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Rocky Shoes & Boots, Inc.
39 East Canal Street • Nelsonville, Ohio 45764 • Phone (740) 753-1951 • Fax (740) 753-4024
http://www.rockyboots.com
1999
Annual Report
cover.flg 4/20/00 7:35 PM Page 4
Rocky Shoes & Boots, Inc. designs, develops, manufactures and markets premium quality rugged
outdoor, duty and casual footwear. The Company’s footwear is marketed through several distribution
channels, primarily under the registered trademark ROCKY®.
ROCKY® is the leader in rugged outdoor footwear. The
GORE-TEX® 10” Realtree® HardwoodsTM illustration
shown below underscores the Company’s reputation for
quality, innovation and comfort. It includes a dual-density
BearClaw2 outsole with “claw” traction design, 1000
grams of ThinsulateTM and many other quality features.
Occupational footwear has been an important category
of the ROCKY® brand for many years. Styles are offered
to meet the diverse needs of persons regularly engaged
in occupational, work, and duty activities. The ROCKY®
WorkSmartTM boot shown below is 25% lighter than
traditional work boots due to its polyurethane midsole
combined with a durable rubber outsole.
Padded
collar
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1,000 grams of Thinsulate™ Insulation
quilted to the Cambrelle® lining
1,000 denier 2 x 2
basketweave
Cordura® nylon
Padded collar and tongue
for comfortable fit
Moisture wicking lining
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GORE-TEX®
fabric bootie
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Leather
toe wrap
Goodyear welt
construction
Triple stitched,
cemented and
sealed seams
locks out water
Foam strip protects foot
from toe cap
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Leather
foxing/back stay
Defined heel and
foot stabilizer
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Shank for
stability
Dual-density BearClaw2®
outsole with “claw” traction
design
Shock attenuating,
dual-density polymer
in the footbed
Softer density polyurethane of
outsole cushions each step
Aggressive rubber
tread design for
traction
Shank
Oil resistant
rubber outsole
shell
Shock
attenuating polymer
heel cushion
ANSI - CLASS 75
approved wide
flanged steel toe
STEEL
TOE
Polyurethane
foam footbed
Lightweight
polyurethane
midsole
Moc Toe Chukka
Slip-on with Velcro® Strap
Plain Toe Oxford
Moc Toe Oxford
The growing line of ROCKY®’s casual footwear features shoes made with full-grain leather, polyurethane Traveler
soles, and a Foot Support System (FSS) Footbed.
To Our Shareholders,
Two key issues-inventory and manufacturing-dominated our performance throughout 1999. Several
actions were taken during the year to deal with frequent changes in consumer demand, extended periods
of unseasonable weather conditions, and challenges operating from multiple warehouses. We also
completed an inventory reduction program by year-end 1999 and recently announced plans to shift
some of our manufacturing to our Caribbean facilities. As a result, we have positioned the Company
to achieve significant improvement in performance in 2000 following a disappointing 1999.
The Company reported a net loss of $5,129,757, or $1.09 per diluted share, for 1999 compared with net
income of $2,262,197, or $0.41 per diluted share, the prior year. The fourth quarter 1999 net loss was
$7,213,654, or $1.59 per diluted share, versus a net loss of $1,132,302, or $0.21 per diluted share, in
1998.
Net sales rose 10.6% to $98,099,184 for 1999 from $88,699,413 a year ago. The decline in gross margin
was attributable to manufacturing inefficiencies resulting from adjustments to production throughout
most of 1999 and sales of inventory at lower margins during fourth quarter 1999. Selling, general and
administrative expenses rose one full percentage point to 20.4% of net sales for 1999 principally due
to costs associated with operating four warehouses temporarily prior to completion of the Company's
finished goods distribution center at year-end 1999. In addition, higher costs were incurred for increased
co-op advertising during the past year.
The most significant contributions to higher net sales in 1999 were from our occupational and rugged
outdoor categories. They grew $6.0 million and $3.4 million, respectively, compared to 1998. Exciting
progress is also being achieved in the historically low-growth occupational market due to the intro-
duction of new styles and more focused sales efforts. Rugged outdoor remains our number one category
and particularly benefited last year from sharply higher sales of rubber products. We are very pleased
with this progress and new designs for 2000 are expected to further strengthen our growth potential.
We began this past year with $47.1 million of inventory, which was higher than expected due to order
cancellations and postponements during fourth quarter 1998. The addition of experienced product
managers for our rugged outdoor, occupational and casual categories in the first half of 1999 resulted
in a review of every style to determine its fit with the Company's branded footwear lines. Many styles
were eliminated and excess inventories of other styles were brought into line with anticipated demand
through lower production schedules and appropriate markdowns during fourth quarter 1999. Inventory
was $32.6 million at December 31, 1999, or 31% lower than on the same date a year ago. This reduction
directly contributed to a net loss for the fourth quarter and full-year 1999, but was an integral step
toward returning the Company to profitability beginning in 2000.
We were pleased to complete our $8 million finished goods distribution center during fourth quarter
1999. It is operating very well and has immediately contributed to improved inventory management
and shipping efficiencies. During most of this past year we operated from four warehouses throughout
Central Ohio. This resulted in a number of logistical challenges and additional expenses were incurred
to respond promptly to customer orders. Those particular challenges are now behind us and we look
forward to realizing further efficiencies this year.
This past year continued to highlight competitive pressures within the industry to lower production
costs. In response to this growing trend we have implemented more efficient manufacturing methods
and sought additional productivity gains within our factories. During most of 1999 we also made
adjustments in our manufacturing plants to help bring inventory in line with demand. Temporary
inefficiencies resulted from these actions which impacted gross margin.
We have pursued additional ways to balance manufacturing and product pricing demands. This has included
sourcing certain footwear styles outside of the United States that are manufactured to our specifications. For
1999, sourcing grew to 26% of net sales from 18% the prior year. We anticipate that this percentage will
continue to grow in the foreseeable future. During this past year we began to manufacture a GORE-TEX®
rugged outdoor boot in China. The results thus far have been positive and may lead to additional styles being
sourced.
A plan to shift a substantial amount of manufacturing from our Nelsonville, Ohio plant to our facilities in
Puerto Rico and the Dominican Republic was announced recently. This very difficult decision was made in the
best long-term interests of the Company and will be completed later this year.
The ROCKY® brand is in demand and growing. We have strong product lines in each of our categories and a
sales management team focused on specific growth strategies. These plans are being executed through a sales
force that is almost exclusively dedicated to selling the ROCKY® brand in their markets. This is resulting in new
opportunities and is putting us in front of new channels of distribution. All of us are excited about our branded
footwear and the potential sales growth that can be achieved.
We hired an experienced team of sales executives during the first half of 1999 that is led by John Friday,
Executive Vice President-Sales. Positive contributions have been realized from these key additions, including
implementation of focused growth strategies for our rugged outdoor, occupational, and casual categories. We
anticipate that this commitment will enable the Company to substantially expand its customer base and enter
additional distribution channels.
The ROCKY® brand is known for innovation and quality. Both of these attributes are apparent in two new lines
being introduced this year, the ROCKY® Scent Control SystemTM and ROCKY® TMCTM (Technology Made
Comfortable) Series of casual shoes. These two lines utilize waterproof GORE-TEX® fabric and HealthShield®,
a specially treated anti-bacterial leather. The line of Scent Control SystemTM footwear includes 14 styles in
leather and rubber. It is the most extensive launch of any ROCKY® footwear in the Company's 68-year history.
ROCKY® TMCTM Series casual shoes, constructed of full-grain and nu buc leathers, offer flexibility and
exceptional comfort with a unique footbed system.
On April 1, 2000 Barbara Brooks Fuller plans to retire from the Company. She has been Vice President of Retail
Sales since 1985, a director of the Company since 1992, and throughout that period has made many valuable
contributions. Under her leadership the Company's retail stores grew to $5.2 million in net sales for 1999.
Robert D. Rockey, who is Chairman and Chief Executive Officer of Duck Head Apparel Company, Inc., will
replace Barbara on the Board of Directors. Previously, he was Chairman and Chief Executive Officer of the
Lennox Group from June 1997 to March 1999, and President of Levi Strauss & Company, N.A. from March
1978 to June 1997.
The combined effect of the actions we took during the past twelve months is expected to directly benefit our
performance beginning in 2000. We fully recognize that this will be best demonstrated through significant
improvement in financial results. Your patience and comments are genuinely appreciated.
Sincerely,
Mike Brooks
Chairman, President
and Chief Executive Officer
March 31, 2000
FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
(cid:1)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1943
For the fiscal year ended December 31, 1999
OR
(cid:2)
Commission File Number: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of Registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
No. 31-1364046
(I.R.S. Employer Identification No.)
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 (cid:1) NO (cid:2)
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. (cid:2)
The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was
approximately $15,000,000 on March 16, 2000.
There were 4,489,215 shares of the Registrant's Common Stock outstanding on March 16, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for 2000 Annual Meeting of Shareholders are incorporated by reference in
Part III.
1
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.
ITEM 1.
BUSINESS.
PART I
Rocky Shoes & Boots, Inc. has two subsidiaries: Five Star Enterprises Ltd. ("Five Star"), a Cayman Islands
corporation, which operates a manufacturing facility in La Vega, Dominican Republic, and Lifestyle Footwear, Inc.
("Lifestyle"), a Delaware corporation, which operates two manufacturing facilities in Aquadilla, Puerto Rico. Unless the context
otherwise requires, all references to "Rocky" or the "Company" include Rocky Shoes & Boots, Inc. and its subsidiaries.
Overview
The Company is the successor to the business of The Wm. Brooks Shoe Company, a company established in 1932 by
William Brooks, who was later joined by F. M. Brooks, the grandfather of the Company's current Chairman, President and Chief
Executive Officer, Mike Brooks. The business was sold in 1959 to a company headquartered in Lancaster, Ohio. John W.
Brooks, the father of Mike Brooks, remained as an employee of the business when it was sold. In 1975, John W. Brooks formed
John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co. ("Rocky Co.")) as an Ohio corporation, reacquired the
Nelsonville, Ohio operating assets of the original company and moved the business'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.
Following completion of the Company's initial public offering in 1993, the Company began to convert all of its
factories to a modular "Team Pass-Through" manufacturing system. This system substantially increased total manufacturing
capacity and operating efficiencies. Most of the Company's footwear is manufactured in the Company's facilities located in
Nelsonville, Ohio, the Dominican Republic and Puerto Rico. The Company purchases raw materials from a number of domestic
and foreign sources. The principal raw materials used in the production of the Company's footwear, in terms of dollar value, are
leather, GORE-TEX waterproof fabric, CORDURA nylon fabric and soling materials. The Company's footwear is distributed
nationwide and in Canada from the Company's finished warehouse located near Logan, Ohio. The Company stores finished
goods in the warehouse until they are used to fill an order. If the product ordered is in inventory, it can be shipped to customers
within one week of the order. In 1999, the Company made adjustments to production to bring inventory in line with demand.
These adjustments led to temporary inefficiencies and affected gross margin.
In the past, the Company has benefited from a relatively low effective tax rate. The Company receives favorable tax
treatment on income earned by its subsidiary in Puerto Rico and benefits from local tax abatements available to such subsidiary.
Beginning the fourth quarter of Fiscal 1996, the Company elected to repatriate future earnings of its subsidiary in the Dominican
Republic. The repatriation of earnings from its subsidiary in the Dominican Republic is subject to U.S. federal income tax, but is
exempt from state and local taxation. In 1999, the Company elected not to repatriate all 1999 and future earnings of its
subsidiary in the Dominican Republic. Consequently, no income taxes are provided on these cumulative earnings of
approximately $5,109,000.
ROCKY® 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 increase sales within its core product categories and markets and to leverage the
ROCKY brand into new markets with products that emphasize the reputation of the Company's footwear for performance,
innovation, quality, comfort and durability. Key elements of the Company's strategy are as follows:
Maintain Performance, Innovation and Quality. Performance, innovation and quality are hallmarks of the ROCKY
brand. The Company believes it has developed a competitive advantage through its ability to produce high quality performance
footwear incorporating premium materials such as GORE-TEX waterproof breathable fabric. The Company continually strives
to develop new products and to introduce innovations in each of its footwear market segments. Recently, the Company
introduced an extensive line of scent suppressant footwear featuring the ROCKY® Scent Control System™ as well as
ROCKY® TMC Series of casual shoes. The Company stresses quality control at every stage of its manufacturing process. Each
manufacturing facility is staffed with trained quality assurance personnel, and a portion of each manufacturing employee's
compensation is based on the level of product quality of each employee's respective work group.
