Rocky Shoes & Boots, Inc. designs, develops, manufactures
and markets premium quality rugged outdoor, occupational
and casual footwear.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
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):
Basic
Diluted
Weighted average number of
shares outstanding:
Basic
Diluted
Years Ended
12/31/00
12/31/99
12/31/98
12/31/97
12/31/96
$102,451
$96
$98,099
($5,130)
$88,699
$2,262
$95,027
$4,761
$73,148
$2,806
$86,051
$89,333
$96,598
$80,955
$58,090
26,445
50,326
25,177
50,229
26,878
59,635
13,407
59,197
19,520
26,375
$0.02
$0.02
($1.09)
($1.09)
$0.42
$0.41
$1.16
$1.10
$0.77
$0.74
4,489
4,493
4,710
4,710
5,425
5,527
4,088
4,330
3,666
3,776
To Our Shareholders,
We were pleased to improve sales and return to modest profitability for the year 2000.
Throughout this past year we focused on ways to improve our cost structure and position the
Company for improved performance. The most significant achievements resulted from targeted
initiatives to reduce our costs. It is anticipated that additional progress will be realized from these
efforts during 2001.
We moved a substantial portion of our manufacturing from the Nelsonville, Ohio factory to
facilities in Puerto Rico and the Dominican Republic. This was a difficult decision, but necessary
in order to remain competitive with our expanding line of ROCKY(cid:226)
manufacturing plans are centered on maximizing production at our factories and utilizing
sourcing to achieve specific growth and product pricing objectives.
branded footwear. Our
Seven years ago we decided to begin sourcing footwear to leverage the production capabilities of
our factories and to accommodate anticipated growth. The requirement at that time is the same
today; that is, quality standards must be identical to footwear produced in our own factories.
Sourcing enables us to be more responsive to new opportunities and maintain competitive price
points. Last year, 36% of our net sales were derived from sourcing. We anticipate the percentage
of sourced footwear will continue to increase in 2001. This strategic manufacturing approach
allows us to balance internal manufacturing capabilities with our growth plans.
Our confidence in the manufacturing capabilities at our Caribbean factories was an important
factor leading to submission of a bid to the U.S. Government last year for production of
Intermediate Cold Wet boots. We were awarded a contract earlier this year to produce ROCKY(cid:226)
Gore-Tex(cid:226)
expected to exceed the annual minimum of $1.6 million. This contract is for one year with an
option to extend the agreement for an additional twelve months.
boots. Initial shipments are scheduled to begin in second quarter 2001 and are
Cost control programs were also implemented in other areas of our business this past year. We
will continue to seek opportunities to realize cost savings which individually may not be large but
in the aggregate contribute to improved profitability. These efforts are part of a company-wide
commitment to achieve sustained growth and profitability.
Rugged outdoor footwear remains our largest category of sales. This category includes our
extensive line of hunting and hiking boots, rubber products, and the new Wild Wolf(cid:212)
ROCKY(cid:226)
year through the introduction of Scent Control System(cid:212)
through increased sales of rubber products. Our launch of the Scent Control System(cid:212)
the most extensive in the Company’s 69-year history.
styles. We are the leader in rugged out door footwear and reinforced that position last
footwear which includes 14 styles, and
line was
by
by ROCKY(cid:226)
exceeded our expectations. This footwear was sold in
Initial response to Wild Wolf(cid:212)
four styles in approximately 900 Wal-Mart stores last fall. Along with Wal-Mart, we are pleased
with the progress to date, which has resulted in the introduction of four new styles of Wild Wolf(cid:212)
by ROCKY(cid:226)
in Wal-Mart this spring. Importantly, these sales occurred during first quarter 2001,
which is historically our weakest quarter of the year due to seasonal factors. These positive
developments are especially noteworthy because they represent our entry into a new channel, mass
merchandising, with ROCKY(cid:226)
branded footwear.
Occupational footwear sales continued to be a substantial part of our business in the year 2000.
Introduction of the ROCKY(cid:210)
styles last year was positive. These styles offer flexibility
and exceptional comfort with a unique foot bed system. This year-round business is stable and
we are expanding our line of occupational footwear to increase our emphasis on work boots.
TMC(cid:212)
Casual footwear sales declined during this past year in response to the Company's reduced
emphasis on this category. We have not retreated from the casual category; rather, we have
determined that while penetration of large, national accounts and specialty retail stores remains
feasible, it requires too much time and resources to achieve a satisfactory percentage of our total
sales. Therefore, we continue to offer casual footwear through our catalogues and, importantly,
they are part of the revitalized sales program with all of our customers.
The past fall and winter seasons were generally colder and more traditional than the past several
years. As a result, sell-through at retail was strong and they are motivated to replenish their
inventory with new merchandise. Nonetheless, consumer confidence has been affected in recent
months in response to a generally weaker economy. If this situation becomes prolonged, then it
could affect our business during our peak period of August through December. We are actively
following economic conditions, closely monitoring production levels and inventory quantities,
staying in close contact with our customers, and will respond appropriately to future changes.
The finished goods distribution facility, which became fully operational in first quarter 2000, has
enabled us to manage our inventory much more effectively. We are pleased with its initial
performance and the progress that has been achieved during the past 12 months. Inventory
decreased to $32 million at December 31, 2000, a $500,000 reduction from the same date a year
ago with a $4.4 million increase in net sales in 2000 versus 1999. Management believes that the
inventory levels at December 31, 2000, and currently, are in line with anticipated 2001 sales in
each footwear category.
We are encouraged, but not satisfied with our progress. This message has also been
communicated directly to the management team. All of us know that we can do better and we are
working diligently to realize our financial targets for 2001, which specifically emphasize
increased profitability. The changes we have made should improve production efficiencies and
combined with ongoing cost reduction efforts will help us achieve our objectives.
Sincerely,
Mike Brooks
Chairman, President
and Chief Executive Officer
March 30, 2001
FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
xx
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
oo
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1943
Commission File Number: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of Registrant as specified in its charter)
Ohio
(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 x NO o
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. o
The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was
approximately $18,069,310 on March 16, 2001.
There were 4,489,215 shares of the Registrant's Common Stock outstanding on March 16, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated by
reference in Part III.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "anticipate," "believe," "expect," "estimate," and "project" and similar words and expressions identify
forward-looking statements which speak only as of the date hereof. Investors are cautioned that such statements
involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated
results due to many factors, including, but not limited to, the factors discussed in "Business - Business Risks." The
Company undertakes no obligation to publicly update or revise any forward -looking statements.
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 Moca, Puerto Rico. Unless the
context otherwise requires, all references to "Rocky" or the "Company" include Rocky Shoes & Boots, Inc. and its
subsidiaries.
Overview
The Company is the successor to the business of The Wm. Brooks Shoe Company, a company established in
1932 by William Brooks, who was later joined by F. M. Brooks, the grandfather of the Company's current Chairman,
President and Chief Executive Officer, Mike Brooks. The business was sold in 1959 to a company headquartered in
Lancaster, Ohio. John W. Brooks, the father of Mike Brooks, remained as an employee of the business when it was
sold. In 1975, John W. Brooks formed John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co. ("Rocky Co."))
as an Ohio corporation, reacquired the Nelsonville, Ohio operating assets of the original company and moved the
business's principal executive offices back to Nelsonville, Ohio. In 1993, the Company, Rocky Co., Lifestyle and Five
Star were parties to a reorganization, and in 1996, Rocky Co. was merged with and into the Company, resulting in the
Company's present corporate structure.
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, and the balance of the footwear is
sourced from factories in China. 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 breathable fabric, CORDURA nylon fabric and soling materials. The Company's footwear is
distributed nationwide and in Canada from the Company's finished goods distribution facility located near Logan, Ohio.
The Company stores finished goods in this facility until they are used to fill an order. If the product ordered is in
inventory, it can be shipped to customers within two days of the order.
In the past, the Company has benefited from a relatively low effective tax rate. The Company receives
favorable tax treatment on income earned by its subsidiary in Puerto Rico and benefits from local tax abatements
available to such subsidiary. Beginning in 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."
Strategy
The Company's objective is to increase sales within its core product categories and to also leverage the
ROCKY brand into new markets. This strategy is pursued 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 innovative products in each of its footwear market segments. In Fiscal 2000,
the Company introduced an extensive line of scent suppressant footwear featuring the ROCKY® Scent Control
System™ as well as ROCKY® TMC Series of occupational 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 manufacturing employees’ compensation is based on the level of product quality of their work groups.
