FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number:
JUNE 30, 1998 0-21026
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ROCKY SHOES & BOOTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
---- ----------
(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
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(Address of principal executive offices)
(740) 753-1951
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(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former Fiscal year if
changed since last report.)
Indicate by check mark 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 twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- ------
5,465,415 common shares, no par value, outstanding at August 5, 1998.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 Dec. 31,1997
(Unaudited)
----------- ------------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 1,367,642 $ 8,556,883
Trade Receivables 21,419,037 17,789,329
Other Receivables 922,741 475,593
Inventories 44,615,892 32,894,236
Deferred Taxes 1,474,799 1,474,799
Other Current Assets 1,926,908 850,018
------------ -----------
Total Current Assets 71,727,019 62,040,858
Fixed Assets - Net 18,811,036 17,608,454
Other Assets 1,340,897 1,305,526
------------ -----------
Total Assets $ 91,878,952 $80,954,838
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 2,422,748 $ 2,414,936
Current Maturities - Long Term Debt 1,082,879 1,173,840
Accrued Liabilities 2,366,460 2,464,511
------------ -----------
Total Current Liabilities 5,872,087 6,053,287
Long-Term Debt-less current maturities 22,798,863 13,406,962
Deferred Liabilities 2,428,791 2,298,059
------------ -----------
Total Liabilities 31,099,741 21,758,308
Shareholders' Equity:
Preferred Stock, Series A, no par value;
1997 -90,000 shares issued and 82,857
shares outstanding 5,400
Common Stock, no par value;10,000,000 shares
authorized; issued 1998-5,462,165 shares;
1997-5,476,620 shares and outstanding
1998-5,462,165 shares; 1997-5,359,668 shares 41,567,361 42,604,658
Common Stock held in Treasury, at cost (1,226,059)
Retained Earnings 19,211,850 17,812,531
------------ -----------
Total Shareholders' Equity 60,779,211 59,196,530
------------ -----------
Total Liabilities and Shareholders' Equity $ 91,878,952 $80,954,838
============ ===========
The accompanying notes are an integral part of the financial statements
2
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $ 21,487,803 $ 22,006,185 $ 34,444,733 $ 34,268,258
Cost of Goods Sold 15,588,467 15,724,912 25,047,865 24,710,110
------------ ------------ ------------ ------------
Gross Margin 5,899,336 6,281,273 9,396,868 9,558,148
Selling, General and Administrative
Expenses 4,161,856 4,141,606 7,233,463 6,718,144
------------ ------------ ------------ ------------
Income From Operations 1,737,480 2,139,667 2,163,405 2,840,004
Other Income (Expense):
Interest Expense (331,044) (641,031) (523,536) (1,106,298)
Other - net 114,850 (23,566) 277,024 (9,135)
------------ ------------ ------------ ------------
Total other - net (216,194) (664,597) (246,512) (1,115,433)
------------ ------------ ------------ ------------
Income Before Income Taxes 1,521,286 1,475,070 1,916,893 1,724,571
Income Taxes 413,654 457,980 517,574 518,502
------------ ------------ ------------ ------------
Net Income $ 1,107,632 $ 1,017,090 $ 1,399,319 $ 1,206,069
============ ============ ============ ============
Net Income Per Share
Basic $ .20 $ .27 $ .26 $ .33
------------ ------------ ------------ ------------
Diluted $ .20 $ .26 $ .25 $ 31
------------ ------------ ------------ ------------
Weighted Average Number of Common
Shares Outstanding
Basic 5,450,414 3,719,014 5,432,112 3,703,024
============ ============ ============ ============
Diluted 5,602,723 3,960,388 5,606,901 3,928,331
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
---- ----
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Income $1,399,319 $ 1,206,069
Adjustments to Reconcile Net Income
To Net Cash Used In
Operating Activities:
Depreciation and Amortization 2,033,080 1,362,973
Deferred compensation & pension - net 130,732 55,473
Change in Assets and Liabilities:
Receivables (4,076,856) (8,023,455)
Inventories (11,721,656) (15,326,057)
Other current assets (1,076,890) (429,787)
Other Assets (45,023) (34,583)
Accounts payable (50,375) 9,452,128
Accrued and Other Liabilities (98,051) (383,341)
----------- -----------
Net Cash Used In Operating Activities (13,505,720) (12,120,580)
----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of Fixed Assets (3,167,823) (1,453,902)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Long Term Debt 24,205,000 20,392,250
Payments on Long Term Debt (14,904,060) (7,089,322)
Proceeds from exercise of stock options
including related income tax effect 183,362 724,044
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Net Cash Provided By
Financing Activities 9,484,302 14,026,972
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INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (7,189,241) 452,490
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,556,883 349,637
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,367,642 $ 802,127
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The accompanying notes are an integral part of the financial statements
4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the unaudited condensed consolidated
financial statements include all normal recurring adjustments the
Company considers necessary for a fair presentation of such financial
statements in accordance with generally accepted accounting principles.