Increase Awareness of the ROCKY Brand. The Company believes that its long-term reputation for performance,
innovation and quality has increased awareness of the ROCKY brand. To increase the strength of its brand, the Company has
reformulated its advertising strategy by shifting its focus from the retail trade directly to the consumer. A key component of this
new strategy includes advertising through cost-effective cable broadcasts aimed at audiences which share the demographic
profile of the Company's typical customers. Similarly, the Company has shifted its national print advertising campaign to more
consumer-oriented publications. Management believes that by directly targeting the consumer it can convey a broader and more
consistent image of the ROCKY brand, thereby increasing demand for its products at higher retail prices.
Leverage the ROCKY Brand. The Company believes that the ROCKY brand has become a recognizable and
established brand name for performance quality-conscious consumers in the rugged outdoor and occupational segments of the
men's footwear market. The Company intends to continue to leverage the ROCKY brand with a major emphasis on broadening
its share of the casual market segment Additionally, the Company licenses the ROCKY brand for use on certain complementary
products, such as socks, hats and accessories in an effort to expand brand recognition.
Utilize Exclusive Rocky-Focused Sales Force. The Company historically sold its footwear through manufacturers'
representatives who carried ROCKY brand products as well as other non-competing products. In an effort to ensure full
representation of its complete product line and consistent support of its customers, late in 1995, the Company began replacing its
manufacturers' representatives with exclusive sales representatives who sell only ROCKY brand products. Currently,
approximately 87% of the Company's sales force is comprised of exclusive sales representatives.
Capitalize on Manufacturing Process. The Company manufactures its products under a twin-plant concept by
producing its labor intensive "upper portion" in its lower wage rate plants in the Dominican Republic and Puerto Rico and
completing its footwear in Puerto Rico and Nelsonville, Ohio where it uses state-of-the-art bottoming techniques. In early 1999,
the Company began to manufacture opening price point hunting boots in the Dominican Republic. On March 1, 2000 the
Company announced it plans to substantially decrease manufacturing at its Nelsonville, Ohio plant during 2000 by moving
additional production to its plants in Puerto Rico and the Dominican Republic. The Company utilizes a modular "Team
Pass-Through" manufacturing system in each of its manufacturing facilities. The Company believes that this system, which
allows each person to perform a number of different tasks, is superior to a traditional assembly line approach, which requires
each person to perform a single repetitive task. This system increases the number of pairs of footwear produced per square foot
of manufacturing space, reduces work-in-process inventory and direct labor and improves the Company's production yields. In
addition, the Company believes that its manufacturing process allows it to respond quickly to changes in product demand and
consumer preferences.
Expand Product Sourcing. The Company's sourced products represented approximately 26% of its net sales in 1999.
The Company primarily sources products from independent manufacturers in the Far East. The Company sources products
which are manufactured to its specifications. This enables the Company to reach price points that it cannot obtain with most
products manufactured in its own facilities. A greater portion of the Company's products may be sourced in the future if the
Company
3
expands and reaches capacity in its manufacturing facilities. The Company employs a full-time quality assurance staff to inspect
each shipment sourced in the Far East. All of the Company's sourced products are designed by the Company's design and
engineering team.
Product Lines
The Company's product lines consist of rugged outdoor, occupational and casual footwear. ROCKY brand products
emphasize quality, patented materials, such as GORE-TEX waterproof breathable fabric, CORDURA nylon fabric,
CAMBRELLE cushioned lining and THINSULATE thermal insulation. The following table summarizes the Company's product
lines:
Rugged Outdoor
Occupational
Casual
TARGET MARKET...............................
Hunters and outdoorsmen
SUGGESTED RETAIL
PRICE RANGE.......................................
$89 - $259
DISTRIBUTION.....................................
CHANNELS............................................
Sporting goods stores,
outdoor specialty stores
and mail order catalogs
Law enforcement and
military personnel,
security guards, postal
workers, paramedics,
industrial and
construction workers
Retail customers of
premium casual wear
$69 - $179
$69 - $189
Retail uniform stores,
mail order catalogs,
specialty safety stores
and independent retail
stores
Independent retail stores,
department store chains,
mail order catalogs and
sporting goods stores
COMPANY'S LEADING
BRAND NAMES...................................
BEAR CLAW, BEAR CLAW II,
JASPER, and PRO HUNTER
ELIMINATOR, ROCKY 911
SERIES, ALPHA FORCE,
WORKSMART, and WORKMAX
EURO TRAVELERS, ROCKY
ROCKERS, FORMZ and
WATERPROOF EXPLORERS
Rugged Outdoor Footwear. Rugged outdoor footwear, which is the Company's largest product line in terms of total net
sales, represented $51.0 million, or 52.0%, of Fiscal 1999 net sales. The Company's rugged outdoor footwear consists of all
season sport/hunting boots that are typically waterproof and insulated and a line of rubber footwear. Rubber footwear was
introduced by the Company in 1998 and consists of patterned and non-patterned knee boots, chest and hip waders and insulated
cold weather pack boots. These products are designed to keep outdoorsmen comfortable in extreme conditions. Most of the
Company's rugged outdoor footwear have outsoles which are designed to provide excellent cushioning and traction. Although
Rocky's rugged outdoor footwear is regularly updated to incorporate new camouflage patterns, the Company believes its
products in this category are relatively insensitive to changing fashion trends.
Occupational Footwear. Occupational footwear, which is the Company's second largest product line, represented $29.9
million, or 30.5%, of Fiscal 1999 net sales. All occupational footwear styles are designed to be comfortable, flexible,
lightweight, slip resistant and durable and are typically worn by people who are required to spend a majority of their time at
work on their feet. Certain styles of the Company's occupational wear incorporate Gore's CROSSTECH fabric, which is resistant
to blood-borne pathogens. Several of the Company's occupational footwear products are similar in design to certain of the
Company's rugged outdoor footwear styles, except the Company's occupational footwear is primarily black in color and features
innersole support systems. This product category includes work/steel toe footwear designed for industrial, construction and
manufacturing workers who demand leather work boots that are durable, flexible and comfortable. Many companies require
their workers to wear steel toe boots and often provide purchase programs for their employees' footwear needs.
Casual Footwear. Aggregate sales of the Company's casual footwear were $9.0 million in Fiscal 1999, accounting for
9.1% of net sales. The Company's casual products target the upscale segment of the market and include well-styled, comfortable
leather shoes of a variety of constructions, including traditional handsewn. Most of the Company's footwear in this segment is
waterproof and highly functional for outdoor activity. The Company has placed increased emphasis on expanding its market
share
4
within the casual segment by increasing the number of its product offerings and more directly targeting the retail consumer. The
Company currently offers approximately 80 styles of footwear within this market segment.
Factory outlet stores. The Company operates factory outlet stores in Nelsonville, Ohio and Westpoint, Mississippi.
Products principally include factory damaged goods and close-outs from the Company and other manufacturers. In addition,
related products manufactured by other manufacturers are sold in the stores. For 1999, net sales for factory outlet stores were
$5.2 million, or 5.3% 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. Aggregate sales of other products were
$3.0 million in Fiscal 1999, representing 3.1% of net sales.
Net Sales Composition. The following table indicates the percentage of net sales derived from each major product line
and the factory outlet store for the periods indicated. Historical percentages may not be indicative of the Company's future
product mix.
Rugged outdoor footwear .................................................................
Occupational footwear......................................................................
Casual footwear.................................................................................
Factory outlet stores..........................................................................
Other..................................................................................................
Product Design and Development
Fiscal
1999
52.0%
30.5
9.1
5.3
3.1
100.0%
Fiscal
1998
Fiscal
1997
53.7%
26.9
9.1
5.5
4.8
100.0%
52.4%
24.3
8.2
5.2
9.9
100.0%
Product design and development are initiated both internally by the Company's development staff and externally by
customers and suppliers. The Company's product development personnel, marketing personnel and sales representatives work
closely to identify opportunities for new styles, camouflage patterns, design improvements and the incorporation of new
materials. These opportunities are reported to the Company's development staff which oversees the development and testing of
the new footwear. The Company also receives design and product innovation ideas from tradeshows and from its customers and
suppliers who work with the Company to design footwear incorporating desired features or product innovations. The Company
strives to develop products which respond to the changing needs and tastes of consumers under time constraints imposed by the
market. As part of the design process, the Company maintains a computer aided design (CAD) system, which significantly
shortens the development period for new footwear styles. Once the product design has been approved for production, a last (a
reusable form utilized in the manufacture of footwear) is developed by the Company and then reproduced by a third-party
supplier.
Sales, Marketing and Advertising
The Company has developed comprehensive marketing and advertising programs to gain national exposure and create
brand awareness for its ROCKY brand products in its targeted markets. By creating strong brand awareness, the Company seeks
to increase the general level of retail demand for its products, expand its customer base and increase brand loyalty. The
Company's footwear is sold by more than 3,000 retail and mail order companies in the United States and Canada. The
Company's largest customers include: Cabela's, Inc., Bass Pro Shops, Inc., Dick's Clothing and Sporting Goods and Gander
Mountain for rugged outdoor footwear; Fecheimer Brothers Uniforms, Inc., R & R Uniforms, Inc. and Galls, Inc. for
occupational footwear; and J.C. Penney Company, Inc. for casual footwear. No single customer accounted for more than 10% of
the Company's revenues in Fiscal 1999.
5
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 53 exclusive sales
representatives and manufacturers' representatives, operating in 17 geographic territories, who sell the Company's products
throughout the United States and in Canada. The Company has historically sold its products through manufacturers'
representatives who carried ROCKY brand products as well as other non-competing products. In an effort to ensure full
representation of its complete product line and consistent support of its customers, late in 1995, the Company began replacing its
manufacturers' representatives with exclusive sales representatives who sell only ROCKY brand products. Currently, 87% of the
Company's sales force is comprised of exclusive sales representatives. The Company also changed its sales and manufacturing
representatives compensation program by setting performance goals based on sales growth, development of new accounts and
increased penetration of existing accounts with new products. The Company's exclusive sales representatives and manufacturers'
representatives are paid on a commission basis and are responsible for sales, service and follow-up.
The Company advertises and promotes the ROCKY brand through a variety of methods, including product packaging,
national print 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 amongst 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 aimed at audiences which share the
demographic profile of the Company's typical customers. Similarly, the Company has shifted its national print advertising
campaign to several consumer publications: including: Field & Stream, North American Hunter, Outdoor Life, Men's Journal,
Police and Security News, Rescue and Law and Order. The Company's print advertisements and television commercials
emphasize the waterproof nature of the Company's footwear as well as its high quality, comfort, functionality and durability.
Management believes that by 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.
All of the Company's advertisements include a toll free number for consumers to inquire about the Company's products
and to locate their nearest retailer. When the consumer calls into this automated telemarketing service, they elect to speak with a
customer service representative, receive a free brochure, or locate the three nearest dealers. The dealer locator service prompts
the consumer for their zip code and responds with the name, address, and phone number of the three nearest dealers indicated by
the zip code entered. By using different phone numbers for various advertising campaigns, the marketing department is able to
track the effectiveness of the advertising and media used.
Manufacturing and Sourcing
The Company manufactures its products under a twin-plant concept by producing the labor intensive "upper portions"
in its lower wage rate plants in the Dominican Republic and Puerto Rico and completing its footwear in Puerto Rico and
Nelsonville, Ohio where it uses state-of-the-art bottoming techniques. In early 1999, the Company began to manufacture
opening price point hunting boots in the Dominican Republic. During 2000, the Company plans to move certain manufacturing
operations from Nelsonville to Puerto Rico and the Dominican Republic. The Company utilizes a modular "Team
Pass-Through" manufacturing system in each of its manufacturing facilities. The Company believes that this system, which
allows each person to perform a number of different tasks, is superior to a traditional assembly line approach, which requires
each person to perform a single repetitive task. This system increases the number of pairs of footwear produced per square foot
of manufacturing space, reduces work-in-process inventory and direct labor and improves the Company's production yields. In
addition, the Company believes that its manufacturing process allows it to respond quickly to changes in product demand and
consumer preferences.
Quality control is stressed at every stage of the manufacturing process and is monitored by trained quality assurance
personnel at each of the Company's manufacturing facilities. Every pair of ROCKY footwear, or its component parts, produced
at the Company's facilities is inspected at least five times during the manufacturing process with some styles inspected up to nine
6
times. Every GORE-TEX waterproof fabric bootie liner is individually tested by filling it with compressed air and submerging it
in water to verify that it is waterproof. Quality control personnel at the Nelsonville, Ohio warehouse conduct quality control
testing on incoming sourced finished goods and raw materials and inspect random samples from the finished goods inventory
from each of the Company's manufacturing facilities to ensure that all items meet the Company's high quality standards. A
portion of each manufacturing employee's compensation is based on the level of product quality of each employee's respective
work group.