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 brand’s strength,
the Company has reformulated its advertising strategy by shifting the focus from the retail trade directly to the
consumer. A key component of this new strategy includes advertising through cost-effective cable broadcasts to
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 ROCKY, thereby increasing demand for
its products at higher retail prices.
Leverage the ROCKY Brand. The Company believes the ROCKY brand has become a recognizable and
established name for performance quality-conscious consumers in the rugged outdoor and occupational segments of
the men's footwear market. The Company intends to continue leveraging ROCKY with a major emphasis on broadening
its share of the occupational shoe market, especially steel toe work shoes. Additionally, the Company licenses ROCKY
for use on certain complementary products, such as socks, hats and accessories in an effort to increase brand
recognition.
Utilize Exclusive Rocky-Focused Sales Force. The Company has historically sold its footwear through
manufacturers' representatives who carried ROCKY brand products as well as other non-competing products. Late in
1995, the Company began replacing its manufacturers' representatives with exclusive sales representatives who sell
only ROCKY brand products. This was implemented in an effort to ensure full representation of its complete product
line and consistent support of its customers. At December 31, 2000, all of the Company’s sales representatives were
working exclusively for the Company.
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 any of its three plants, depending on the type of construction. Those styles most
technologically advanced are finished in 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, at which time
the Company moved a substantial portion of its bottoming operation from its Nelsonville, Ohio facility to Puerto Rico
and the Dominican Republic. During the second half of 2000, employment in its Nelsonville, Ohio manufacturing facility
declined by 78 positions to 69 positions by December 31, 2000. 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 production
yields. In addition, the Company believes its manufacturing process allows a quick response to changes in product
demand and consumer preferences.
Expand Product Sourcing. The Company's sourced products represented approximately 36% of net sales in
2000. The Company sources products which are manufactured to its specifications from independent manufacturers in
the Far East. This enables the Company to offer product for sale at price points that cannot generally be achieved with
products manufactured in its own plants.
The Company can achieve higher initial gross margin on sourced footwear than is attainable on footwear
manufactured in its own factories. 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. All product sourcing is planned and implemented under the direction and supervision of the
Company’s Director of Sourcing.
Product Lines
The Company's product lines consist of rugged outdoor, occupational and casual footwear. ROCKY brand
products emp hasize 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...............................
$59 - 259
DISTRIBUTION CHANNELS...........
Sporting goods stores,
outdoor specialty stores,
order catalogs and
independent retail stores and
mass merchandisers
COMPANY'S LEADING
BRAND NAMES.............................
BEAR CLAW, BEAR CLAW II,
JASPER, PRO HUNTER, and
WILD WOLF
® by Rocky
®
Law enforcement and
military personnel,
security guards, postal
workers, paramedics,
industrial workers and
construction workers
Retail customers of
premium casual wear
$69 - $179
$69 - $189
Retail uniform stores,
mail order catalogs,
mail order catalogs,
Independent retail stores,
sporting goods stores,
specialty safety stores mail
sporting goods stores
ELIMINATOR, ROCKY 911
SERIES, ALPHA FORCE
WORKSMART, and WORKMAX
ROCKY ROCKERS and
GORE TEX HANDSEWN
FOOTWEAR
Rugged Outdoor Footwear. Rugged outdoor footwear is the Company's largest product line, representing
$61.8 million, or 60.4%, of Fiscal 2000 net sales. The Company's rugged outdoor footwear consists of all season
sport/hunting boots that are typically waterproof and insulated and a line of rubber footwear. Rubber footwear was
introduced by the Company in 1998 and consists of patterned and non-patterned camouflage knee boots, chest and hip
waders and insulated cold weather pack boots. These products are designed to keep outdoorsmen comfortable in
extreme conditions. Most of the Company's rugged outdoor footwear have outsoles which are designed to provide
excellent cushioning and traction. Although Rocky's rugged outdoor footwear is regularly updated to incorporate new
camouflage patterns, the Company believes its products in this category are relatively insensitive to changing fashion
trends.
Occupational Footwear. Occupational footwear, the Company's second largest product line, represented
$28.0 million, or 27.3%, of Fiscal 2000 net sales. All occupational footwear styles are designed to be comfortable,
flexible, lightweight, slip resistant and durable and are typically worn by people who are required to spend a majority of
their time at work on their feet. Several of the Company's occupational footwear products are similar in design to certain
of the Company's rugged outdoor footwear styles, except the Company's occupational footwear is primarily black in
color and features innersole support systems. This product category includes work/steel toe footwear designed for
industrial, construction and manufacturing workers who demand leather work boots that are durable, flexible and
comfortable. The Company increased its emphasis of work steel toe footwear in 2000.
Casual Footwear. Sales of the Company's casual footwear were $6.2 million in Fiscal 2000, accounting for
6.0% of net sales. The Company's casual products target the upscale segment of the market and include well-styled,
comfortable leather shoes of a variety of constructions, including traditional handsewn. Most of the Company's
footwear in this segment is waterproof and highly functional for outdoor activity. The Company reduced its emphasis
on the Casual Footwear segment in 2000. While continuing to offer high performance rugged casual footwear, the
emphasis is on marketing this line through the traditional dealer base.
Factory outlet stores. 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 Rocky
licensed products. In addition, related products from other manufacturers are sold in the stores. For 2000, net sales for
factory outlet stores were $5.9 million, or 5.7% of the Company's total net sales.
Other. The Company manufactures and/or markets a variety of accessories, including GORE-TEX waterproof
oversocks, GORE-TEX waterproof booties, innersole support systems, foot warmers, laces and foot powder.
GORE-TEX waterproof oversocks are sold under the ROCKY brand and as private label products. Sales of other
products were $0.6 million in Fiscal 2000.
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 ..............................................................................
Occupational ...................................................................................
Casual ...............................................................................................
Factory outlet stores .......................................................................
Other..................................................................................................
Fiscal
2000
60.4%
27.3
6.0
5.7
0.6
100.0%
Fiscal
1999
Fiscal
1998
52.0%
30.5
9.1
5.3
3.1
100.0%
53.7%
26.9
9.1
5.5
4.8
100.0%
Product Design and Development
Product design and development are initiated both internally by the Company's development staff and
externally by customers and suppliers. The Company's product development personnel, marketing personnel and sales
representatives work closely together to identify opportunities for new styles, camouflage patterns, design
improvements and the incorporation of new materials. These opportunities are reported to the Company's development
staff which oversees the development and testing of the new footwear. The Company strives to develop products
which respond to the changing needs and tastes of consumers under time constraints imposed by the market. As part
of the design process, the Company maintains a computer aided design system, which significantly shortens the
development period for new footwear styles.
Sales, Marketing and Advertising
The Company has developed comprehensive marketing and advertising programs to gain national exposure
and create brand awareness for the ROCKY brand products in targeted markets. By creating strong brand awareness,
the Company seeks to increase the general level of retail demand for its products, expand the customer base and
increase brand loyalty. The Company's footwear is sold by more than 3,000 retail and mail order companies in the
United States and Canada. The Company's largest customers include: Bass Pro Shops, Inc., Cabela's, Inc., Dick's
Clothing and Sporting Goods, Gander Mountain, and Wal-Mart for rugged outdoor footwear; Fecheimer Brothers
Uniforms, Inc., Galls, Inc. and R & R Uniforms, Inc. for occupational footwear. No single customer accounted for more
than 10% of the Company's revenues in Fiscal 2000.
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 51 exclusive
sales representatives and manufacturers' representatives, operating in 30 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.
Currently, 100% 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 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 within the trade industry. The Company's marketing personnel have developed a product list, product
catalog and dealer support system which includes attractive point-of-sale displays and co-op advertising programs.
The Company believes its long-term reputation for quality has increased awareness of the ROCKY brand. To
further increase the strength of its brand, the Company has targeted the majority of its advertising efforts toward end
consumers. A key component of this strategy includes advertising through cost-effective cable broadcasts 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.
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, followed by completion of the
bottoming process at any of the Company’s three facilities. The most technologically advanced styles are completed in
Nelsonville, Ohio where it uses state-of-the-art bottoming techniques. In early 1999, the Company began to
manufacture opening price point hunting boots in the Dominican Republic. The Company moved a substantial portion
of its production to Puerto Rico and the Dominican Republic. During 2000 the Company reduced employment in its
Nelsonville, Ohio manufacturing facility. By December 31, 2000, 78 manufacturing positions had been eliminated,
leaving 69 manufacturing employees engaged in the most technologically advanced bottoming operations employed by
the Company. 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 production per square foot of manufacturing space, reduces work-in-process
inventory and direct labor and improves production yields. In addition, the Company believes that its manufacturing
process allows it to respond quickly to changes in product demand and consumer preferences.