2. INVENTORIES
Inventories are comprised of the following:
June 30, 1998 Dec. 31, 1997
Raw materials $ 9,287,621 $ 6,210,161
Work-in Process 4,533,150 3,348,275
Manufactured finished goods 28,278,105 21,140,951
Factory outlet finished goods 2,517,016 2,194,849
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Total $44,615,892 $32,894,236
=========== ===========
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Six Months Ended
June 30,
1998 1997
---- ----
Interest $ 573,478 $1,067,151
========== ==========
Federal, state and local
income taxes $1,009,570 $1,184,300
========== ==========
Accounts payable at June 30, 1998 and December 31, 1997 included a
total of $191,204 and $133,017, respectively, relating to the purchase
of fixed assets.
5
4. LONG-TERM DEBT
In May 1998 the Company entered into an amendment to its Revolving
Credit Loan Agreement due in 2003, which allows the Company to increase its
borrowings under a revolving line of credit to a maximum amount that ranges from
$25,000,000 to $42,000,000. Interest on the revolving line of credit facility is
payable monthly as a factor of, at the Company's option, the bank's prime rate
or LIBOR.
The Company also entered into an interest rate swap agreement with its
lender. The agreement effectively fixes the interest rate at 6.07% on
$15,000,000 in principal amount of floating rate debt provided under the loan
agreement with the bank. The interest swap expires on June 1, 2005 and is based
on one-month LIBOR. The interest rate swap is accounted for using settlement
accounting.
5. PER SHARE INFORMATION
A reconciliation of the shares used in the basic and diluted income per
share computation for the three months and six months ended June 30, 1998 and
1997 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic-Weighted average
shares outstanding 5,450,414 3,719,014 5,432,112 3,703,024
Diluted securities:
Preferred Stock 0 83,626 14,730 88,242
Stock options 152,309 157,748 160,059 137,065
------- ------- ------- -------
Diluted-weighted
average shares outstanding 5,602,723 3,960,388 5,606,901 3,928,331
========= ========= ========= =========
6. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130 and SFAS No. 131. SFAS No. 130 "Reporting Comprehensive Income" is not
applicable due to the absence of other items of comprehensive income. SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information" will
require adoption in December, 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating segments.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company has not yet
determined what, if any, impact the adoption of this Statement will have on its
financial statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and other Postretirement Benefits" which will require adoption in
December 1998. SFAS No. 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. The statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. The Company has not yet determined what effect the
adoption of this Statement will have on its financial statements.
6
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
will require adoption by the first quarter of 2000. SFAS No. 133 requires that
derivatives be reported on the balance sheet at fair value. Changes in fair
value are recognized in net income or, for derivatives which are hedging market
risk related to future cash flows, in the accumulated other comprehensive income
section of shareholders' equity. The cumulative effect of adoption is reflected
in net income and accumulated other comprehensive income, as appropriate. The
Company has not yet determined the effect or timing of implementation of this
Statement.
7
PART 1 - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's Consolidated Financial Statements, expressed as a percentage
of net sales. The discussion that follows the table should be read in
conjunction with the Consolidated Financial Statements of the Company.
PERCENTAGE OF NET SALES
Three months Six months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 72.5% 71.5% 72.7% 72.1%
------- ------- ----- -------
Gross Margin 27.5% 28.5% 27.3% 27.9%
Selling, General and
Administrative Expenses 19.4% 18.8% 21.0% 19.6%
------- ------- ------- -------
Income from Operations 8.1% 9.7% 6.3% 8.3%
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net Sales
Net sales for the quarter ended June 30, 1998 decreased $518,382, or 2.4%, to
$21,487,803 from $22,006,185 for the same period last year. Increased sales of
occupational and work shoe footwear were more than offset by lower shipments of
footwear uppers for a private label customer. Rugged outdoor footwear shipments
were relatively flat in the second quarter of 1998 versus a year ago due to
higher levels of customer carryover inventory from the mild weather last winter.
Sales prices were approximately 2% higher than the same period last year.
8
Gross Margin
Gross margin decreased $381,937, or 6.1% to $5,899,336 from $6,281,273 for the
same period in 1997. As a percentage of net sales, gross margin was 27.5% for
the second quarter versus 28.5% the prior year. The decrease in gross margin was
primarily attributable to certain manufacturing facilities being operated at
lower levels during the three months ended June 30, 1998 in order to proactively
manage inventory, especially for insulated outdoor boots. The factories
increased production by the end of the second quarter in response to new orders
for the upcoming fall season.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses rose $20,250, or 0.5%, to
$4,161,856 for the three months ended June 30, 1998, compared with $4,141,606 in
1997. The decline in net sales for the second quarter of 1998 was the primary
factor which contributed to an increase in S,G&A expenses to 19.4% of net sales
for the second quarter from 18.8% the prior year.