Most of the Company's footwear is produced in its own facilities in Nelsonville, Ohio, the Dominican Republic and
Puerto Rico. The Company sources some footwear from manufacturers in the Far East, primarily China, which in 1999
accounted for approximately 26% of its revenues. During late 1998, the Company entered into a joint venture with a factory in
China to develop GORE-TEX footwear products. Pursuant to the joint venture, the Company will supply the technology and
know-how to the factory to become W. L. Gore certified. The Company has an exclusive agreement with the product source for
two years. The Company believes this source will improve sourced product quality and produce better gross margins. A greater
portion of the Company's products may be sourced in the future if the Company expands and reaches capacity in its
manufacturing facilities. The Company sources products to reach price points that it cannot obtain with products manufactured
in its own facilities. The Company will source products from outside facilities only if the Company believes that these facilities
will maintain the high quality that has become associated with ROCKY brand footwear. All product sourcing is planned and
implemented under the direction and supervision of the Company's Director of Sourcing.
As part of the Company's quality control process, the Company uses agents 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
facilities, another inspection of raw material and work in process inventory is conducted by Company personnel. 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 the
Company's wholesale selling prices for an extended period of time. The principal raw materials used in the production of the
Company's footwear, in terms of dollar value, are leather, GORE-TEX waterproof breathable fabric, CORDURA nylon fabric
and soling materials. The Company believes that these materials will continue to be available from its current suppliers, and that,
with the exception of GORE-TEX waterproof breathable fabric, there are acceptable present alternatives to these suppliers and
materials.
GORE-TEX waterproof fabric is purchased under license directly from W. L. Gore & Associates, Inc. ("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,
7
simulating a 500-mile march through several inches of water. The prototype is then placed in a sweat absorption and
transmission tester to measure "breathability," which is the amount of perspiration that can escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be waterproof for one year from the date of
purchase. When a customer claims that a product is not waterproof, the product is returned to the Nelsonville, Ohio
manufacturing facility for further testing. If the product fails this testing process, it is either replaced or credit is given, at the
customer's discretion. The Company believes that, historically, the claims associated with this guarantee have been consistent
with guarantee claims in the footwear industry.
Seasonality and Weather
The Company has historically experienced significant seasonal fluctuations in the sale of rugged outdoor footwear. A
majority of orders for the Company's rugged outdoor footwear are placed in January through April for delivery in July through
October. In order to meet demand, the Company must manufacture rugged outdoor footwear year round to be in a position to
ship advance orders during the last two quarters of each calendar year. Accordingly, average inventory levels have been highest
during the second and third quarters of each calendar year and sales have been highest in the last two quarters of each calendar
year. Because of seasonal fluctuations, there can be no assurance that the results for any particular interim period will be
indicative of results for the full year or for future interim periods.
Many of the Company's products, particularly its rugged outdoor footwear line, are used by consumers in cold or wet
weather. Mild or dry weather can have a material adverse effect on sales of the Company's products, particularly if mild or dry
weather conditions occur in broad geographical areas during late fall or early winter. Also, due to variations in weather
conditions from year to year, results for any single quarter or year may not be indicative of results for any future quarter or year.
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, 1999 and December 31, 1998, backlog was $7.7 and $4.7 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®, ROCKY BOOTS® (which claims a
ram's head Design as part of the mark), ROCKY BOOTS and Design® (which claims a ram's head Design as part of the mark),
BEAR CLAW®, CORNSTALKERS®, COME WALK WITH U.S. and Design®, TAC-TEAM and Design®, ROCKY 911
SERIES and Design®, SNOW STALKER®, 4 WAY STOP and Design®, ROCKY and Design® for cigars, ROCKY ROCKY
SHOES & BOOTS INC. SINCE 1932 and Design® plus a detailed full ram Design, and STALKERS®. Additional mark
variations for ROCKY BOOTS® and Design (which claims a ram's head Design as part of the mark), AQUAGUARD™,
FORMZ™, SILENTHUNTER™, PROHIKER™, ELIMINATOR™, PROHUNTER™, and LONGBEARD™ are the subject
of pending United States federal applications for registration. In addition, the Company uses and has common law rights in the
8
marks ROCKY® MOUNTAIN STALKERS®, and other ROCKY® 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® 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® and CROSSTECH® are registered trademarks of W.L. Gore & Associates, Inc.;
CORDURA® is a registered trademark of E.I. DuPont de Nemours and Company; THINSULATE® is a registered trademark of
Minnesota Mining and Manufacturing Company; and CAMBRELLE® is a trademark of Koppers Industries, Inc. The Company
is not aware of any material conflicts concerning its marks or its use of marks owned by other corporations.
Competition
The Company operates in a very competitive environment. Product function, design, comfort, quality, technological
improvements, brand awareness, timeliness of product delivery and pricing are all important elements of competition in the
markets for the Company's footwear. The Company believes that, based on these factors, it competes favorably in its rugged
outdoor footwear and occupational footwear market niches. Many of the Company's competitors have greater financial,
distribution and marketing resources than the Company. The Company has at least five major competitors in each of its markets.
All of these competitors have strong brand name recognition in the markets that they serve.
The footwear industry is subject to rapid changes in consumer preferences. The Company's casual product line and
certain styles within its rugged outdoor and occupational product lines are susceptible to fashion trends. Therefore, the success of
these products and styles are more dependent on the Company's ability to anticipate and respond to changing fashion trends and
consumer demands within its niche market in a timely manner. The Company's inability or failure to do so could adversely affect
consumer acceptance of these product lines and styles and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Employees
At December 31, 1999, the Company had approximately 1,397 full-time employees and 22 part-time employees.
Approximately 1,020 of these full-time employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 1,141 employees engaged in production and the balance in managerial and administrative positions. The
production employees at the Nelsonville, Ohio facility are represented by the Union of Needletrades, Industrial and Textile
Employees ("UNITE"). The current collective bargaining agreement between the Company and the union was reached in May
1998 and will expire in May 2000. The Company has initiated negotiations concerning its collective bargaining agreement with
UNITE. The Company believes the agreement is consistent with other contracts in the footwear industry. Management considers
its relations with all of its employees, both union and non-union, to be good.
Business Risks
The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). In addition to the other information in this report, readers should carefully consider that the
following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations for 1998 and beyond, to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the Company.
Dependence on Sales Forecasts. The Company's investments in infrastructure and product inventory are based on sales
forecasts and are necessarily made in advance of actual sales. The markets in which the Company does business are highly
competitive, and the Company's business is affected by a variety of factors, including brand awareness, changing consumer
preferences, product innovations, fashion trends, retail market conditions, weather conditions and economic and other factors.
One of management's principal challenges is to improve its ability to predict these factors, in order to enable the Company to
better match production of its products with demand. In addition, the Company's growth over the years has created the need to
9
increase these investments in infrastructure and product and to enhance the Company's operational systems. To the extent sales
forecasts are not achieved, costs associated with infrastructure and carrying cost of product inventory would represent a higher
percentage of revenue, which would adversely affect the Company's financial performance.
Changes in Consumer Demand. The footwear industry is subject to rapid changes in consumer preferences. Demand
for the Company's products, particularly the Company's casual product line and certain styles within its rugged outdoor and
occupational product lines, may be adversely affected by changing fashion trends. The future success of the Company will
depend upon the Company's ability to anticipate and respond to changing consumer preferences and fashion trends in a timely
manner. The Company's failure to adequately anticipate or respond to such changes could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition, sales of the Company's products may be
negatively affected by weak consumer spending as a result of adverse economic trends or uncertainties regarding the economy.
See "Business -- Competition."
Seasonality. The Company has historically experienced, and expects to continue to experience, significant seasonal
fluctuations in the sale of its products. The Company's operating results have varied significantly in the past, and may vary
significantly in the future, partly due to such seasonal fluctuations. A majority of the orders for the Company's rugged outdoor
footwear are placed in January through April for delivery in July through October. To meet demand, the Company must
manufacture its products year-round. Accordingly, average inventory levels have been highest during the second and third
quarters of each calendar year, and sales have been highest in the last two quarters of each calendar year. The Company believes
that sales of its products will continue to follow this seasonal cycle. Additionally, the Company does not have long-term
contracts with its customers. Accordingly, there is no assurance that the results for any particular quarter will be indicative of
results for the full year or for the future. The Company believes that comparisons of its interim results of operations are not
necessarily meaningful and should not be relied upon as indications of future performance. Due to the factors mentioned above
as well as factors discussed elsewhere in this Form 10-K, it is likely that in some future quarter the Company's operating results
will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock
will likely be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations"
and "Business -- Seasonality and Weather."
Impact of Weather. Many of the Company's products, particularly its rugged outdoor footwear line, are used primarily
in cold or wet weather. Mild or dry weather has in the past and may in the future have a material adverse effect on sales of the
Company's products, particularly if mild or dry weather conditions occur in broad geographical areas 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 fabric, CORDURA nylon fabric and soling materials. The Company believes that currently there are
acceptable alternatives to these suppliers and materials, with the exception of the GORE-TEX waterproof fabric.
The Company is currently one of the largest customers of GORE-TEX waterproof fabric for use in footwear. The
Company's licensing agreement with W.L. Gore & Associates, Inc. may be terminated by either party upon 90 days written
notice. Although other waterproofing techniques and materials are available, the Company places a high value on its
GORE-TEX waterproof breathable fabric license because GORE-TEX has high brand name recognition and the GORE-TEX
waterproof fabric used in the manufacture of ROCKY footwear has a reputation for quality and proven performance. Even
the
though
10
Company does not believe that its supply of GORE-TEX waterproof fabric will be interrupted in the future, no assurance can be
given in this regard. The Company's loss of its license to use GORE-TEX waterproof breathable fabric could materially
adversely affect the Company's competitive position, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Suppliers."
The Company delivers a majority of shipments to its customers via United Parcel Service ("UPS"). Possible
interruptions of UPS's service in the future could have a material adverse effect on the Company's business, financial condition
and results of operations. The Company utilizes other carriers and the U.S. Postal Service to deliver its shipments.
Changing Retailing Trends. Historically, the Company has chosen not to sell products to discount mass merchandisers.
A continued shift in the marketplace from traditional independent retailers to large discount mass merchandisers has increased
the pressure on many footwear manufacturers to sell products to large discount mass merchandisers at less favorable margins.
Because of competition from large discount mass merchandisers, a number of small retailing customers of the Company have
gone out of business, and in the future more of such customers may go out of business, which could have a material adverse
effect on the Company's business, financial condition and results of operations. Although progressive independent retailers have
attempted to improve their competitive position by joining buying groups, stressing personal service and stocking more products
that address specific local needs, a continued shift to discount mass merchandisers could have a material adverse effect on the
Company's business, Financial condition and results of operations and could cause the Company to reevaluate its strategy. See
"Business -- Sales, Marketing and Advertising."
Reliance on Key Personnel. The development of the Company's business has been, and will continue to be, highly
dependent upon Mike Brooks, Chairman, President and Chief Executive Officer, and David Fraedrich, Executive Vice President
and Chief Financial Officer, and John Friday, Executive Vice President-Sales. Each of these executive officers has an at-will
employment agreement with the Company. The employment agreements provide that in the event of termination of employment
with the Company, the employee will receive a severance benefit and may not compete with the Company for a period of one
year. The Company has obtained key man life insurance on Messrs. Brooks and Fraedrich in the amount of $1,146,022 and
$1,143,602, respectively. The loss of the services of any of these officers could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Reliance on Foreign Manufacturing. Most of the Company's rugged outdoor and casual footwear uppers and some
opening price point hunting boots are produced in the Dominican Republic. Therefore, the Company's business is subject to the
risks of doing business offshore, such as: the imposition of additional United States legislation and regulations relating to
imports, including quotas, duties, taxes or other charges or restrictions; weather conditions in the Dominican Republic; foreign
governmental regulation and taxation; fluctuations in foreign exchange rates; changes in economic conditions; changes in the
political stability of the Dominican Republic; and changes in relationships between the United States and the Dominican
Republic. If any such factors were to render the conduct of business in the Dominican Republic undesirable or impracticable, the
Company would have to locate new facilities for its manufacturing operations. There can be no assurance that additional
facilities would be available to the Company or, if available, that such facilities could be obtained on terms favorable to the
Company. Such a development would have a material adverse effect on the Company's business, financial condition and results
of operations. See "Business -- Manufacturing and Sourcing."