Quality control is stressed at every stage of the manufacturing process and is monitored by trained quality
assurance personnel at each of the Company's manufacturing facilities. Every pair of ROCKY footwear, or its
component parts, produced at the Company's facilities is inspected at least five times during the manufacturing process
with some styles inspected up to nine times. Every GORE-TEX waterproof fabric bootie liner is individually tested by
filling it with compressed air and submerging it in water to verify that it is waterproof. Quality control personnel at the
finished goods distribution facility located near Logan, Ohio conduct quality control testing on incoming sourced
finished goods and raw materials and inspect random samples from the finished goods inventory from each of the
Company's manufacturing facilities to ensure that all items meet the Company's high quality standards. A portion of the
manufacturing employees’ compensation is based on the level of product quality of their work groups.
The majority 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 fiscal 2000 accounted for approximately 36% of net sales. 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
supplied the technology and know-how to the factory to become W. L. Gore certified. The Company believes this
supplier improved sourced product quality. A greater portion of the Company's products may be sourced in the future
since the Company can achieve higher initial gross margins on sourced footwear. The Company 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 employees in its China office to visit
foreign factories to conduct quality control reviews of raw materials, work in process inventory, and finished goods. In
addition, upon arrival at the Company's Ohio distribution center, another inspection of sourced footwear is conducted
by the Director of Quality Control. The Company does not use hedging instruments with respect to foreign sourced
products.
Compliance with federal, state and local regulations with respect to the environment has not had any material
effect on the earnings, manufacturing process, capital expenditures or competitive position of the Company.
Compliance with such laws or changes therein could have a negative impact in the future.
Suppliers
The Company purchases raw materials from a number of domestic and foreign sources. The Company does
not have any long-term supply contracts for the purchase of its raw materials, except for limited blanket orders on
leather to protect wholesale selling prices for an extended period of time. The principal raw materials used in the
production of the Company's footwear, in terms of dollar value, are leather, GORE-TEX waterproof breathable fabric,
CORDURA nylon fabric and soling materials. The Company believes that these materials will continue to be available
from its current suppliers, and, with the exception of GORE-TEX waterproof breathable fabric, there are acceptable
present alternatives to these suppliers and materials.
GORE-TEX waterproof fabric is purchased under license directly from W. L. Gore & Associates, Inc. ("Gore").
A majority of the Company's footwear incorporates GORE-TEX waterproof breathable fabric. The Company, which has
been a customer of Gore since 1980, was the first footwear manufacturer licensed by Gore to manufacture, promote, sell
and distribute footwear worldwide using GORE-TEX waterproof breathable fabric. The Company is currently one of the
largest customers of GORE-TEX waterproof breathable fabric for footwear. Although other waterproofing techniques
or materials are available, the Company places a high value on its GORE-TEX license because the GORE-TEX trade
name has high brand name recognition and the GORE-TEX waterproof breathable fabric used in the manufacture of
ROCKY footwear has a reputation for quality and proven performance.
Under the Company's licensing agreement with Gore, a prototype or sample of each style of shoe or boot
designed and produced by the Company that incorporates GORE-TEX waterproof breathable fabric must be tested and
approved by Gore before the Company is permitted to manufacture or sell commercial quantities of that style of
footwear. Gore's testing involves immersing the Company's footwear prototype for days in a water exclusion tester and
flexing the prototype 500,000 times, simulating a 500-mile march through several inches of water. The prototype is then
placed in a sweat absorption and transmission tester to measure "breathability," which is the amount of perspiration
that can escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be waterproof for one year from the date of
purchase. When a customer claims that a product is not waterproof, the product is returned to the 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 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 are placed in January through April for delivery in July through October. In order to
meet demand, the Company must manufacture rugged outdoor footwear year round to be in a position to ship advance
orders during the last two quarters of each calendar year. Accordingly, average inventory levels have been highest
during the second and third quarters of each calendar year and sales have been highest in the last two quarters of each
calendar year. Because of seasonal fluctuations, there can be no assurance that the results for any particular interim
period will be indicative of results for the full year or for future interim periods.
Many of the Company's products, particularly its rugged outdoor footwear line, are used by consumers in cold
or wet weather. Mild or dry weather conditions can have a material adverse effect on sales of the Company's products,
particularly if they occur in broad geographical areas during late fall or early winter. Also, due to variations in weather
conditions from year to year, results for any single quarter or year may not be indicative of results for any future quarter
or year.
Footwear retailers in general have begun placing orders closer to the selling season. This increases the
Company's business risk because it must produce and carry inventories for relatively longer periods. In addition, the
later placement of orders may change the historical pattern of orders and sales and increase the seasonal fluctuations in
the Company's business. There can be no assurance that the results for any particular interim period or year will be
indicative of results for the full year or for any future interim period or year.
Backlog
At December 31, 2000 and December 31, 1999, backlog was $6.7 and $7.7 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 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™, ROCKY ELIMINATOR™, PROHUNTER™,
LONGBEARD™, RAMDRYTM, and FIRSTMED TM are the subject of pending United States federal applications for
registration. In addition, the Company uses and has common law rights in the marks ROCKY® 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. The Company has at least five major
competitors in each of its markets. All of these competitors have strong brand name recognition in the markets they
serve.
The footwear industry is subject to rapid changes in consumer preferences. The Company's casual product
line and certain styles within its rugged outdoor and occupational product lines are susceptible to fashion trends.
Therefore, the success of these products and styles are more dependent on the Company's ability to anticipate and
respond to changing fashion trends and consumer demands within its niche market in a timely manner. The Company's
inability or failure to do so could adversely affect consumer acceptance of these product lines and styles and could
have a material adverse effect on the Company's business, financial condition and results of operations.
Employees
At December 31, 2000, the Company had approximately 1,167 full-time employees and 27 part-time employees.
Approximately 915 of these full-time employees are in the Dominican Republic and Puerto Rico. The Company has
approximately 794 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 2000 and will expire in May 2001. 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 fiscal 2001
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 with demand. In addition, the
Company's growth over the years has created the need to increase these investments in infrastructure and product and
to enhance the Company's operational systems . To the extent sales forecasts are not achieved, costs associated with
infrastructure and carrying cost of product inventory would represent a higher percentage of revenue, which would
adversely affect the Company's financial performance.
Changes in Consumer Demand. Demand for the Company's products, particularly the Company's casual
product line and certain styles within its rugged outdoor and occupational product lines, may be adversely affected by
changing fashion trends. The future success of the Company will depend upon its ability to anticipate and respond to
changing consumer preferences and fashion trends in a timely manner. The Company's failure to adequately anticipate
or respond to such changes could have a material adverse effect on the Company's business, financial condition and
results of operations.
In addition, sales of the Company's products may be negatively affected by weak consumer spending as a result of
adverse economic trends or uncertainties regarding the economy. See "Business -- Competition."
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 breathable 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 breathable fabric.
The Company is currently one of the largest customers of GORE-TEX waterproof fabric for use in footwear.
The Company's licensing agreement with W.L. Gore & Associates, Inc. may be terminated by either party upon 90 days
written notice. Although other waterproofing techniques and materials are available, the Company places a high value
on its GORE-TEX waterproof breathable fabric license because GORE-TEX has high brand name recognition and the
GORE-TEX waterproof fabric used in the manufacture of ROCKY footwear has a reputation for quality and proven
performance. Even though the Company does not believe that its supply of GORE-TEX waterproof breathable fabric
will be interrupted in the future, no assurance can be given in this regard. The Company's loss of its license to use
GORE-TEX waterproof breathable fabric could have a material adverse effect on the Company's competitive position,
which could have a material adverse effect on the Company's business, financial condition and results of operations.
See "Business -- Suppliers."
The Company delivers a majority of shipments to its customers via United Parcel Service. Possible
interruptions of United Parcel Service’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.
The Company purchases leather from a number of both domestic and foreign suppliers. Due to the recent
outbreak of disease in European cattle the worldwide supply of cowhide has been reduced. This situation could cause
an increase in the price of leather later in 2001. The Company believes it has the ability to increase the price of its
footwear in response to this situation since all of its competitors purchase from the same suppliers.