Interest Expense
Interest expense for the second quarter decreased $309,987, or 48.4%, to
$331,044 from $641,031 for the same period last year. The decline in interest
expense was due to lower outstanding balances and more favorable interest rates
on the amounts outstanding under the Company's credit facilities.
Income Taxes
Income taxes decreased $44,326, or 9.7%, to $413,654 for the three months ended
June 30, 1998, versus $457,980 for the same period a year ago. The Company's
effective tax rate declined to 27.2% for the second quarter from 31.0% in 1997.
The relatively low effective tax rate resulted from favorable tax treatment
afforded income earned by the Company's subsidiary in Puerto Rico and local tax
abatements available to the Company's subsidiary in Puerto Rico.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
Net Sales
Net sales for the first half of 1998 rose $176,475, or 0.5%, to $34,444,733
compared with $34,268,258 last year. The increase was primarily attributable to
higher sales of occupational work boots, which was partially offset by decreased
shipments of shoe uppers to a private label customer. Shipments of rugged
outdoor footwear, especially insulated boots, were relatively flat versus a year
ago.
Gross Margin
Gross margin for the six months ended June 30, 1998 was $9,396,868, a decline of
$161,280 or 1.7% from the same period in 1997. As a percentage of net sales,
gross margin was 27.3% for the first half
9
of 1998 versus 27.9% a year ago. The decrease in gross margin was primarily a
result of lower production in the Company's manufacturing facilities in order to
bring inventories of insulated rugged outdoor boots in line with demand. As a
result, fixed overhead costs adversely impacted gross margin for the first six
months of 1998 compared with 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $515,319, or 7.7%, for
the six months ended June 30, 1998 versus the same period last year. As a
percentage of net sales, S,G&A expenses rose to 21.0% for the first half of 1998
from 19.6% a year ago. The 1998 year-to-date increase is due to higher salaries
and fringe benefits compared with the prior year, which has a greater impact in
the first quarter of this year. S,G&A expenses as a percentage of sales are
expected to be more in line with historical levels during the second half of
1998 when management believes net sales will be substantially higher than the
first half of 1998.
Interest Expense
Interest expense for the first six months of 1998 declined $582,762 or 52.7%, to
$523,536 from $1,106,298 for the same period last year. The decrease is due to
lower outstanding balances and lower rates on the Company's indebtedness. The
Company utilized the net proceeds from a $26.9 million follow-on offering in the
fourth quarter of 1997 to pay down outstanding debt.
Income Taxes
Income taxes decreased $928 or 0.2% to $517,574 for the six months ended June
30, 1998 versus $518,502 for 1997. The Company's effective tax rate was 27.0%
for the first half of 1998 compared with 30.1% for the same period last year.
The relatively low effective tax rate is due to favorable tax treatment afforded
income earned by the Company's subsidiary in Puerto Rico.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily funded its working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness,
and in fiscal 1997, through issuance of additional shares of common stock.
Working capital is primarily used to support changes in accounts receivable and
inventory as a result of the Company's seasonal business cycle and business
expansion. These requirements are generally lowest in the months of January
through March of each year and highest during the months of May through October
of each year. In addition, the Company requires financing to support additions
to machinery, equipment and facilities as well as the introduction of footwear
styles.
At June 30, 1998, the Company had working capital of $65,854,932 versus
$55,987,571, at December 31, 1997. During the fourth quarter of 1997, the
Company received $26.9 million net proceeds from a follow-on common stock
offering and the exercise of the underwriters' over-allotment option in
connection therewith. The proceeds were used to reduce outstanding debt and
10
increase working capital.
The Company renegotiated its credit facilities during the second quarter of 1998
which reduced its cost of borrowed funds. The credit facility permits maximum
borrowing of $25,000,000 for the period from January 28, through and including
May 15, of each year and of $42,000,000 from May 16, through and including
January 27, of the following year. The credit facility expires May 31, 2003.
Changes in the line of credit during the year reflect the Company's seasonal
requirements for working capital. As of June 30, 1998, the Company had borrowed
$20,500,000 against its available line of credit.
Capital expenditures for 1998 are expected to be approximately $4,500,000 for
machinery and equipment to support increased production and for lasts, dies and
patterns for new footwear styles, and construction of a new distribution
facility. The Company believes it will be able to finance such additions and
meet operating expenditure requirements in 1998 through available cash on hand,
additional long-term borrowing and operating cash flows.