Changes in Tax Rates. In past years, the Company's effective tax rate typically has been substantially below the United
States federal statutory rates. The Company has paid minimal income taxes on income earned by its subsidiary in Puerto Rico
due to tax credits afforded the Company under Section 936 of the Internal Revenue Code and local tax abatements. However,
Section 936 of the Internal Revenue Code has been repealed such that future tax credits available to the Company will be capped
beginning in 2002 and terminate in 2006. In addition, the Company's local tax abatements in Puerto Rico are due to expire in
2004. Before Fiscal 1996, the Company paid no foreign income tax on the income generated by its subsidiary in the Dominican
Republic. During fourth quarter Fiscal 1996, the Company elected to repatriate future earnings of its subsidiary in the Dominican
Republic. In 1999, the Company elected not to repatriate all 1999 and future earnings of its subsidiary in the Dominican
Republic. Consequently, no income taxes are provided on these cumulative earnings of approximately $5,109,000.
11
The Company's future tax rate will vary depending on many factors, including the level of relative earnings and tax
rates in each jurisdiction in which it operates and the repatriation of any foreign income to the United States. Accordingly, since
October 1, 1996, the Company has accrued taxes on all amounts repatriated and will accrue taxes on future earnings as they are
no longer deemed permanently invested. The Company cannot anticipate future changes in such laws. Increases in effective tax
rates or changes in tax laws may have a material adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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. On
March 1, 2000 the Company announced it plans to substantially decrease manufacturing at its Nelsonville, Ohio plant during
2000 by moving additional production to its plants in Puerto Rico and the Dominican Republic.
Concentration of Stock Ownership; Certain Corporate Governance Measures. The directors, executive officers and
principal shareholders of the Company beneficially own approximately 16.5 % 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 more difficult a merger, tender offer or proxy contest involving the Company even if such events might be deemed by
certain shareholders to be beneficial to the interest of the shareholders.
Volatility of Market Price. From time to time, there may be significant volatility in the market price of the Common
Stock. The Company believes that the current market price of its Common Stock reflects expectations that the Company will be
able to continue to market its products profitably and develop new products with market appeal. If the Company is unable to
market its products profitably and develop new products at a pace that reflects the expectations of the market, investors could sell
shares of the Common Stock at or after the time that it becomes apparent that such expectations may not be realized, resulting in
a decrease in the market price of the Common Stock.
In addition to the operating results of the Company, changes in earnings estimates by analysts, changes in general
conditions in the economy or the financial markets or other developments affecting the Company or its industry could cause the
market price of the Common Stock to fluctuate substantially. In recent years, the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies,
including the Company, for reasons unrelated to their operating performance. See "Market for the Registrant's Common Equity
and Related Matters."
Accounting Standards. Changes in the accounting standards promulgated by the Financial Accounting Standards Board
or other authoritative bodies could have an adverse affect on the Company's future reported operating results.
Environmental and Other Regulation. The Company is subject to various environmental and other laws and
regulations, which may change periodically. Compliance with such laws or changes therein could have a negative impact on the
Company's future reported operating results.
Limited Protection of Intellectual Property. The Company regards certain of its footwear designs as proprietary and
relies on patents to protect those designs. The Company believes that the ownership of the patents is a significant factor in its
business. Existing intellectual property laws afford only limited protection of the Company's proprietary rights, and it may be
possible for unauthorized third parties to copy certain of the Company's footwear designs or to reverse engineer or otherwise
obtain and use information that the Company regards as proprietary. The Company believes its patents provide a measure of
security against competition, and the Company intends to enforce its patents against infringement by third parties. However, if
the
12
Company's patents are found to be invalid, to the extent they have served, or would in the future serve, as a barrier to entry to the
Company's competitors, such invalidity could have a material adverse effect on the Company's business, financial condition and
results of operations.
The Company owns United States federal registrations for a number of its trademarks, trade names and designs.
Additional trademarks, trade names and designs are the subject of pending federal applications for registration. The Company
also uses and has common law rights in certain trademarks. During 1994, the Company began to increase distribution of its
goods in several foreign countries. Accordingly, the Company has applied for trademark registrations in a number of these
countries. The Company intends to enforce its trademarks and trade names against unauthorized use by third parties. However,
existing trademark and trade name laws afford only limited protection, and the laws of countries other than the United States
may not protect the Company's proprietary rights to as great an extent as do the laws of the United States. Accordingly,
regardless of the legal rights of the Company, it may be possible for unauthorized third parties to use the Company's trademarks,
trade names or designs and realize monetary gain at the Company's expense. Although such unauthorized use may be illegal, the
Company may be forced to expend substantial resources to enforce its rights and nonetheless be divested of a portion of its
goodwill as a result of such unauthorized use. See "Business -- Patents, Trademarks and Trade Names."
Risks Associated with Forward Looking Statements. This Annual Report on Form 10-K contains certain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements concerning the Company's future profitability and its
operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties
including, without limitation, the factors set forth under the caption "Business Risks" in this Annual Report on Form 10-K and
other factors detailed from time to time in the Company's filings with the Securities and Exchange Commission. Although the
Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this
Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
ITEM 2.
PROPERTIES.
The Company's executive offices and factory outlet store are located in Nelsonville, Ohio in a two-story 25,000 square
foot building adjacent to the Company's Nelsonville manufacturing facility. The first floor of this building, which consists of
approximately 12,500 square feet, houses the Company's factory outlet store which was opened in late 1994. The second floor
houses the Company's executive offices. The Company also owns a 5,000 square foot office building in Nelsonville, Ohio,
subject to a mortgage, which is used to house administrative staff.
The Company owns a 98,000 square foot distribution warehouse in Nelsonville, Ohio. This facility is currently used to
receive and warehouse raw materials and footwear uppers, and houses the footwear returns department.
The Company leases a 41,000 square foot manufacturing 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. The lease
expires in April 2003 and is renewable for two five-year terms.
During 1999, the Company leased three buildings of 54,000, 16,000 and 24,000 square feet, respectively, in Newark
Ohio to store finished goods inventory, rubber products and retail inventory. The Company vacated the Newark facilities in late
1999 and consolidated finished goods, rubber products and retail inventory into Company-owned facilities.
Lifestyle leases a 20,500 square foot manufacturing facility and a 22,700 square foot manufacturing facility and
warehouse in Puerto Rico from the Puerto Rico Industrial Development Company under net noncancellable operating leases, one
13
of which expired in 1998 and one of which expires in 2002. The Company is currently on a month-to-month basis in the facility
whose lease expired in 1998. The Company has signed a lease for an 84,559 square foot facility in Puerto Rico and plans to
move all of its operations to this location during second quarter 2000.
Five Star's manufacturing facility, consisting of three connected buildings and a stand-alone building, is located in a
tax-free trade zone in the Dominican Republic. Five Star leases 82,600 square feet of this facility from the Dominican Republic
Corporation for Industrial Development (the "DRCID") under a Consolidation of Lease Contract, dated as of December 13,
1993, the term of which expires on February 1, 2003. Five Star leases an additional stand-alone 32,000 square feet from the
DRCID under a temporary lease. The Company is currently negotiating a permanent lease for the 32,000 square foot facility.
The Company leased a 3,900 square foot retail outlet store in Westpoint, Mississippi in October of 1998, pursuant to a
lease which expires October 30, 2000.
The Company substantially completed construction of a finished goods distribution center near Logan, Ohio in
December 1999. The building contains 192,000 square feet and is situated on 17.9 acres of land. The new distribution center
became fully operational in the first quarter of 2000. The company has an option on an additional four acres of land.
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.
14
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
March 31, 1998 ........................................................................................................
June 30, 1998 ...........................................................................................................
September 30, 1998 .................................................................................................
December 31, 1998 ..................................................................................................
March 31, 1999 ........................................................................................................
June 30, 1999 ...........................................................................................................
September 30, 1999 .................................................................................................
December 31, 1999 ..................................................................................................
High
19.00
17.50
14.38
8.00
6.75
9.38
8.50
8.13
Low
14.38
13.75
7.25
5.00
4.75
4.81
5.53
6.63
On March 16, 2000, the last reported sales price of the Common Stock on the Nasdaq National Market was $4.00 per
share. As of March 16, 2000, there were approximately 172 shareholders of record of the Common Stock.
The Company presently intends to retain its earnings to finance the growth and development of its business and does
not anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend upon the earnings and
financial condition of the Company, the Company's need for funds and other factors. Presently, the Line of Credit (as defined
below) restricts the payment of dividends on the Common Stock. At December 31, 1999, the Company had no retained earnings
available for distribution.
ITEM 6.
SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(in thousands, except for per share data)
Years Ended
12/31/99
12/31/98
12/31/97
12/31/96
Twelve Months
Ended
12/31/95
(UNAUDITED)
Six Months
Ended
12/31/95
INCOME STATEMENT DATA
Net sales ..............................................
Net income (loss) ................................
BALANCE SHEET DATA
Total assets ..........................................
Long-term debt, less current
maturities.............................................
Shareholders' equity............................
PER SHARE
Net income (loss):
$
$
$
98,099
(5,130)
89,333
25,177
50,229
Basic .............................................
Diluted ..........................................
$
$
(1.09)
(1.09)
Weighted average number of
shares outstanding:
Basic .............................................
Diluted ..........................................
4,710
4,710
$
$
$
$
$
88,699
2,262
96,598
26,878
59,635
0.42
0.41
5,425
5,527
15
$
$
$
$
$
$
$
$
$
$
95,027
4,761
80,955
13,407
59,197
1.16
1.10
4,088
4,330
73,148
2,806
58,090
19,520
26,375
$
$
$
60,384
(537)
49,081
16,554
23,569
$
$
$
36,124
(490)
49,081
16,554
23,569
0.77
0.74
$
$
(0.15)
(0.15)
$ (0.13)
$ (0.13)
3,666
3,776
3,666
3,666
3,666
3,666
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
References to Fiscal 1999, 1998 and 1997 are to Fiscal years of the Company ended December 31 of the respective
year.
PERCENTAGE OF NET SALES
1999
1998
1997
Net sales ..........................................................................................................
Costs of goods sold .........................................................................................
Gross margin ...................................................................................................
Selling, general and Administrative expenses ...............................................
Income (Loss) from operations ......................................................................
100.0%
84.9
15.1
20.4
(5.3%)
100.0%
76.9
23.1
19.4
3.7%
100.0%
72.9
27.1
17.3
9.8%
Fiscal 1999 Compared to Fiscal 1998
Net Sales
Net sales rose 10.6% to $98,099,184 for Fiscal 1999 compared with $88,699,413 for Fiscal 1998. A significant portion
of this increase was due to higher sales in the Company's occupational and rugged outdoor footwear categories. The
occupational category grew approximately $6.0 million in Fiscal 1999 versus the prior year, benefiting from additional styles
and increased market acceptance of the Company's branded products. The rugged outdoor category, which includes all season
sport/hunting boots that are typically waterproof and insulated, and a line of rubber footwear, increased approximately $3.4
million in Fiscal 1999 compared with a year ago. Sales of rubber footwear, which were introduced in Fiscal 1998, were
particularly strong compared to Fiscal 1998. Casual footwear sales rose $0.9 million for Fiscal 1999 compared to Fiscal 1998.
Average list prices for the Company's products were approximately 2% higher in Fiscal 1999 than the prior year.
Gross Margin
Gross margin declined $5,671,956 to $14,842,416 in Fiscal 1999 from $20,514,372 in Fiscal 1998. As a percentage of
net sales, gross margin was 15.1% for Fiscal 1999 versus 23.1% for Fiscal 1998. The Company ended Fiscal 1998 with higher
than anticipated inventory and implemented plans during Fiscal 1999 to bring it into line with expected sales, including an
aggressive inventory reduction program during the fourth quarter of the year. Manufacturing inefficiencies resulting from
relocating certain production operations to the Company's Dominican Republic facilities throughout the second half of Fiscal
1999, as well as the sale of certain inventory at low or negative margins during fourth quarter 1999, adversely impacted Fiscal
1999 gross margin compared to Fiscal 1998. As a result of the inventory reduction program, the Company established a reserve
of $445,000 for inventories where the estimated net realizable value is deemed to be less than cost. The reserve was recorded in
cost of goods sold.