Changing Retailing Trends. A continued shift in the marketplace from traditional independent retailers to large
discount mass merchandisers has increased the pressure on many footwear manufacturers to sell products to large
discount mass merchandisers at less favorable margins. Because of competition from large discount mass
merchandisers, a number of small retailing customers of the Company have gone out of business, and in the future more
of these customers may go out of business, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Although progressive independent retailers have attempted to improve
their competitive position by joining buying groups, stressing personal service and stocking more products that
address specific local needs, a continued shift to discount mass merchandisers could have a material adverse effect on
the Company's business, financial condition and results of operations. In fiscal 2000, to offer rugged outdoor footwear
for sale in another segment of retail, the Company established the Wild Wolf® by Rocky
® brand. This footwear is sold to
the mass merchandise channel of distribution at lower retail prices than historically available in Rocky brand product.
See "Business -- Sales, Marketing and Advertising."
Reliance on Key Personnel. The development of the Company's business has been, and will continue to be,
highly dependent upon Mike Brooks, Chairman, President and Chief Executive Officer, and David Fraedrich, Executive
Vice President and Chief Financial Officer, and David Sharp, Vice President-Sales & Marketing. 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 imp orts, 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. Consequently, no income taxes are provided on these
cumulative earnings of approximately $5,109,000. 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.
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 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 completed this move in the fourth quarter of Fiscal 2000 resulting in a
reduction of 78 positions. At December 31, 2000 the Company had 69 people engaged in manufacturing in Nelsonville,
Ohio.
Concentration of Stock Ownership; Certain Corporate Governance Measures. The directors, executive
officers and principal shareholders of the Company beneficially own approximately 11.7 % 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 effect on the Company's future reported operating
results.
Environmental and Other Regulation. The Company is subject to various environmental and other laws and
regulations, which may change periodically. Compliance with such laws or changes therein could have a negative
impact on the Company's future reported operating results.
Limited Protection of Intellectual Property. The Company regards certain of its footwear designs as
proprietary and relies on patents to protect those designs. The Company believes that the ownership of the patents is
a significant factor in its business. Existing intellectual property laws afford only limited protection of the Company's
proprietary rights, and it may be possible for unauthorized third parties to copy certain of the Company's footwear
designs or to reverse engineer or otherwise obtain and use information that the Company regards as proprietary. The
Comp any believes its patents provide a measure of security against competition, and the Company intends to enforce
its patents against infringement by third parties. However, if the Company's patents are found to be invalid, to the
extent they have served, or would in the future serve, as a barrier to entry to the Company's competitors, such invalidity
could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company owns United States federal registrations for a number of its trademarks, trade names and
designs. Additional trademarks, trade names and designs are the subject of pending federal applications for
registration. The Company also uses and has common law rights in certain trademarks. During 1994, the Company
began to increase distribution of its goods in several foreign countries. Accordingly, the Company has applied for
trademark registrations in a number of these countries. The Company intends to enforce its trademarks and trade names
against unauthorized use by third parties. See "Business -- Patents, Trademarks and Trade Names."
Risks Associated with Forward Looking Statements. This Annual Report on Form 10-K contains certain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all
statements regarding the intent, belief and expectations of the Company and its management, such as statements
concerning the Company's future profitability and its operating and growth strategy. Investors are cautioned that all
forward-looking statements involve risks 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 owns, subject to a mortgage, executive offices and a factory outlet store which are located in
Nelsonville, Ohio in a two-story 25,000 square foot building adjacent to the Company's 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, subject to a mortgage, 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 facility in Nelsonville, Ohio, from the William Brooks Real Estate
Company, which is 20% owned by Mike Brooks, President and Chief Executive Officer of the Company. This building is
used for manufacturing and houses additional outlet store retail space. The lease expires in April 2003 and is renewable
for two five-year terms.
Lifestyle leases two manufacturing facilities, T-1236-0-87 which contains 44,978 sq. ft. and T-1236-1-82-00
which contains 39,581 sq. ft. in Moca, Puerto Rico. These buildings are leased from the Puerto Rico Industrial
Development Company under a net non-cancelable operating lease which expires in 2009.
Five Star's manufacturing facility, consisting of three connected buildings and a stand-alone building, is
located in a tax-free trade zone in the Dominican Republic. Five Star leases 82,600 square feet of this facility from the
Dominican Republic Corporation for Industrial Development (the "DRCID") under a Consolidation of Lease Contract,
dated as of December 13, 1993, the term of which expires on February 1, 2003. Five Star leases an additional
stand-alone 32,000 square feet from the DRCID under a temporary lease. The Company is currently negotiating a
permanent lease for the 32,000 square foot facility.
The Company leases a 3,900 square foot retail outlet store in Westpoint, Mississippi in October of 1998,
pursuant to a lease which expires October 30, 2001.
The Company owns, subject to a mortgage, a finished goods distribution facility near Logan, Ohio. The
building contains 192,000 square feet and is situated on 17.9 acres of land. The finished goods distribution facility
became fully operational in the first quarter of 2000. The company has an option on an additional four acres of land.
ITEM 3.
LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation which arises in the normal course of its business.
Although the ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the
resolution of such proceedings in the aggregate will not have a material adverse effect on the Company's financial
position, results of operations, or liquidity.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The Company's Common Stock trades on the Nasdaq National Market under the symbol "RCKY." The
following table sets forth the range of high and low sales prices for the Common Stock for the periods indicated, as
reported by the Nasdaq National Market:
Quarter Ended
High
Low
March 31, 1999 ........................................................................................................
June 30, 1999............................................................................................................
September 30, 1999 .................................................................................................
December 31, 1999 ..................................................................................................
March 31, 2000 ........................................................................................................
June 30, 2000............................................................................................................
September 30, 2000 .................................................................................................
December 31, 2000 ..................................................................................................
6.75
9.38
8.50
8.13
7.53
6.53
5.47
5.38
4.75
4.81
5.53
6.63
3.69
4.88
4.63
3.75
On March 16, 2001, the last reported sales price of the Common Stock on the Nasdaq National Market was
$4.56 per share. As of March 16, 2001, 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 restricts the payment of dividends on the Common Stock. At December 31, 2000, the Company had no
retained earnings available for distribution.
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share data)
Five Year Financial Summary
12/31/00
12/31/99
12/31/98
12/31/97
12/31/96
Income Statement Data
Net sales...............................................
$102,451
$98,099
$88,699
$95,027
$73,148
Gross margin % of sales ....................
23.3%
15.1%
23.1%
27.1%
Net income (loss)................................
$96
$(5,130)
$2,262
$4,761
24.7%
$2,806
Balance Sheet Data
Inventories...........................................
$32,035
$32,573
$47,110
$32,894
$25,390
Total assets .........................................
86,051
89,333
96,598
80,955
Working capital...................................
50,201
48,468
67,468
55,988
Long-term debt, less current
maturities...........................................
26,445
25,177
26,878
13,407
Shareholders' equity...........................
50,326
50,229
59,635
59,197
58,090
30,609
19,520
26,375
Per Share
Net income (loss):
Basic ...............................................
$0.02
$(1.09)
Diluted............................................
$0.02
$(1.09)
$0.42
$0.41
$1.16
$1.10
$0.77
$0.74
Weighted average number of common
shares outstanding:
Basic ...............................................
Diluted............................................
4,489
4,493
4,710
4,710
5,425
5,527
4,088
4,330
3,666
3,776
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
References to Fiscal 2000, 1999 and 1998 are to Fiscal years of the Company ended December 31 of the
respective year.
PERCENTAGE OF NET SALES
2000
1999
1998
Net sales..........................................................................................................
Costs of goods sold ......................................................................................
Gross margin...................................................................................................
Selling, general and administrative expenses ............................................
Income (Loss) from operations....................................................................
100.0%
76.7
23.3
20.2
3.1%
100.0%
84.9
15.1
20.4
(5.3%)
100.0%
76.9
23.1
19.4
3.7%
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales
Net sales rose 4.4% to $102,451,376 for Fiscal 2000 compared with $98,099,184 for Fiscal 1999. This increase
was due to higher sales in the rugged outdoor category, especially Wild Wolf(cid:226)
footwear, initial shipments of
which were made during third quarter 2000. This new line increases the availability of ROCKY branded footwear in an
additional segment of the rugged outdoor category. Occupational sales for Fiscal 2000 were $1.9 million below the prior
year. This is primarily due to more sales of footwear at lower price points than during the prior year. The Company
reduced its emphasis on casual footwear sales during the second half of Fiscal 2000. As a result, these net sales were
$2.6 million below the prior year. Average list prices for the Company’s product were approximately 2% higher in Fiscal
2000 than in 1999.
by Rocky
Gross Margin
Gross margin increased $8,991,868, or 60.6%, to $23,834,284 in Fiscal 2000 versus $14,842,416 in 1999. As a
percentage of net sales, gross margin improved to 23.3% in Fiscal 2000 from 15.1% in 1999. This gross margin
improvement is attributable to changing product mix, a significant shift in production during Fiscal 2000 to the
Company's lower wage rate factories in the Caribbean, and an inventory reduction program implemented during fourth
quarter 1999. The Company is committed to increasing gross margin through improved operating efficiencies in its own
factories and higher production levels of ROCKY branded sourced footwear. Net sales of sourced footwear grew to
36% of net sales in Fiscal 2000 from 26% last year.
