized as follows:
Purchase price $3,510,070
Estimated fair value of assets and liabilities acquired:
Inventories $2,040,070
----------
Total $2,040,070
----------
Cost in excess of fair value of net assets acquired (Goodwill) $1,470,000 ***
==========
*** Subject to final allocation based on an independent appraisal of
the fair value of the assets acquired.
{E} Adjustment to reflect the net effect of: 1) eliminating the interest
expense reflected on Gates' statement of operations for borrowings
which were not assumed by Rocky ($460,563) 2) recording the interest
incurred on the debt used to acquire Gates assuming Rocky's weighted
average borrowing rate at December 31, 2002 of 3.88% ($137,355).
{F} Adjustment to reflect Rocky's estimated effective tax rate of 30% for
2002 on the pro forma loss before tax benefit.
PF-4
{G} Adjustment to reflect the net effect of: 1) adjusting depreciation
expense due to Rocky not purchasing Gates' property and equipment.
Gates recorded all depreciation in Selling, General and Administrative
expense 2) adjustment to record the amortization of the cost is excess
of fair value of tangible net assets acquired by Rocky as part of the
acquisition has not been recorded as Rocky has not completed its
assessment of the components of the intangible assets acquired. To the
extent amounts are subsequently allocated to items such as trademarks
and patents, a resulting amortization would be recorded based on the
appropriate estimated life of these assets. In accordance with
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" any amount of the intangible asset allocated to
goodwill would not be amortized but instead the related asset would be
regularly evaluated for impairment.
PF-5