Selling, General & Administrative Expenses
Selling, general & administrative ("SG&A") expenses increased $2,812,146 to $20,020,357 for Fiscal 1999 from
$17,208,211 for Fiscal 1998. As a percentage of net sales, SG&A expenses were 20.4% for Fiscal 1999 versus 19.4% the prior
year. This was principally due to substantially higher costs to temporarily operate four warehouse facilities and additional
shipping costs while the Company's finished goods distribution center was being constructed and substantially completed in
December 1999. In addition, the Company expanded the use of co-op advertising during Fiscal 1999 to support sales.
16
Interest Expense
Interest expense rose $681,071 to $2,415,682 for Fiscal 1999 versus $1,734,611 for Fiscal 1998. The higher interest
expense was attributable to additional interest expense associated with the higher than anticipated inventory during most of
Fiscal 1999, the Company's share repurchase program, and somewhat higher interest rates in Fiscal 1999 versus Fiscal 1998.
Other Income
Other income-net decreased $454,786 to $236,287 in Fiscal 1999 compared to $691,073 in Fiscal 1998. The lower
other income is due to a decrease in interest income earned on the Company's lower average cash balances in 1999 compared to
1998, and fewer cash discounts earned on early payments of trade payables.
Income Taxes
The Company recognized an income tax benefit of $2,227,579 for Fiscal 1999 compared with income tax expense of
$426 for Fiscal 1998. The current year benefit resulted from losses generated in Rocky, Inc., offset by income earned in the
Dominican Republic and losses in the Company's Puerto Rican subsidiary. The primary components of the income tax benefit
were a net operating loss carry back of $1,671,000 and a net operating loss carry forward of $1,794,000 which was offset by a
$822,000 reduction of the uniform capitalization costs as a result of reduced inventory levels. The Company's effective tax
benefit rate of 31.1% reflects favorable tax treatment in Puerto Rico and the Dominican Republic. Effective in 1999, the
Company intends to reinvest accumulated undistributed earnings of Five Star, which amounted to $5,109,000 as of December
1999, in the Dominican Republic. As a result of this decision, no taxes were provided on the 1999 earnings of the Company's
Dominican Republic subsidiary. In addition, Section 936 of the Internal Revenue Code has been repealed such that future tax
credits available to the Company will be capped beginning in 2002 and terminate in 2006. The Company receives abatements on
its Commonwealth and municipal taxes on its subsidiary in Puerto Rico.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales
Net sales increased $6,327,373, or 6.7%, to $88,699,413 for Fiscal 1998 versus $95,026,786 for Fiscal 1997. Rugged
outdoor footwear sales decreased $2,145,547 in Fiscal 1998 versus Fiscal 1997. This decrease resulted from lower sales of
insulated rugged outdoor footwear due to retail carryover from the prior year's selling season and unusually mild weather during
the final four months of the year. These factors caused the Company to experience substantial order cancellations and reductions
of re-orders of rugged outdoor footwear during the second half of Fiscal 1998. Although sales of rugged outdoor footwear
declined in Fiscal 1998 versus Fiscal 1997, the category benefited from the introduction of ROCKY® rubber products.
Occupational footwear sales increased $750,506 in Fiscal 1998 compared to Fiscal 1997. Casual footwear sales rose $331,047 in
Fiscal 1998 versus Fiscal 1997. Average prices for the Company's products were approximately 2% higher in Fiscal 1998 than
the prior year. Additionally, in Fiscal 1998 the Company discontinued a contract to manufacture shoe uppers on a private label
basis for a customer.
Gross Margin
Gross margin declined $5,212,343, or 20.3%, to $20,514,372 for Fiscal 1998 versus $25,726,715 for Fiscal 1997. As a
percentage of net sales, gross margin declined to 23.1% for Fiscal 1998 from 27.1% for Fiscal 1997. The reduction in gross
margin was primarily a result of lower than expected sales, which resulted in temporary manufacturing inefficiencies. The
Company attempted to respond promptly throughout Fiscal 1998 to changes in retail demand, unusual weather conditions, and
higher than planned inventories. However, some manufacturing inefficiencies could not be avoided due to fluctuating demand
for the Company's products. Additionally, gross margin was negatively impacted by increased expenses associated with
hardware and software upgrades to enhance inventory management systems.
17
Selling, General & Administrative Expenses
Selling, general & administrative expenses ("SG&A") increased $791,870, or 4.8%, to $17,208,211 for Fiscal 1998
versus $16,416,341 for Fiscal 1997. As a percentage of net sales, SG&A increased to 19.4% for Fiscal 1998, versus 17.3% for
Fiscal 1997. The increase in SG&A for Fiscal 1998 was due to the addition of new product managers, higher employee benefit
costs and increased advertising expenditures.
Interest Expense
Interest expense declined $818,121, or 32.0%, to $1,734,611 for Fiscal 1998 versus $2,552,732 for Fiscal 1997. This
decrease was a result of lower outstanding balances on the Company's credit facility during Fiscal 1998, and more favorable
interest rates due to re-negotiation of the Company's credit facility during the second quarter of Fiscal 1998. The Company
received net proceeds of $26.9 million from a follow-on common stock offering during the fourth quarter of Fiscal 1997. The
proceeds were used to reduce outstanding debt which resulted in lower interest expense for the fourth quarter of Fiscal 1997 and
first nine months of Fiscal 1998.
Other Income
Other income-net increased $588,385, to $691,073, in Fiscal 1998 compared to $108,688 in Fiscal 1997 due primarily
to increases in interest income earned on the Company's cash balances, increases in licensing income, and increases on discounts
earned on early payments of trade payables.
Income Taxes
Income tax expense was $426 for Fiscal 1998 versus $2,105,000 for Fiscal 1997. The current year tax expense resulted
from taxes on the Company's Puerto Rican subsidiary offset by a benefit generated from the net operating losses incurred in the
U.S. and the Dominican Republic. The Company's effective tax rate in Fiscal 1997 was 30.7%, which reflected favorable tax
treatment afforded income earned by the Company's subsidiary in Puerto Rico and local tax abatements available to the
Company's subsidiary in Puerto Rico. The income of this subsidiary is exempt from taxation under Section 936 of the Internal
Revenue Code. However, Section 936 of the Internal Revenue Code has been repealed such that future tax credits available to
the Company will be capped beginning in 2002 and terminate in 2006. The Company receives abatements on its Commonwealth
and municipal taxes on its subsidiary in Puerto Rico.
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. Working capital is primarily used to support changes in accounts
receivable and inventory as a result of the Company's seasonal business cycle and business expansion. These requirements are
generally lowest in the months of January through March of each year and highest during the months of May through October of
each year. In addition, the Company requires capital to support additions to machinery, equipment and facilities as well as the
introduction of new footwear styles. The Company had working capital of $48,467,902 and $67,468,343 at December 31, 1999
and 1998, respectively.
The Company renegotiated its credit facility during second quarter 1998, which reduced its cost of borrowed funds.
The credit facility has maximum borrowings that range from $25,000,000 (from January 28 to March 31 annually) to
$42,000,000 (from April 1 to January 27 annually). At December 31, 1999, the Company had borrowings under the credit
facility of $31,900,000. At December 31, 1999, the Company did not comply with certain bank covenants. In March 2000, the
Company obtained a waiver from the bank with respect to such events of noncompliance. In addition, the Company and the bank
have had discussions with respect to the possible modification and adjustment of certain terms of the agreement. The Company
and the bank expect these discussions to continue in the near future. Based on the Company's projected results of operations for
2000 and the possible modification of certain covenants, management believes it is probable that the Company will be in
with
compliance
18
the covenants in 2000. However, if the Company's performance falls below the projected results of operations for 2000, the
Company's liquidity and ability to obtain further financing to fund future operating and capital requirements could be negatively
impacted.
During first quarter 2000, the Company completed mortgage financing with GE Capital 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's cash flow from operations increased to $5,100,000 in 1999, while the Company's operating activities in
1998 and 1997 used $7,900,000 and $6,400,000 of cash flows, respectively. The primary cause of the cash generated from
operations in 1999 was due to the significant reduction in inventory due to increased sales in the fourth quarter. Correspondingly,
the cash flows used in operating activities in 1998 and 1997 were due primarily to the increase in inventory in those years.
The principal use of cash flows in investing activities over the last three years has been for investment in property, plant
and equipment. In 1999, property, plant and equipment expenditures were $9,600,000 or $2,800,000 over 1998 amounts due
primarily to the completion of the Company's new distribution facility in late December 1999. 1998 fixed asset expenditures
were $6,800,000 or $2,400,000 greater than 1997 amounts due primarily to hardware and software upgrades and manufacturing
equipment purchases. Capital expenditures for Fiscal 2000 are expected to be approximately $2 million to support
manufacturing, including expenditures for lasts, dies and patterns for new footwear styles.
The largest financing activity in 1999 and 1998 involved the purchase of $4,300,000 and $2,000,000, respectively, of
the Company's common stock which was financed primarily by increased borrowings under its revolving credit facility. In 1997,
the Company received $26,900,000 in net proceeds from a common stock offering. The proceeds were used to reduce
borrowings and increase working capital.
The Company believes it will be able to finance capital additions and meet operating expenditure requirements for
Fiscal 2000 through cash balances, additional long-term borrowings, and operating cash flows.
Inflation
The Company cannot determine the precise effects of inflation; however, inflation continues to have an influence on
the cost of raw materials, salaries and employee benefits. The Company attempts to minimize or offset the effects of inflation
through increased selling prices, productivity improvements, and reduction of costs.
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to, all statements regarding the intent, belief and
expectations of the Company and its management, such as statements concerning the Company's future capital expenditures.
Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation,
dependence on sales forecasts, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers,
changing retail trends, as well as other factors set forth under the caption "Business Risks" in this Annual Report on Form 10-K
and other factors detailed from time to time in the Company's filings with the Securities and Exchange Commission. Although
the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of
the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein
will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives
and plans of the Company will be achieved.
19
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk results from fluctuations in interest rates. The Company is also exposed to changes
in the price of commodities used in its manufacturing operations. However, commodity price risk related to the Company's
current commodities is not material as price changes in commodities are usually passed along to the final customer. The
Company does not hold any material market risk sensitive instruments for trading purposes.
The Company has the following three items that are market rate sensitive for interest rates: (1) Long-term debt consists
of a credit facility with a balance at December 31, 1999 of $31,900,000. Interest is payable monthly at the bank's LIBOR rate
(plus 100 to 190 basis points) or prime. In order to minimize the effect of the interest rate fluctuation, the Company has one
interest rate swap arrangement with a major bank for a total notional amount of $15,000,000. Under this agreement, the
Company pays a weighted average fixed rate of 6% (plus 100 to 190 basis points). (2) The Company also has equipment and
other obligations at December 31, 1999, that bear interest at fixed and variable rates ranging from 3.0% to 8.5%. (3) The
Company has a real estate obligation at December 31, 1999, that bears interest at a variable rate of 7.375%.
Assuming a hypothetical 20% change in short-term interest rates, interest expense would not change significantly, as
the interest rate swap agreement would principally offset the impact.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial balance sheets as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1999, 1998, and 1997, together
with the independent auditors' report thereon appear on pages F-1 through F-20 hereof, and are incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions "ELECTION OF DIRECTORS" and
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS -
EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders (the "Proxy Statement") to be held on May 24, 2000,
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.
20
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
Consolidated Balance Sheets as of December 31, 1999 and 1998 ........................................
Consolidated Statements of Operations for the fiscal years ended
December 31, 1999, 1998, and 1997..................................................................................
Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 1999, 1998, and 1997 .............................................................
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1999, 1998, and 1997..................................................................................
Notes to Consolidated Financial Statements for the fiscal years ended
F-2 - F-3
F-4
F-5
F-6
December 31, 1999, 1998, and 1997..................................................................................
F-7 - F-20
(2)The following financial statement schedule for the fiscal years ended December 31, 1999, 1998, and 1997 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
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
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Description
Second Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
Amended and Restated Code of Regulations of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1, registration number 33-56118 (the "Registration Statement").
Form of Stock Certificate for the Registrant (incorporated by reference to Exhibit 4.1 to the Registration
Statement).
Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth of the Registrant's Amended
and Restated Articles of Incorporation (see Exhibit 3.1).
Articles I and II of the Registrant's Code of Regulations (see Exhibit 3.2).
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")).
Information concerning Employment Agreements substantially similar to Exhibit 10.1.
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).
Information concerning Deferred Compensation Agreements substantially similar to Exhibit 10.3.
Form of Company's amended 1992 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the 1995
Form 10-K).
Form of Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Registration Statement).