Selling, General & Administrative Expenses
Selling, general & administrative ("SG&A") expenses increased $628,790, or 3.1%, to $20,649,147 in Fiscal 2000
compared to $20,020,357 in 1999. As a percentage of net sales, SG&A declined slightly to 20.2% from 20.4% in Fiscal
1999. SG&A compared to the prior year included increased commissions from the higher net sales and costs associated
with the finished goods distribution center, which began operations in first quarter 2000. During the fourth quarter of
Fiscal 2000 the Company reorganized the sales force, reduced its emphasis on casual footwear, and achieved
productivity improvements in the finished goods distribution facility. The Company believes that these actions will
have a positive effect on operations in Fiscal 2001. In addition, an ongoing cost reduction program will continue to be
implemented throughout the Company.
(cid:226)
Interest Expense
Interest expense rose $938,706, or 38.9%, to $3,354,388 for Fiscal 2000 from $2,415,682 in Fiscal 1999, principally
due to higher rates of interest that prevailed during Fiscal 2000 compared to the prior year. On September 18, 2000 the
Company entered into a revolving line of credit agreement with another lender, which also includes a higher borrowing
limit, subject to certain levels of collateralized assets of the Company.
Other Income
Other income-net increased $212,970 to $449,257 in Fiscal 2000 compared to $236,287 in Fiscal 1999. The
higher level of other income-net is primarily due to increased licensing income.
Income Taxes
The Company recognized income tax expense of $183,464 for Fiscal 2000 comp ared with an income tax benefit
of $2,227,579 for Fiscal 1999. The current year expense resulted from income generated in Rocky Shoes & Boots, Inc.
and the Dominican Republic offset by losses in the Company’s Puerto Rican subsidiary. The Company’s effective tax
rate of 65.5% reflects permanent differences, prior year rate reconcilement adjustments and favorable tax treatment in
Puerto Rico and the Dominican Republic. Effective in 2000, the Company intends to reinvest accumulated undistributed
earnings of Five Star, which amounted to $5,109,000 as of December 2000, in the Dominican Republic. As a result of this
decision, no taxes were provided on the 2000 earnings of the Company’s Dominican Republic subsidiary.
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.
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 Shoes & Boots, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company principally funds its working capital requirements and capital expenditures through net income,
borrowings under its credit facility and other indebtedness. During Fiscal 2000 the Company principally relied upon
borrowings under its revolving credit facility. Working capital is primarily used to support changes in accounts
receivable and inventory as a result of the Company’s seasonal business cycle and business expansion. These
requirements are generally lowest in the months of January through March of each year and highest during the months
of May through October of each year. The Company had working capital of $50,200,965 and $48,467,902 at December
31, 2000 and 1999, respectively.
Inventory was $32.0 million at December 31, 2000 or 1.7% lower than on the same date of the prior year. Factors
that contributed to this decline included an inventory management program and full operation of the finished goods
distribution facility since first quarter 2000. The Company believes its inventory levels at December 31, 2000 are in line
with anticipated Fiscal 2001 sales in each footwear category.
The Company also requires capital to support additions to machinery, equipment and facilities as well as the
introduction of new footwear styles. Capital expenditures for Fiscal 2000 were $3.1 million compared to $9.7 million the
prior year. Capital expenditures are anticipated to be lower in Fiscal 2001 compared to Fiscal 2000.
On September 18, 2000 the Company completed a revolving line of credit agreement with maximum borrowing
limits of $50,000,000 subject to certain levels of accounts receivable and inventory, which is $8,000,000 higher than the
previous agreement. The agreement expires September 17, 2003. As of December 31, 2000, the Company had borrowed
$20,491,101 against its available line of credit of $25,371,101. At December 31, 2000, the Company did not comply with
certain bank covenants. On March 27, 2001, the Company obtained a waiver from the bank with respect to such events
of noncompliance and amended these covenants through 2001.
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 financing activities during Fiscal 2000 were to support future growth. No single activity
represented a significant amount of the total expenditures. In Fiscal 1999 the largest financing activity was the
repurchase of 685,100 shares of common stock for $4,300,000. This was primarily financed through increased
borrowings under the Company's revolving credit facility. The Company believes it will be able to finance capital
additions and meet operating expenditure requirements for Fiscal 2001 through net income, borrowings under its credit
facility and other indebtedness.
Inflation
The Company cannot determine the precise effects of inflation; however, inflation continues to have an
influence on the cost of raw materials, salaries and employee benefits. The Company attempts to minimize or offset the
effects of inflation through increased selling prices, productivity improvements, and reduction of costs.
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
This 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. The Company assumes no obligation to update any forward-looking
statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk results from fluctuations in interest rates. The Company is also exposed to
changes in the price of commodities used in its manufacturing operations. However, commodity price risk related to the
Company's current commodities is not material as price changes in commodities are usually passed along to the 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, 2000 of $20,491,101. Interest is payable monthly at the bank's
LIBOR rate plus 250 basis points or prime plus 25 basis points. (2) The Company also has equipment and other
obligations at December 31, 2000, that bear interest at fixed and variable rates ranging from 3.0% to Prime rate plus one-
quarter percent (0.25%). (3) The Company has a real estate obligations at December 31, 2000, that bear interest at a fixed
and variable rates of 7.625% to 8.275%.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial balance sheets as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 31, 2000,
1999, and 1998, together with the independent auditors' report thereon appear on pages F-1 through F-21 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 2001 Annual Meeting of Shareholders (the "Proxy Statement") to be held on May
23, 2001, and is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this item is included under the captions "INFORMATION CONCERNING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS" and "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in the Company's Proxy Statement, and is incorporated herein by
reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption "INFORMATION CONCERNING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS - OWNERSHIP OF COMMON STOCK BY
MANAGEMENT" and "- OWNERSHIP OF COMMON STOCK BY PRINCIPAL SHAREHOLDERS," in the Company's
Proxy Statement, and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption "INFORMATION CONCERNING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS - COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION" in the Company's Proxy Statement, and is incorporated herein by
reference.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)
THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) The following Financial Statements are included in this Annual Report on Form 10-K on the pages indicated
below:
Independent Auditors' Report .............................................................................................
F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999...................................
Consolidated Statements of Operations for the fiscal years ended
December 31, 2000, 1999, and 1998..................................................................................
Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 2000, 1999, and 1998...........................................................
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 2000, 1999, and 1998..................................................................................
Notes to Consolidated Financial Statements for the fiscal years ended
December 31, 2000, 1999, and 1998..................................................................................
F-2 - F-3
F-4
F-5
F-6
F-7 - F-21
(2) The following financial statement schedule for the fiscal years ended December 31, 2000, 1999, and 1998 is
included in this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial
Statements contained in the Annual Report.
Schedule II -- Consolidated Valuation and Qualifying Accounts.
Independent Auditors’ Report on Financial Statement Schedule.
Schedules not listed above are omitted because of the absence of the conditions under which they are required or
because the required information is included in the Consolidated Financial Statements or the notes thereto.
(3) Exhibits:
Exhibit
Number
Description
3.1
3.2
4.1
4.2
Second Amended and Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
Amended and Restated Code of Regulations of the Company (incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-1, registration number 33-56118 (the
"Registration Statement").
Form of Stock Certificate for the Company (incorporated by reference to Exhibit 4.1 to the
Registration Statement).
Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth of the
Company's Amended and Restated Articles of Incorporation (see Exhibit 3.1).
4.3
Articles I and II of the Company's Code of Regulations (see Exhibit 3.2).
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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
(incorporated by reference to Exhibit 10.2 to the 1995 Form 10-K).
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 (incorporated by reference to Exhibit 10.4 to the Registration Statement).
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).
Indemnification Agreement, dated December 21, 1992, between the Company and Mike Brooks
(incorporated by reference to Exhibit 10.10 to the Registration Statement).