INFORMATION SYSTEMS AND THE YEAR 2000
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the Year 2000 problem. The company
is currently engaged in a comprehensive project to upgrade its information,
technology, manufacturing and facilities computer software to programs that will
consistently and properly recognize the Year 2000. Most of the Company's systems
include new packaged software recently purchased from large vendors who have
represented that these systems are already Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram or
replace and text all of its software for Year 2000 compliance, and the Company
expects to complete the project in early 1999. The estimated cost for this
project could range as high as $300,000, including the cost of new systems which
will be capitalized. This cost is being funded through operating cash flows.
Failure by the Company and/or vendors and customers to complete Year 2000
compliance work in a timely manner could have a material adverse effect on
certain of the Company's operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding the intent, belief and expectations of the Company and
its management. Investors are cautioned that such statements involve risks and
uncertainties, including, but not limited to, changes in consumer demand,
seasonality, impact of weather, competition, reliance on suppliers, changing
retailing trends, reliance on foreign manufacturing, changes in tax rates,
limited protection of proprietary technology, and other risks, uncertainties and
factors described in the Company's most recent Annual Report on Form 10-K and
other filings from
11
time to time with the Securities and Exchange Commission. There can be no
assurance that the forward-looking statements included herein will prove to be
accurate, and the inclusion of such statements herein should not be regarded as
a representation by the Company, its management or any other person that the
objectives and plans of the Company will be achieved. All forward looking
statements made herein are based on information presently available to the
management of the Company. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on May 19, 1998 for
the purpose of electing Class II Directors of the Company to serve until the
2000 Annual Meeting of Shareholders or until their successors are elected and
qualified, to approve and adopt amendments to the Company's 1995 Stock Option
Plan, and to ratify the appointment of Deloitte & Touche LLP to serve as the
Company's independent public accountants for the fiscal year ending December 31,
1998.
All of the Management's nominees for directors as listed in the Proxy
Statement were elected with the following vote:
NUMBER OF SHARES VOTED
----------------------------------------------------------------
FOR AGAINST ABSTAIN
------------------- ------------------ -----------------
Leonard L. Brown 4,124,829 434,760 0
---------------- ------------------ -----------------
David Fraedrich 4,124,829 434,760 0
---------------- ------------------ -----------------
Barbara Brooks Fuller 4,124,829 434,760 0
---------------- ------------------ -----------------
Curtis A. Loveland 4,123,839 435,750 0
---------------- ------------------ -----------------
The adoption of amendments to the Company's 1995 Stock Option Plan was
approved by the following vote:
NUMBER OF SHARES VOTED
- ----------------------------------------------------------------------------------------------
FOR AGAINST ABSTAINED TOTAL
- --------------------- --------------------- --------------------- -----------------
1,939,594 1,767,953 21,830 3,729,377
----------------- ------------------ ----------------- -----------------
13
The appointment of Deloitte & Touche LLP as independent accountants was
approved by the following vote:
NUMBER OF SHARES VOTED
- ----------------------------------------------------------------------------------------------
FOR AGAINST ABSTAINED TOTAL
- --------------------- --------------------- --------------------- -----------------
4,550,079 1,110 8,400 4,559,589
----------------- ------------------ ----------------- -----------------
Item 5. Other Information.
Any shareholder proposal submitted outside the processes of Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for presentation to the
Company's 1999 Annual Meeting of Shareholders will be considered untimely filed
for purposes of Rule 14a-4 and 14a-5 if notice thereof is not received by the
Company by February 24, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits to this report begin at page ___.
(b) Reports on Form 8-K.
None.
14
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 thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: August 14, 1998 By: /s/ DAVID FRAEDRICH
---------------------------------------------
David Fraedrich, Executive Vice President,
Treasurer and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
15
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
10.1 Lease Agreement, dated May 1, 1998, between Rocky Shoes &
Boots, Inc. and William Brooks Real Estate Company regarding
Nelsonville factory.
10.2 Second Amendment to Revolving Credit Loan Agreement dated
May 29, 1998, among Rocky Shoes & Boots, Inc.; Five Star
Enterprises Ltd.; Lifestyle Footwear, Inc.; Bank One, NA; The
Huntington National Bank; and Bank One, NA, as Agent.
10.3 Second Amended and Restated Master Business Loan Note, dated
May 29, 1998, among Rocky Shoes & Boots, Inc.; Five Star
Enterprises Ltd.; Lifestyle Footwear, Inc.; and payable to Bank
One, NA.
10.4 Second Amended and Restated Master Business Loan Note, dated
May 29, 1998, among Rocky Shoes & Boots, Inc.; Five Star
Enterprises Ltd.; Lifestyle Footwear, Inc.; and payable to The
Huntington National Bank.
27 Financial Data Schedule