Revolving Credit Loan Agreement, dated January 28, 1997, among Rocky Shoes & Boots, Inc., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., Bank One Columbus, N.A., The Huntington National Bank, and Bank
One, Columbus, N.A., as Agent (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "1996 Form 10-K")).
Term Loan Agreement and First Amendment to Revolving Credit Loan Agreement, dated as of April 18, 1997,
between the Registrant, Five Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, Columbus, N.A., the
Huntington National Bank, and Bank One, Columbus, N.A., as Agent (incorporated by reference to Exhibit 10.8
to Form S-2 filed September 11, 1997, registration number 333-35391).
22
Exhibit
Number
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.16A
10.17
10.18
Description
Second Amendment to Revolving Credit Loan Agreement dated May 29, 1998, among the Registrant, Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, N.A., The Huntington National Bank, and Bank One,
N.A., as Agent (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (the "June 30, 1998 Form 10-Q")).
Second Amended and Restated Master Business Loan Note, dated May 29, 1998, among the Registrant, Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and payable to Bank One, N.A. (incorporated by reference to
Exhibit 10.3 of the June 30, 1998 Form 10-Q).
Second Amended and Restated Master Business Loan Note, dated May 29, 1998, among the Registrant, Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and payable to The Huntington National Bank (incorporated by
reference to Exhibit 10.3 of the June 30, 1998 Form 10-Q).
Master Agreement, dated as of February 1, 1996, by and between Bank One, Columbus, N.A., and Rocky Shoes
& Boots Co. (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
transition period ended December 31, 1995).
Indemnification Agreement, dated December 21, 1992, between the Registrant and Mike Brooks (incorporated
by reference to Exhibit 10.10 to the Registration Statement).
Information concerning Indemnification Agreements substantially similar to Exhibit 10.13 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1993 (the "1993 Form 10-K")).
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")).
Decree of Tax Exemption from the Government of the Commonwealth of Puerto Rico (incorporated by
reference to Exhibit 10.13 to the Registration Statement).
English Translation of Addendum to Exhibit 10.16 (incorporated by reference to Exhibit 10.13A to the
Registration Statement).
Lease Agreement, dated May 1, 1998, as amended, between Rocky Shoes & Boots Co. and William Brooks
Real Estate Company regarding Nelsonville factory (incorporated by reference to Exhibit 10.3 of the June 30,
1998 Form 10-Q).
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).
23
Exhibit
Number
10.19
Lease Contract, undated, between Lifestyle Footwear, Inc. and The Puerto Rico Industrial Development
company regarding factory location 2 (incorporated by reference to Exhibit 10.16 to the Registration Statement).
Description
10.19A
English translation of Exhibit 10.19 (incorporated by reference to Exhibit 10.16A to the Registration Statement).
10.20
10.20A
10.21
10.22
10.23
10.24
10.25
10.26
10.27
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")).
English translation of Exhibit 10.20 (incorporated by reference to Exhibit 10.2A to the September 30, 1995
Form 10-Q).
Continuing Security Agreement, dated January 28, 1997, among Rocky Shoes & Boots, Inc., Five Star
Enterprises Ltd., Lifestyle Footwear, Inc., and Bank One, Columbus, N.A., as Agent (incorporated by reference
to Exhibit 10.18 to the 1996 Form 10-K).
Loan Purchase, Assignment and Master Amendment Agreement, dated as of February 1, 1996, among Bank
One Columbus, N.A., NBD Bank, NBD Bank, as Agent, Rocky Shoes & Boots, Inc., Rocky Shoes & Boots,
Co., Five Star Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the transition period ended December 31, 1995).
Installment Business Loan Note, dated August 19, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes &
Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to
Exhibit 10.20 to the 1994 Form 10-K).
Second Amendment to Business Loan Note, dated January 28, 1997, among Rocky Shoes & Boots, Inc., Five
Star Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by reference to Exhibit 10.21 to the 1996 Form
10-K).
Term Lease Master Agreement, dated April 27, 1993, between Rocky Shoes & Boots, Inc. and IBM Credit
Corporation (incorporated by reference to Exhibit 10.22 to the 1993 Form 10-K).
Fourth Amendment to Promissory Note, dated January 28, 1997, among Rocky Shoes & Boots, Inc., Five Star
Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by reference to Exhibit 10.23 to the 1996 Form
10-K).
Acceptance Credit Agreement, dated May 4, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots
Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.24 to the 1994 Form 10-K).
24
Exhibit
Number
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
Description
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).
First Amendment to Acceptance Credit Agreement, dated October 20, 1993, among Rocky Shoes & Boots, Inc.,
Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.26 to the 1994 Form 10-K).
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).
Form of Stock Option Agreement under the 1995 Stock Option Plan (incorporated by reference to Exhibit 10.28
to the 1995 Form 10-K).
Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated March 30, 1995, between
Rocky Shoes & Boots Co. and NBD Bank, as Agent (incorporated by reference to Exhibit No. 10.3 to the March
31, 1995 Form 10-Q).
Installment Business Loan Note, dated May 11, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots
Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.30 to the 1994 Form 10-K).
Construction and Term Loan Agreement, dated October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.31 to the 1994 Form 10-K).
Promissory Note, dated October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.32 to the
1994 Form 10-K).
Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated October 27, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and
NBD Bank (incorporated by reference to Exhibit 10.33 to the 1994 Form 10-K).
First Amendment to Construction and Term Loan Agreement, dated January 28, 1994, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.34 to the 1994 Form 10-K).
First Amendment to Promissory Note, dated January 28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes
& Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to
Exhibit 10.35 to the 1994 Form 10-K).
First Amendment to Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated
January 28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.36 to the 1994 Form 10-K).
25
Exhibit
Number
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
Description
Letter Agreement between the Registrant and the Kravetz Group, dated August 3, 1994 (incorporated by
reference to Exhibit No. 10.6 to the March 31, 1995 Form 10-Q).
Amended and Restated Master Business Loan Note, dated March 30, 1995, among the Registrant, Rocky Shoes
& Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc. (incorporated by reference to Exhibit No. 10.4
to the March 31, 1995 Form 10-Q).
Third Amendment to Construction and Term Loan Agreement, dated as of March 30, 1995, among the
Registrant, Rocky Shoes & Boots Co., Five Star Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by
reference to Exhibit No. 10.5 to the March 31, 1995 Form 10-Q).
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).
Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots Co. to the Director of Development of the
State of Ohio (incorporated by reference to Exhibit 10.44 to the 1995 Form 10-K).
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).
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).
Information covering Employment Agreements substantially similar to Exhibit 10.46 (incorporated by reference
to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
Termination of Buy-Sell Agreement, dated August 18, 1998, among the Registrant, Mike Brooks, Barbara
Brooks Fuller, Patricia H. Robey, Jay W. Brooks, and Charles Stuart Brooks (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
10.49
Employment Agreement, dated April 27, 1999, between the Company and John E. Friday.
21
23
24
27
99.1
99.2
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form S-2 filed September 11, 1997,
registration number 333-35391).
Independent Auditors' Consent and Report on Schedules of Deloitte & Touche LLP.
Powers of Attorney.
Financial Data Schedule.
Independent Auditors' Report on Schedules of Deloitte & Touche LLP (incorporated by reference to Exhibit
23).
Financial Statement Schedule.
26
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 signature page.
(d)
FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors' report thereon are included on the following pages.
27
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.
SIGNATURES
Date: March 30, 2000
ROCKY SHOES & BOOTS, INC.
By:
/s/ DAVE FRAEDRICH
Dave Fraedrich, Executive Vice President,
Treasurer, and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.
Signature
Title
Date
* MIKE BROOKS
Mike Brooks
/s/ DAVE FRAEDRICH
Dave Fraedrich
Chairman, President and Chief
Executive Officer (Principal
Executive Officer)
Executive Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Financial and Accounting
Officer)
March 30, 2000
March 30, 2000
* CURTIS A. LOVELAND
Curtis A. Loveland
Secretary and Director
March 30, 2000
March 30, 2000
March 30, 2000
March 30, 2000
March 30, 2000
March 30, 2000
Leonard L. Brown
* BARBARA BROOKS FULLER
Barbara Brooks Fuller
* STANLEY I. KRAVETZ
Stanley I. Kravetz
* JAMES L. STEWART
James L. Stewart
* ROBERT D. STIX
Robert D. Stix
*By: /s/ CURTIS A. LOVELAND
Curtis A. Loveland, Attorney-in-Fact
Director
Director
Director
Director
Director
28
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
F - 2 - F - 3
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
F - 4
F - 5
F - 6
Notes to Consolidated Financial Statements
F - 7 - F - 20
29
This Page Intentionally Left Blank.
30
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, 1999 and 1998 and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 1999.
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, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of America.
Columbus, Ohio
March 30, 2000
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable - trade, net
Refundable income taxes
Other receivables
Inventories
Deferred income taxes
Other current assets
December 31,
1999
1998
$
2,330,324
18,712,588
3,850,000
1,377,394
32,573,067
1,017,331
1,222,914
$
7,232,876
15,595,483
1,654,471
47,110,011
1,735,699
871,533
Total current assets
61,083,618
74,200,073
FIXED ASSETS, AT COST:
Property, plant and equipment
Less - accumulated depreciation
45,012,101
(18,879,879)
37,346,300
(16,842,446)
Total fixed assets - net
26,132,222
20,503,854
DEFERRED PENSION ASSET
OTHER ASSETS
TOTAL ASSETS
See notes to consolidated financial statements.
357,520
884,268
1,759,994
1,010,274
$
89,333,354
$
96,598,469
F-2
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CURRENT LIABILITIES:
Accounts payable
Current maturities - long-term debt
Accrued expenses:
Taxes - other
Salaries and wages
Other
December 31,
1999
1998
$
2,128,112
8,599,897
$
2,194,026
2,927,625
412,721
569,203
905,783
479,211
511,916
618,952
Total current liabilities
12,615,716
6,731,730
LONG-TERM DEBT - Less current maturities
25,176,918
26,877,509
DEFERRED LIABILITIES:
Compensation
Income taxes
Pension
Total deferred liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, Series A, no par value, $.06 stated value;
none outstanding 1999 and 1998
Common stock, no par value; 10,000,000 shares authorized; outstanding
1999 - 4,489,215 shares; 1998 - 5,172,815 shares
Retained earnings
Total shareholders’ equity
170,294
528,273
613,023
173,535
2,298,863
881,761
1,311,590
3,354,159
39,104,224
36,963,398
35,284,159
14,944,971
39,560,343
20,074,728
50,229,130
59,635,071
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
89,333,354
$
96,598,469
See notes to consolidated financial statements.
F-3
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NET SALES
COST OF GOODS SOLD
GROSS MARGIN
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Year Ended December 31,
1998
1997
1999
$
98,099,184
$
88,699,413
$
95,026,786
83,256,768
68,185,041
69,300,071
14,842,416
20,514,372
25,726,715
20,020,357
17,208,211
16,416,341
INCOME (LOSS) FROM OPERATIONS
(5,177,941)
3,306,161
9,310,374
OTHER INCOME AND (EXPENSES):
Interest expense
Other - net
(2,415,682)
236,287
(1,734,611)
691,073
(2,552,732)
108,688
Total other - net
(2,179,395)
(1,043,538)
(2,444,044)
INCOME (LOSS) BEFORE INCOME TAXES
(7,357,336)
2,262,623
6,866,330
INCOME TAX EXPENSE (BENEFIT)
(2,227,579)
426
2,105,000
NET INCOME (LOSS)
$
(5,129,757)
$
2,262,197
$
4,761,330
NET INCOME (LOSS) PER COMMON SHARE:
Basic
Diluted
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic
Diluted
See notes to consolidated financial statements.
$
$
(1.09)
(1.09)
$
$
0.42
0.41
$
$
1.16
1.10
4,710,039
4,710,039
5,425,026
5,526,863
4,087,682
4,329,907
F-4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Preferred
Stock
Common
Stock
Treasury
Stock
Retained
Earnings
Total
Shareholders’
Equity
BALANCE, DECEMBER 31, 1996
$
6,000
$
14,543,947
$
(1,226,059)
$
13,051,201
$
26,375,089
YEAR ENDED DECEMBER 31, 1997:
Net income
Shares issued (1,570,000) pursuant to public
offering, net of costs of $453,483
Stock options exercised
Tax benefit related to stock options
Preferred stock converted to common stock
26,895,917
1,020,794
143,400
600
(600)
4,761,330
4,761,330
26,895,917
1,020,794
143,400
BALANCE, DECEMBER 31, 1997
5,400
42,604,658
(1,226,059)
17,812,531
59,196,530
YEAR ENDED DECEMBER 31, 1998:
Net income
Treasury stock retired (124,095 shares)
Treasury stock purchased and retired (292,600 shares)
Stock options exercised
Preferred stock converted to common stock
(1,226,059)
(2,038,118)
214,462
5,400
(5,400)
1,226,059
2,262,197
2,262,197
(2,038,118)
214,462
BALANCE, DECEMBER 31, 1998
0
39,560,343
0
20,074,728
59,635,071
YEAR ENDED DECEMBER 31, 1999:
Net loss
Treasury stock purchased and retired (685,100 shares)
Stock options exercised
(4,285,184)
9,000
(5,129,757)
(5,129,757)
(4,285,184)
9,000
BALANCE, DECEMBER 31, 1999
$
0
$
35,284,159
$
0
$
14,944,971
$
50,229,130
See notes to consolidated financial statements.