Information concerning Indemnification Agreements substantially similar to Exhibit 10.7
(incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 (the "1993 Form 10-K")).
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
Exhibit
Number
ended June 30, 1994 (the "1994 Form 10-K")).
Description
10.10
Decree of Tax Exemption from the Government of the Commonwealth of Puerto Rico
(incorporated by reference to Exhibit 10.13 to the Registration Statement).
10.10A English Translation of Addendum to Exhibit 10.16 (incorporated by reference to Exhibit 10.13A
to the Registration Statement).
10.11
10.12
10.13
Lease Agreement, dated May 1, 1998, as amended, between Rocky Shoes & Boots Co. and
William Brooks Real Estate Company regarding Nelsonville factory (incorporated by reference
to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
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).
Lease Contract, undated, between Lifestyle Footwear, Inc. and The Puerto Rico Industrial
Development company regarding factory location 2 (incorporated by reference to Exhibit 10.16
to the Registration Statement).
10.13A English translation of Exhibit 10.13 (incorporated by reference to Exhibit 10.16A to the
Registration Statement).
10.14
Lease Agreement, dated December 13, 1993, between Five Star Enterprises Ltd. and the
Dominican Republic Corporation for Industrial Development regarding buildings and annexes
of a combined manufacturing surface of 75,526 square feet, located in the Industrial Free Zone
of La Vega (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 (the "September 30, 1995 Form 10-Q")).
10.14A English translation of Exhibit 10.20 (incorporated by reference to Exhibit 10.2A to the
September 30, 1995 Form 10-Q).
10.15
Term Lease Master Agreement, dated April 27, 1993, between the Company and IBM Credit
Corporation (incorporated by reference to Exhibit 10.22 to the 1993 Form 10-K).
10.16
Adjustable Rate Note, dated May 23, 1988, between Nelsonville Home and Savings
Association and Rocky Shoes & Boots Co. (incorporated by reference to Exhibit 10.25 to the
Registration Statement).
10.17
Form of Company's Amended and Restated 1995 Stock Option Plan (incorporated by reference
to Exhibit 4(a) to the Registration Statement on Form S-8, registration number 333-67357).
10.18
Form of Stock Option Agreement under the 1995 Stock Option Plan (incorporated by reference
to Exhibit 10.28 to the 1995 Form 10-K).
10.19
Letter Agreement between the Company and the Kravetz Group, dated August 3, 1994
Exhibit
Number
10.20
10.21
10.22
Description
(incorporated by reference to Exhibit No. 10.6 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
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).
10.23
Form of Employment Agreement, dated September 7, 1995, for executive officers (incorporated
by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Information covering Employment Agreements substantially similar
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
to Exhibit 10.23
Termination of Buy-Sell Agreement, dated August 18, 1998, among the Company, Mike
Brooks, Barbara Brooks Fuller, Patricia H. Robey, Jay W. Brooks, and Charles Stuart Brooks
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
Employment Agreement, dated April 27, 1999, between the Company and John E. Friday
(incorporated by reference to Exhibit 10.49 to the Annual Report on Form 10-K for the year
ended December 31, 1999).
Promissory Note, dated December 30, 1999, in favor of General Electric Capital Business Asset
Funding Corporation in the amount of $1,050,000 (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (the “June 30, 2000 Form
10-Q”)).
Promissory Note, dated December 30, 1999, in favor of General Electric Capital Business Asset
Funding Corporation in the amount of $1,500,000 (incorporated by reference to Exhibit 10.2 to
the June 30, 2000 Form 10-Q).
Promissory Note, dated December 30, 1999, in favor of General Electric Capital Business Asset
Funding Corporation in the amount of $3,750,000 (incorporated by reference to Exhibit 10.3 to
the June 30, 2000 Form 10-Q).
Limited Waiver and Modification Agreement, dated May 14, 2000, by and among the
Company, Five Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, NA, The Huntington
National Bank, and Bank One, NA, as agent (incorporated by reference to Exhibit 10.4 to the
June 30, 2000 Form 10-Q).
Exhibit
Number
10.31
Description
Extension of Limited Waiver and Modification Agreement, dated June 30, 2000, by and among
the Company, Five Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, NA, The
Huntington National Bank, and Bank One, NA, as agent (incorporated by reference to Exhibit
10.5 to the June 30, 2000 Form 10-Q).
10.32
Loan and Security Agreement, dated September 18, 2000, among the Company, Lifestyle
Footwear, Inc., and GMAC Business Credit, LLC (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K, filed on September 20, 2000).
10.33
First Amendment to Loan and Security Agreement, dated November 20, 2000, among the
Company, Lifestyle Footwear, Inc., and GMAC Business Credit, LLC.
10.34
Second Amendment to Loan and Security Agreement, dated March 27, 2001, among the
Company, Lifestyle Footwear, Inc., and GMAC Business Credit, LLC.
21
23
24
Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Registration
Statement on Form S-2 filed September 11, 1997, registration number 333-35391).
Independent Auditors' Consent and Report on Schedules of Deloitte & Touche LLP.
Powers of Attorney.
99.1
Independent Auditors' Report on Schedules of Deloitte & Touche LLP (incorporated by
reference to Exhibit 23).
99.2
Financial Statement Schedule.
The Registrant agrees to furnish to the Commission upon its request copies of any omitted schedules or exhibits to any
Exhibit filed herewith.
(b)
REPORTS ON FORM 8-K
None
(c)
EXHIBITS
The exhibits to this report begin immediately following the signature page.
(d)
FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors' report thereon are included in this Annual
Report on Form 10-K as Exhibit 99.1 and Exhibit 99.2, respectively.
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, 2001
ROCKY SHOES & BOOTS, INC.
By: /s/ DAVID FRAEDRICH
David 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/ DAVID FRAEDRICH
David Fraedrich
* CURTIS A. LOVELAND
Curtis A. Loveland
* LEONARD L. BROWN
Leonard L. Brown
* STANLEY I. KRAVETZ
Stanley I. Kravetz
* JAMES L. STEWART
James L. Stewart
*ROBERT D. ROCKEY
Robert D. Rockey
* GLENN E. CORLETT
Glenn E. Corlett
*By: /s/ CURTIS A. LOVELAND
Curtis A. Loveland, Attorney-in-Fact
Chairman, President, Chief
Executive Officer and Director (Principal
Executive Officer)
Executive Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Financial and Accounting
Officer)
March 30, 2001
March 30, 2001
Secretary and Director
March 30, 2001
Director
Director
Director
Director
Director
March 30, 2001
March 30, 2001
March 30, 2001
March 30, 2001
March 30, 2001
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
F - 1
Consolidated Balance Sheets as of December 31, 2000 and 1999
F - 2 - F - 3
Consolidated Statements of Operations for the Years Ended December 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders’ Equity for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998
F - 4
F - 5
F - 6
Notes to Consolidated Financial Statements
F - 7 - F - 21
Deloitte & Touche LLP
155 East Broad Street
Columbus, Ohio 43215-3611
Tel: (614) 221-1000
Fax: (614) 229-4647
www.us.deloitte.com
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, 2000 and 1999 and the related consolidated statements of
operations, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2000. 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, 2000 and
1999 and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles generally accepted in
the United States of America.
March 27, 2001
F - 1
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,
2000
1999
$
2,117,994
18,055,881
2,956,900
32,035,237
536,012
1,295,287
$
2,330,324
18,712,588
3,850,000
1,377,394
32,573,067
1,017,331
1,222,914
Total current assets
56,997,311
61,083,618
FIXED ASSETS, AT COST:
Property, plant and equipment
Less - accumulated depreciation
47,401,015
(23,070,696)
45,012,101
(18,879,879)
Total fixed assets - net
24,330,319
26,132,222
DEFERRED PENSION ASSET
OTHER ASSETS
TOTAL ASSETS
See notes to consolidated financial statements.