F-5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization
Deferred income taxes
Deferred compensation and pension - net
Loss on sale of fixed assets
Change in assets and liabilities:
Receivables
Inventories
Other current assets
Other assets
Accounts payable
Accrued liabilities
Year Ended December 31,
1999
1998
1997
$
(5,129,757)
$
2,262,197
$
4,761,330
3,836,586
(1,052,222)
254,769
9,048
(6,690,028)
14,536,944
(378,992)
(749,720)
162,705
277,628
4,226,313
(11,293)
138,485
837
1,014,968
(14,215,775)
(21,515)
58,811
(506,171)
(854,432)
2,925,932
156,247
(13,227)
1,213
(5,176,709)
(7,504,334)
(143,921)
78,951
(711,792)
(740,704)
Net cash provided by (used in) operating activities
5,076,961
(7,907,575)
(6,367,014)
CASH FLOWS FROM INVESTING
ACTIVITIES - Purchase of fixed assets
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt
Payments on long-term debt
Proceeds from issuance of stock (net of
offering expenses)
Purchase of treasury stock
Proceeds from exercise of stock options, including
related tax benefit
(9,675,010)
(6,817,108)
(4,462,236)
57,527,000
(53,555,319)
79,835,000
(64,610,668)
77,050,000
(86,073,615)
(4,285,184)
(2,038,118)
26,895,917
9,000
214,462
1,164,194
Net cash provided by (used in) financing activities
(304,503)
13,400,676
19,036,496
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
(4,902,552)
(1,324,007)
8,207,246
7,232,876
8,556,883
349,637
CASH AND CASH EQUIVALENTS, END OF YEAR
$
2,330,324
$
7,232,876
$
8,556,883
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, 1999, 1998 AND 1997
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. The Company maintains a
nationwide network of independent and Company sales representatives who sell the Company’s
products primarily through independent shoe, sporting goods, specialty, and uniform stores and
catalogs throughout the United States. The Company did not have any customers that accounted for
more than 10% of consolidated net sales in 1999, 1998 and 1997.
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 $715,000 and $606,000 at December 31, 1999 and 1998, respectively.
Concentration of Credit Risk - The Company’s exposure to credit risk is impacted by the economic
climate affecting its industry. The Company manages this risk by performing ongoing credit
evaluations of its customers and maintains reserves for potential uncollectible accounts.
Supplier and Labor Concentrations - The Company purchases raw materials from a number of
domestic and foreign sources. The Company currently buys all of its waterproof fabric, a
component used in a significant portion of the Company’s shoes and boots, from one supplier
(GORE-TEX). The Company has had a relationship with this supplier for over 18 years and has
no reason to believe that such relationship will not continue.
A significant portion of the Company’s shoes and boots are produced in the Company’s Dominican
Republic operations. The Company has conducted operations in the Dominican Republic since
1987 and is not aware of any governmental or economic restrictions that would alter its current
operations.
F-7
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 (see Notes 10).
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:
Building and improvements
Machinery and equipment
Furniture and fixtures
Lasts, dies, and patterns
Years
5-40
8-12
8-12
8-12
Effective January 1, 1998, the Company changed the estimated useful life of certain computer
software costs. This change decreased 1998 net income by $447,600, or $.08 per diluted share.
This change was made to better reflect how the asset is expected to be used over time and to
provide a better matching of revenues and expenses.
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
$2,997,462, $2,323,372 and $1,334,034 for 1999, 1998 and 1997, respectively.
Revenue Recognition - Revenue and related cost of goods sold are recognized at the time footwear
product is shipped to the customer and is recorded net of estimated sales discounts and returns
based upon historical trends. All sales are considered final upon shipment.
Per Share Information - Basic net income per common share is computed based on the weighted
average number of common shares outstanding during the period. Diluted net income per common
share is computed similarly but includes the dilutive effect of the Company’s Series A preferred
stock and stock options. A reconciliation of the shares used in the basic and diluted income per
share computations is as follows:
F-8
Year Ended December 31,
1998
1999
1997
Basic - Weighted average shares outstanding
4,710,039
5,425,026
4,087,682
Dilutive securities:
Preferred stock
Stock options
7,365
94,472
85,549
156,676
Diluted - Weighted average shares outstanding
4,710,039
5,526,863
4,329,907
No adjustments to net income were required for purposes of computing diluted per share amounts.
In 1999, 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 - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”. In June, 1999, the FASB issued Statement of Financial Accounting Standards
No. 137 (SFAS 137). SFAS 133 now is required to be adopted for the Company’s 2001 annual consolidated
financial statements. The Company has not yet determined what, if any, impact the
adoption of this standard will have on its consolidated financial statements.
Segment Information - The Company is managed in one operating segment, footwear. Within their
one operating segment, the Company has identified three product groups; Rugged Outdoor,
Occupational, and Handsewn Casual. The following is supplemental information on net sales by
product group:
Rugged
Outdoor
Handsewn
Casual
Occupational
and Other
Total
1999
1998
1997
$
51,029,943
47,640,000
58,661,798
$
29,847,018
23,847,520
27,232,590
$
17,222,223
17,211,893
9,132,398
$
98,099,184
88,699,413
95,026,786
F-9
2.
INVENTORIES
Inventories are comprised of the following:
Raw materials
Work-in-process
Finished goods
Factory outlet finished goods
Less reserve for obsolescence or lower of
cost or market (see Note 10)
Total
3.
FIXED ASSETS
Fixed assets are comprised of the following:
Land
Building and improvements
Machinery and equipment
Furniture and fixtures
Lasts, dies and patterns
Construction work-in-progress
Total
Less - accumulated depreciation
December 31,
1999
1998
$
4,133,520
2,128,738
24,110,469
2,645,340
$
7,917,557
5,184,591
31,882,217
2,475,646
(445,000)
(350,000)
$
32,573,067
$
47,110,011
December 31,
1999
1998
$
557,071
6,314,768
21,765,027
3,479,787
5,509,926
7,385,522
45,012,101
(18,879,879)
$
544,816
6,346,976
19,622,714
2,959,471
5,157,100
2,715,223
37,346,300
(16,842,446)
Net fixed assets
$
26,132,222
$
20,503,854
F-10
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
Bank - revolving credit facility
Equipment and other obligations
Real estate obligation
Other
Total long-term debt
Less current maturities
December 31,
1999
1998
$
31,900,000
1,687,898
56,875
132,042
33,776,815
8,599,897
$
27,000,000
2,495,129
70,741
239,264
29,805,134
2,927,625
Net long-term debt
$
25,176,918
$
26,877,509
The Company has a loan agreement with a bank, as amended on April 18, 1997, May 29, 1998,
April 1, 1999 and July 23, 1999 with maximum borrowings that range from $25,000,000 (from
January 28 to March 31, annually), to $42,000,000 (from April 1 to January 27, annually). Interest
on the revolving credit facility is payable monthly at the bank’s LIBOR rate (plus 100 to 190 basis
points) or prime, and the principal is due May 31, 2003. The weighted average interest rate for the
outstanding balance at December 31, 1999 was 6.01% (6.63% at December 31, 1998). At
December 31, 1999, the Company had no retained earnings available for distribution and
$6,900,000 was classified as current based on the scheduled reduction in the maximum borrowings
that occurred on January 28, 2000.
Any amounts borrowed under the agreement are secured by the accounts receivable, inventories,
and equipment of the Company. The bank debt agreement contains certain restrictive covenants
which, among others, require the Company to maintain a certain level of tangible net worth, as
defined, certain current and debt service coverage ratios, and restrict the amount of capital
expenditures. At December 31, 1999, the Company did not comply with certain of the bank
covenant requirements. In March 2000, the Company obtained a waiver from the bank with respect
to such events of noncompliance. In addition, the Company and the bank have had discussions with
respect to the possible modification and adjustment of certain terms of the agreement. The
Company and the banks expect these discussions to continue in the near future. Based on the
Company’s projected results of operations for 2000 and the possible modification of certain
covenants, management believes it is probable that the Company will be in compliance with
the covenants in 2000.
Equipment and other obligations at December 31, 1999 bear interest at fixed and variable rates
ranging from 3% to 8.5% and are payable in monthly installments to 2002. The obligations are
secured by equipment and are subject to the security agreement and covenants applicable to the
revolving credit facility.
The real estate obligation at December 31, 1999 bears interest at a variable rate of 7.375% and is
payable in monthly installments through 2003. The obligation is secured by real estate and is
subject to the security agreement and covenants applicable to the revolving credit facility.
F-11
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. The Company is exposed to credit loss
only in the event of nonperformance by the bank on the interest rate swap agreements, which the
Company does not anticipate. 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 fair value of the
remaining $15,000,000 interest rate swap at December 31, 1999 is an unrealized gain of $450,926,
that represents the amount at which it could be settled, based on an estimate obtained from a dealer.
The fair value of the interest rate swaps at December 31, 1998 was an unrealized loss of
$1,105,676.
At December 31, 1999 essentially all trade accounts receivable, inventories and property are held as
collateral for the Company’s long-term debt.
Long-term debt matures as follows for the years ended December 31:
2000
2001
2002
2003
Total
$
8,599,897
149,871
18,374
25,008,673
$
33,776,815
The estimated fair value of the Company’s long-term obligations approximated their carrying
amount at December 31, 1999 and 1998, based on current market prices for the same or similar
issues or on debt available to the Company with similar rates and maturities.
During the first quarter of 2000, the Company completed mortgage financing with GE Capital for
three of its facilities totaling $6,300,000, with total monthly payments of $63,100 (including
principal and 8.275% interest) to 2014. The proceeds of the financing were used to pay down
borrowings under the revolving credit facility.
5. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under operating leases that
generally provide for renewal options. The Company incurred approximately $1,069,000,
$840,000, $643,000 in rent expense under operating lease arrangements for 1999, 1998, and 1997,
respectively.
Included in total rent expense above are monthly payments of $7,000 for 1999 and 1998 and $6,000
for 1997, respectively, for the Company’s Ohio manufacturing facility leased from an entity in
which the owners are also shareholders of the Company.
F-12
Future minimum lease payments under non-cancelable operating leases are as follows for the years
ended December 31:
2000
2001
2002
2003
Total
6.
INCOME TAXES
$
358,000
238,000
153,000
30,000
$
779,000
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, 1999, a provision has not been made for U.S. taxes on the accumulated
undistributed earnings of Five Star through December 31, 1999 of approximately $5,109,000 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 not provided any U.S. tollgate taxes on approximately $2,257,000 of
accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that
would be payable if such earnings were repatriated to the United States. It is the intention of the
Company to reinvest all such earnings of Lifestyle. 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 $1,737,000 and $226,000, respectively.
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes,” which requires an asset and liability approach to financial accounting and reporting
for income taxes. Accordingly, deferred income taxes have been provided for the temporary
differences between the financial reporting and the income tax basis of the Company’s assets and
liabilities by applying enacted statutory tax rates applicable to future years to the basis differences.