2,526,603
357,520
2,196,939
1,759,994
$
86,051,172
$
89,333,354
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
Co-op advertising
Interest
Other
December 31,
2000
1999
$
3,502,296
1,070,374
$
2,128,112
8,599,897
560,537
369,925
520,019
272,882
500,313
412,721
569,203
128,644
198,399
578,740
Total current liabilities
6,796,346
12,615,716
LONG-TERM DEBT - Less current maturities
26,445,276
25,176,918
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 2000 and 1999
Common stock, no par value; 10,000,000 shares authorized;
outstanding 2000 and 1999 - 4,489,215 shares
Retained earnings
Total shareholders’ equity
187,959
2,295,919
170,294
528,273
613,023
2,483,878
1,311,590
35,725,500
39,104,224
35,284,159
15,041,513
35,284,159
14,944,971
50,325,672
50,229,130
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
86,051,172
$
89,333,354
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,
1999
2000
1998
$
102,451,376
$
98,099,184
$
88,699,413
78,617,092
83,256,768
68,185,041
23,834,284
14,842,416
20,514,372
20,649,147
20,020,357
17,208,211
INCOME (LOSS) FROM OPERATIONS
3,185,137
(5,177,941)
3,306,161
OTHER INCOME AND (EXPENSES):
Interest expense
Other - net
(3,354,388)
449,257
(2,415,682)
236,287
(1,734,611)
691,073
Total other - net
(2,905,131)
(2,179,395)
(1,043,538)
INCOME (LOSS) BEFORE INCOME TAXES
280,006
(7,357,336)
2,262,623
INCOME TAX EXPENSE (BENEFIT)
183,464
(2,227,579)
426
NET INCOME (LOSS)
$
96,542
$
(5,129,757)
$
2,262,197
NET INCOME (LOSS) PER COMMON SHARE:
Basic
Diluted
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic
Diluted
See notes to consolidated financial statements.
$
0.02
$
0.02
$
(1.09)
$
(1.09)
$
0.42
$
0.41
4,489,215
4,493,304
4,710,039
4,710,039
5,425,026
5,526,863
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, 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
BALANCE, DECEMBER 31, 1998
YEAR ENDED DECEMBER 31, 1999:
Net loss
Treasury stock purchased and retired (685,100 shares)
Stock options exercised
(5,400)
(1,226,059)
(2,038,118)
214,462
5,400
39,560,343
(4,285,184)
9,000
2,262,197
2,262,197
1,226,059
(2,038,118)
214,462
20,074,728
59,635,071
(5,129,757)
(5,129,757)
(4,285,184)
9,000
BALANCE, DECEMBER 31, 1999
35,284,159
14,944,971
50,229,130
YEAR ENDED DECEMBER 31, 2000:
Net income
96,542
96,542
BALANCE, DECEMBER 31, 2000
$
$
35,284,159
$
$
15,041,513
$
50,325,672
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 expenses
Year Ended December 31,
2000
1999
1998
$
96,542
$
(5,129,757)
$
2,262,197
4,698,554
(46,954)
(468,522)
32,116
2,927,201
537,830
(72,373)
(469,514)
1,551,745
335,969
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)
Net cash provided by (used in) operating activities
9,122,594
5,076,961
(7,907,575)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
Proceeds from sale of fixed assets
(3,113,529)
39,770
(9,675,010)
(6,817,108)
Net cash used in investing activities
(3,073,759)
(9,675,010)
(6,817,108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt
Payments on long-term debt
Purchase of treasury stock
Proceeds from exercise of stock options
106,607,246
(112,868,411)
57,527,000
(53,555,319)
(4,285,184)
9,000
79,835,000
(64,610,668)
(2,038,118)
214,462
Net cash provided by (used in) financing activities
(6,261,165)
(304,503)
13,400,676
DECREASE IN CASH AND CASH EQUIVALENTS
(212,330)
(4,902,552)
(1,324,007)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
2,330,324
7,232,876
8,556,883
CASH AND CASH EQUIVALENTS, END OF YEAR
$
2,117,994
$
2,330,324
$
7,232,876
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, 2000, 1999 AND 1998
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
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(cid:226)
a nationwide network of Company sales representatives who sell the Company’s products
primarily through independent shoe, sporting goods, specialty, uniform stores and catalogs, and
through mass merchandisers throughout the United States. The Company did not have any
customers that accounted for more than 10% of consolidated net sales in 2000, 1999 and 1998.
. The Company maintains
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 $503,000 and $715,000 at December 31, 2000 and 1999, 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 the majority of its waterproof fabric,
a component used in a significant portion of the Company’s shoes and boots, from one supplier
(GORE-TEX(cid:210)
no reason to believe that such relationship will not continue.
). The Company has had a relationship with this supplier for over 19 years and has
F - 7
A significant portion of the Company’s shoes and boots are produced in the Company’s
Dominican Republic operations. The Company has conducted operations in the Dominican
Republic since 1987 and is not aware of any governmental or economic restrictions that would
alter its current operations.
The Company sources a significant portion of its footwear from manufacturers in the Far East,
primarily China. The Company has had sourcing operations in China since 1993 and is not aware
of any governmental or economic restrictions that would alter its current sourcing operations.
Inventories - Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO)
basis, or market. Reserves are established for inventories when the net realizable value (NRV) is
deemed to be less than its cost based on management’s periodic estimates of NRV.
Fixed Assets - The Company records fixed assets at historical cost and generally utilizes the
straight-line method of computing depreciation for financial reporting purposes over the estimated
useful lives of the assets as follows:
Building and improvements
Machinery and equipment
Furniture and fixtures
Lasts, dies, and patterns
Years
5-40
8-12
8-12
8-12
Management periodically evaluates the future economic benefit of its long-term assets when events
or circumstances indicate potential recoverability concerns. This evaluation is based on
consideration of expected future undiscounted cash flows and other operating factors. Carrying
amounts are adjusted appropriately when determined to have been impaired.
For income tax purposes, the Company generally computes depreciation utilizing accelerated
methods.
Advertising - The Company expenses advertising costs as incurred. Advertising expense was
$2,532,671, $2,997,462 and $2,323,372 for 2000, 1999 and 1998, respectively.
Revenue Recognition - Revenue and related cost of goods sold are recognized at the time footwear
product is shipped to the customer and title transfers. Revenue is recorded net of estimated sales
discounts and returns based upon historical trends. All sales are considered final upon shipment.
F - 8
Per Share Information - Basic net loss per common share is computed based on the weighted
average number of common shares outstanding during the period. Diluted net income per
common share is computed similarly but includes the dilutive effect of the Company’s Series A
preferred stock and stock options. A reconciliation of the shares used in the basic and diluted
income per share computations is as follows:
Year Ended December 31,
1999
2000
1998
Basic - Weighted average shares outstanding
4,489,215
4,710,039
5,425,026
Dilutive securities:
Preferred stock
Stock options
4,089
7,365
94,472
Diluted - Weighted average shares outstanding
4,493,304
4,710,039
5,526,863
In 1999, no adjustments to net loss were required for purposes of computing diluted per share
amounts. Stock options of 30,236 were not used to compute diluted weighted average common
shares outstanding since the loss the Company incurred in 1999 makes these stock options anti-
dilutive.
Recently Issued Financial Accounting Standards - Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133 certain contracts that were not
formerly considered derivatives may now meet the definition of a derivative. The Company
adopted SFAS 133 effective January 1, 2001. Management does not expect the adoption of
SFAS 133 to have a significant impact on the financial position, results of operations, or cash
flows of the Company.
F - 9
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:
% of
Net
Sales
% of
Net
Sales
1999
1998
2000
Rugged Outdoor
Occupational
Handsewn Casual
Factory Outlet Stores
Other
$
61,828,170
27,991,923
6,178,237
5,872,380
580,666
$
60.4 % 51,029,943
27.3 % 29,847,018
8,927,026
6.0 %
5,199,257
5.7 %
3,095,940
0.6 %
$
52.0 % 47,640,000
30.4 % 23,847,520
8,071,647
9.1 %
4,878,468
5.3 %
4,261,778
3.2 %
% of
Net
Sales
53.7 %
26.9 %
9.1 %
5.5 %
4.8 %
Total
$
102,451,376
$
100.0 % 98,099,184
$
100.0 % 88,699,413
100.0 %
Net sales to foreign countries, primarily Canada, represented approximately 1% of net sales in
2000, 1999, and 1998.
Reclassifications - Certain amounts in the prior years’ consolidated financial statements have been
reclassified to conform with 2000 presentation.