F-13
Income taxes (benefits) are summarized as follows:
Federal:
Current
Deferred
Total Federal
State and local:
Current
Deferred
Total state and local
Year Ended December 31,
1998
1999
1997
$
(1,273,033)
(1,007,542)
(2,280,575)
$
(76,294)
10,357
(65,937)
$
1,556,631
146,143
1,702,774
97,676
(44,680)
52,996
88,013
(21,650)
66,363
392,122
10,104
402,226
Total
$
(2,227,579)
$
426
$
2,105,000
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:
Expected expense (benefit) at statutory rate
Decrease in income taxes resulting from:
Exempt (income) loss from operations in
Puerto Rico, net of tollgate taxes
Exempt (income) loss from Dominican
Republic operations
State and local income taxes
Alternative minimum tax
Other - net
Year Ended December 31,
1999
1998
1997
$
(2,501,494)
$
769,286
$
2,334,552
563,663
(802,791)
(476,493)
(625,978)
(18,019)
118,829
182,424
(22,563)
(136,757)
(9,869)
(18,528)
Total
$
(2,280,575)
$
(65,937)
$
1,702,774
F-14
Deferred income taxes recorded in the consolidated balance sheets at December 31, 1999 and 1998
consist of the following:
Deferred tax assets:
State and local income taxes
Alternative minimum tax carryforward
Asset valuation allowances
Pension and deferred compensation
Net operating loss carryforwards
Inventories
December 31,
1999
1998
$
118,829
549,265
168,755
1,854,661
309,066
$
47,546
454,494
197,535
215,445
1,131,231
Total deferred tax assets
3,000,576
2,046,251
Deferred tax liabilities:
Fixed assets
Prepaid assets
Tax on Five Star earnings
Tollgate tax on Lifestyle earnings
(1,630,696)
(40,048)
(64,339)
(776,435)
(1,499,613)
(34,173)
(64,339)
(1,011,290)
Total deferred tax liabilities
(2,511,518)
(2,609,415)
Net deferred tax asset (liability)
$
489,058
$
(563,164)
At December 31, 1999, the Company has approximately $4,810,000 of net operating loss
carryforwards for Federal income tax purposes. There are annual utilization limitations over the
next two years for $425,000 of the net operating loss carryforwards. The remaining net operating
loss carryforward expires in 2019.
7. 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.
F-15
Net pension cost of the Company’s plans is as follows:
Year Ended December 31,
1999
1998
1997
Service cost
Interest
Actual loss (return) on plan assets
Amortization and deferral
$
323,726
356,194
(404,283)
152,373
$
273,091
317,725
42,745
(327,398)
$
215,263
284,420
(953,212)
781,589
Net pension cost
$
428,010
$
306,163
$
328,060
The funded status of the Company’s plans and reconciliation of accrued pension cost at
December 31, 1999 and 1998 are presented below (information with respect to benefit obligations
and plan assets as of September 30 is):
Change in benefit obligation:
Benefit obligation at beginning of the year
Service cost
Interest cost
Actuarial gain
Amendments
Exchange (gain)/loss
Benefits paid
December 31,
1999
1998
$
5,463,914
323,726
356,194
(433,965)
(93,418)
(193,633)
$
4,486,537
273,091
317,725
186,659
233,278
130,596
(163,972)
Benefit obligation at end of year
$
5,422,818
$
5,463,914
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
$
3,906,376
404,283
270,000
(193,633)
$
3,897,093
(42,745)
216,000
(163,972)
Fair value of plan assets at end of year
$
4,387,026
$
3,906,376
Funded status (deficit)
Remaining unrecognized benefit obligation existing
at transition
Unrecognized prior service costs due to plan amendments
Unrecognized net loss (gain)
Adjustment required to recognize minimum liability
Additional contributions (September 30-December31)
$
(1,035,792)
$
(1,557,538)
260,255
688,260
(168,226)
(357,520)
288,146
748,678
423,221
(884,268)
100,000
Accrued pension cost
$
(613,023)
$
(881,761)
F-16
The assets of the plans consist primarily of common stocks, bonds, and cash equivalents. The
assets of the plans include 61,000 and 43,400 shares of the Company’s common stock with a market
value of $468,000 and $254,975 at September 30, 1999 and 1998, respectively. The Company’s
unrecognized benefit obligations existing at the date of transition for the union and non-union plans
are being amortized over 23 and 21 years, respectively. Actuarial assumptions used in the
accounting for the plans were as follows:
Discount rate
Average rate of increase in compensation levels
(non-union only)
Expected long-term rate of return on plan assets
December 31,
1999
1998
7.25%
6.75 %
3.0%
9.0%
3.0 %
9.0 %
SFAS No. 87, “Employers’ Accounting for Pensions,” generally requires the Company to recognize
a minimum liability in instances in which a plan’s accumulated benefit obligation exceeds the fair
value of plan assets. In accordance with the Statement, the Company has recorded in the
accompanying financial statements a non-current intangible asset of $357,520, and $884,268 as of
December 31, 1999 and 1998, respectively.
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. Company contributions to the 401(k) savings plan were
$14,504 for 1998. No Company contribution was made for 1999 and 1997.
8. CAPITAL STOCK
The Company has authorized 250,000 shares of voting preferred stock without par value. No shares
are issued or outstanding. Also, the Company has authorized 250,000 shares of non-voting
preferred stock without par value. Of these, 125,000 shares have been designated Series A non-voting
convertible preferred stock with a stated value of $.06 per share, of which no shares are
issued and none are outstanding at December 31, 1999 and 1998, respectively. In accordance with
its terms, all of the outstanding Series A preferred stock was converted into common shares of the
Company on a one for one basis on February 3, 1998.
In November 1997, the Company’s Board of Directors adopted a Rights Agreement which provides
for one preferred share purchase right to be associated with each share of the Company’s
outstanding common stock. Shareholders exercising these rights would become entitled to purchase
shares of Series B Junior Participating Cumulative Preferred Stock. The rights may be exercised
after the time when a person or group of persons without the approval of the Board of Directors
acquire beneficial ownership of 20 percent or more of the Company’s common stock or announce
the initiation of a tender or exchange offer which if successful would cause such person or group to
beneficially own 20 percent or more of the common stock. Such exercise may ultimately entitle the
holders of the rights to purchase for $80 per right, common stock of the Company having a market
value of $160. The person or groups effecting such 20 percent acquisition or undertaking such
F-17
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 1998 and 1999, the
Company purchased and retired 292,600 and 685,100 shares for $2,038,118 and $4,285,184,
respectively, under its share repurchase program. At December 31, 1999, the Company’s Board of
Directors has not authorized any additional share repurchase.
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. 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, 1997 through December 31, 1999:
Outstanding at January 1, 1997
Issued
Exercised
Forfeited
Outstanding at December 31, 1997
Issued
Exercised
Forfeited
Outstanding at December 31, 1998
Issued
Exercised
Forfeited
Weighted
Average
Exercise
Price
$
8.74
9.37
8.94
8.28
8.82
14.44
9.37
9.47
10.86
5.82
6.00
10.61
Shares
447,900
85,500
(114,120)
(11,320)
407,960
210,000
(22,890)
(34,660)
560,410
247,000
(1,500)
(112,160)
Outstanding at December 31, 1999
693,750
$
9.12
Options exercisable at December 31:
1997
1998
1999
235,140
359,785
386,035
$
$
$
9.24
10.01
9.27
F-18
The following table summarizes information about options outstanding at December 31, 1999:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$5.375 - $6.75
$7.50 - $8.875
$9.50 - $10.125
$13.125 - $20.00
Total
Number
295,250
125,750
122,250
150,500
693,750
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
6.5
4.2
1.8
5.8
$
$
$
$
5.87
8.55
9.81
15.42
Weighted-
Average
Exercise
Price
$
$
$
$
5.88
8.57
9.82
15.69
Number
120,000
81,125
123,410
61,500
5.1
$
9.12
386,035
$
9.27
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 1999, 1998, and 1997, respectively; dividend yield
of 0%; expected volatility of 41%, 48% and 40%; risk-free interest rates of 6.66%, 5.29%, and
6.40%; and expected life of 6 years. The weighted average grant date fair value of options issued
during 1999, 1998, and 1997 was $3.40, $8.55, and $4.62, respectively.
Net income (loss):
As reported
Pro forma
Income (loss) per share:
As reported:
Basic
Diluted
Pro forma:
Basic
Diluted
Year Ended December 31,
1998
1999
1997
$
$
(5,129,757)
(5,201,230)
$
$
2,262,197
1,301,976
$
$
4,761,330
4,498,370
$
$
(1.09)
(1.09)
$
$
0.42
0.41
$
$
1.16
1.10
$
$
(1.10)
(1.10)
$
$
0.24
0.24
$
$
1.10
1.04
The pro forma amounts are not representative of the effects on reported net income for future years.
F-19
9.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as follows:
Year Ended December 31,
1999
1998
1997
Interest
$
2,547,104
$
1,756,078
$
2,619,374
Federal, state and local
income taxes - net of refunds
$
2,370,588
$
1,210,445
$
2,306,150
The Company entered into no capital lease arrangements during the year ended December 31, 1999
and 1998. During the years ended December 31, 1997, the Company entered into capital lease
arrangements for certain equipment which had a present value of $474,743. Accounts payable at
December 31, 1999, 1998 and 1997 include a total of $189,659, $418,278 and $133,017,
respectively, relating to the purchase of fixed assets.
10. FOURTH QUARTER RESULTS (UNAUDITED)
For the fourth quarter of 1999, the Company incurred a net loss of $7.2 million or $1.59 loss per
basic and diluted share compared to a loss of $1.1 million or $0.21 loss per basic and diluted share
in the fourth quarter of 1998. The primary reason for the loss in the fourth quarter and the year is
due to the Company’s inventory reduction program. During 1999 (principally in the fourth
quarter), the Company reduced its inventory to $32.6 million from $47.1 million at December 31,
1998. As a result of this program, the Company had a negative gross margin of $3.1 million in the
fourth quarter of 1999, primarily due to sales agreements the Company entered into in December
1999 resulting in sales of approximately $3.8 million with a negative gross margin of $2.3 million.
In addition, the Company recorded a reserve to the lower of cost or market of $445,000 at
December 31, 1999 related to finished goods inventory that was sold in the first quarter of 2000 at
a price below cost.
Also contributing to the loss in the fourth quarter of 1999 were increased selling, general, and
administrative expenses of $1.6 million compared to the fourth quarter of 1998. This was
principally due to substantially higher costs to temporarily operate four warehouse facilities,
additional shipping costs while the Company’s new finished goods distribution center was being
constructed, and expanded use of co-op advertising.
* * * * * *
F-20
MARKET MAKERS
The following broker-dealer firms are market makers in the Company's Common Stock:
Herzog, Heine, Geduld, Inc.
Knight Securities, Inc.
McDonald & Company Securities, Inc.
Mitchell Securities Corporation of Oregon
Nash, Weiss & Co.
Sherwood Securities Corp.
Spear, Leeds & Kellogg Capital Markets
The Annual Meeting of Shareholders will be held on May 24, 2000, at 9:30 a.m. at the Capital Club, 41 South High
Street, Columbus, Ohio.
ANNUAL MEETING
BOARD OF DIRECTORS
Mike Brooks
Chairman of the Board,
President and Chief Executive Officer
Leonard L. Brown
President
Leonard L. Brown, Inc.
David Fraedrich
Executive Vice President, Treasurer
and Chief Financial Officer
Stanley I. Kravetz
President
The Kravetz Group
Curtis A. Loveland
Secretary, Partner,
Porter, Wright, Morris &
Arthur LLP
Robert D. Rockey
Chairman and Chief Executive Officer
Duck Head Apparel Company, Inc.
Robert D. Stix
Former Vice President and General
Manager of Operations
James L. Stewart
Proprietor
Rising Wolf Ranch, Inc.
Mike Brooks
Chairman of the Board,
President and
Chief Executive Officer
David Fraedrich
Executive Vice President,
Treasurer and
Chief Financial Officer
John E. Friday
Executive Vice President,
Sales
Dennis Disser
Vice President,
Marketing
OFFICERS
Corporate Offices
Stock Listing
NASDAQ National Market
Symbol: RCKY
Internet
Corporate and Investor
information on Rocky Shoes &
Boots, Inc. can be accessed at:
http://www.rockyboots.com
39 E. Canal Street
Nelsonville, Ohio 45764
(740) 753-1951
Independent Accountants
Deloitte & Touche LLP
Columbus, Ohio
Legal Counsel
Porter, Wright, Morris & Arthur LLP
Columbus, Ohio
Transfer Agent and Registrar
Communications regarding changes of address,
transfer of shares, and lost certificates should be
directed to the Company's stock transfer and registrar:
Form 10-K
Copies of the signatures, exhibit index and exhibits
contained therein as filed with the Securities and Exchange
Commission are available without charge upon written
request to:
Fifth Third Bank
Corporate Trust Services
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(800) 837-2755
David Fraedrich
Executive Vice President
Rocky Shoes & Boots, Inc.
39 E. Canal Street
Nelsonville, Ohio 45764
cover.flg 4/20/00 7:28 PM Page 2
Rocky Shoes & Boots, Inc.
39 East Canal Street • Nelsonville, Ohio 45764 • Phone (740) 753-1951 • Fax (740) 753-4024
http://www.rockyboots.com
1999
Annual Report