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
Total
December 31,
2000
1999
$
5,043,839
1,288,960
23,604,593
2,438,398
$
4,133,520
2,128,738
24,110,469
2,645,340
(340,553)
(445,000)
$
32,035,237
$
32,573,067
F - 10
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
Net fixed assets
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
Bank - revolving credit facility
Equipment and other obligations
Real estate obligations
Other
Total debt
Less current maturities
December 31,
2000
1999
$
572,838
13,892,507
23,021,226
3,854,503
6,029,904
30,037
47,401,015
(23,070,696)
$
557,071
6,314,768
21,765,027
3,479,787
5,509,926
7,385,522
45,012,101
(18,879,879)
$
24,330,319
$
26,132,222
December 31,
2000
1999
$
20,491,101
896,408
6,108,661
19,480
27,515,650
1,070,374
$
31,900,000
1,687,898
56,875
132,042
33,776,815
8,599,897
Net long-term debt
$
26,445,276
$
25,176,918
On September 18, 2000, the Company entered into a three-year loan and security agreement with
GMAC Business Credit, LLC (GMAC) refinancing its former bank revolving line of credit based on
the collateral value of its accounts receivable and inventory. The new agreement replaces the
Company’s previous loan and security agreement with a bank and increases the Company’s
borrowing base from $42,000,000 to a maximum of $50,000,000. Interest on the revolving credit
facility is payable monthly at one-quarter percent (0.25%) per annum in excess of the GMAC’s
Prime rate, and the entire principal is due September 17, 2003. Under terms of the agreement, the
Company has the option to borrow up to half of their outstanding obligation at LIBOR plus two
and one-half percent (2.50%). The interest rate for the outstanding balance at December 31, 2000
was 9.75% (6.01% at December 31, 1999).
Amounts borrowed under the agreement are secured by accounts receivable, inventory, equipment,
intangible assets of the Company and its wholly-owned domestic subsidiary, Lifestyle Footwear,
Inc. Additional security includes 65% of the capital stock of the Company’s wholly-owned
foreign subsidiary, Five Star Enterprises, Ltd., and 100% of the capital stock of the Company’s
wholly-owned domestic subsidiary.
F - 11
The loan and security agreement contains certain restrictive covenants, which among other things,
require the Company to maintain a certain level of EBITDA (earnings before interest, taxes, and
depreciation and amortization), net worth, and fixed charge coverage. At December 31, 2000, the
Company was not in compliance with these bank covenant requirements. In March 2001, the
Company obtained a waiver from GMAC with respect to such events of noncompliance and
amended the loan covenants for 2001. Management believes the Company will be in compliance
with the revised 2001 covenants.
Equipment and other obligations at December 31, 2000 bear interest at fixed and variable rates
ranging from 3% to prime rate plus one-quarter percent (.25%) and are payable in monthly
installments to 2003. The equipment is held as collateral against the outstanding obligations.
In January 2000, the Company completed a mortgage financing facility with GE Capital Corp. for
three of its facilities totaling $6,300,000. The facility bears interest at 8.275%, with total monthly
principal and interest payments of $63,100 to 2014. The proceeds of the financing were used to
pay down borrowings under a former revolving credit facility.
In 1998, the Company entered into two interest rate swap agreements with a major bank for a total
notional amount of $25,000,000 with average maturities of seven years to reduce the impact of
changes in interest rates on its variable rate long-term debt. One interest rate swap agreement for a
notional amount of $10,000,000 was terminated in 1999 and resulted in a gain of $103,000. The
remaining interest rate swap agreement for a notional amount of $15,000,000 was terminated
during the second quarter 2000 and resulted in a gain of $294,000. At December 31, 2000 the
Company has no interest rate swap agreements.
At December 31, 2000 essentially all trade accounts receivable, inventories and property are held as
collateral for the Company’s debt.
Long-term debt matures as follows for the years ended December 31:
2001
2002
2003
2004
2005
Thereafter
Total
$
1,070,374
470,650
20,486,161
503,933
492,020
4,492,512
$
27,515,650
The estimated fair value of the Company’s long-term obligations approximated their carrying
amount at December 31, 2000 and 1999, based on current market prices for the same or similar
issues or on debt available to the Company with similar rates and maturities.
F - 12
5. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under operating leases that
generally provide for renewal options. The Company incurred approximately $1,161,000,
$1,069,000, and $840,000 in rent expense under operating lease arrangements for 2000, 1999 and
1998, respectively.
Included in total rent expense above are monthly payments of $7,000 for 2000, 1999 and 1998,
respectively, for the Company’s Ohio manufacturing facility leased from an entity in which the
owners are also shareholders of the Company.
Future minimum lease payments under non-cancelable operating leases are as follows for the years
ended December 31:
2001
2002
2003
2004
2005
Thereafter
Total
6.
INCOME TAXES
$
788,000
656,000
564,000
536,000
536,000
700,000
$
3,780,000
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, 2000, a provision has not been made for U.S. taxes on the accumulated
undistributed earnings of Five Star through December 31, 2000 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,
2000
1999
1998
$
(115,262)
263,071
147,809
$
(1,273,033)
(1,007,542)
(2,280,575)
$
(76,294)
10,357
(65,937)
345,680
(310,025)
35,655
97,676
(44,680)
52,996
88,013
(21,650)
66,363
Total
$
183,464
$
(2,227,579)
$
426
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
Increase (decrease) in income taxes
resulting from:
Exempt (income) loss from operations in
Puerto Rico, net of tollgate taxes
Exempt income from Dominican
Republic operations
State and local income taxes (benefit)
Revision of prior year taxes
Alternative minimum tax
Other - net
Year Ended December 31,
2000
1999
1998
$
95,202
$
(2,501,494)
$
769,286
77,938
563,663
(802,791)
(74,034)
23,532
56,229
4,597
(625,978)
(18,019)
118,829
182,424
(22,563)
(9,869)
Total
$
183,464
$
(2,280,575)
$
(65,937)
Deferred income taxes recorded in the consolidated balance sheets at December 31, 2000
and 1999 consist of the following:
Deferred tax assets:
Alternative minimum tax carryforward - Rocky
Alternative minimum tax carryforward - Lifestyle
Asset valuation allowances
Pension and deferred compensation
Net operating loss carryforwards
Inventories
$
118,829
188,800
648,577
202,291
1,657,782
318,267
$
118,829
549,265
168,755
1,854,661
309,066
Total deferred tax assets
3,134,546
3,000,576
Deferred tax liabilities:
Fixed assets
State and local income taxes
Prepaid assets
Tax on Five Star earnings
Tollgate tax on Lifestyle earnings
(1,497,685)
(47,425)
(276,989)
(776,435)
(1,630,696)
(40,048)
(64,339)
(776,435)
Total deferred tax liabilities
(2,598,534)
(2,511,518)
Net deferred tax asset
$
536,012
$
489,058
At December 31, 2000, the Company has approximately $4,062,000 of net operating loss
carryforwards for Federal income tax purposes. The expiration of such carryforwards in
2001 is $213,000. 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.
In April 2000, the Company announced that certain union and non-union employees were
eligible to participate in voluntary early retirement plans. As part of the plans, employees
who accepted the offers received increased retiree benefits that are to be paid from plan
assets over the employees established retirement period. The effect of the union and non-
union plan amendments increased the Company’s benefit obligation $1,907,868.
F-15
Net pension cost of the Company’s plans is as follows:
Year Ended December 31,
2000
1999
1998
Service cost
Interest
Actual loss (return) on plan assets
Amortization and deferral
$
303,748
403,542
(185,315)
(58,162)
$
323,726
356,194
(404,283)
152,373
$
273,091
317,725
42,745
(327,398)
Net pension cost
$
463,813
$
428,010
$
306,163
The funded status of the Company’s plans and reconciliation of accrued pension cost at December 31, 2000
and 1999 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,
2000
1999
$
5,422,818
303,748
403,542
1,907,868
248,684
(301,653)
$
5,463,914
323,726
356,194
(433,965)
(93,418)
(193,633)
Benefit obligation at end of year
$
7,985,007
$
5,422,818
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
$
4,387,026
185,315
300,000
(301,653)
$
3,906,376
404,283
270,000
(193,633)
Fair value of plan assets at end of year
$
4,570,688
$
4,387,026
Funded 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-December 31)
$
(3,414,319)
$
(1,035,792)
232,362
2,473,620
289,021
(2,526,603)
650,000
260,255
688,260
(168,226)
(357,520)
Accrued pension cost
$
(2,295,919)
$
(613,023)
The assets of the plans consist primarily of common stocks, bonds, and cash equivalents. The
assets of the plans include 61,400 and 61,000 shares of the Company’s common stock with a
market value of $314,675 and $468,000 at September 30, 2000 and 1999, 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,
2000
1999
7.25 %
7.25%
3.0 %
3.0%
9.0 %
9.0%
SFAS No. 87, “Employers’ Accounting for Pensions,” generally requires the Company to
recognize a minimum liability in instances in which a plan’s accumulated benefit obligation exceeds
the fair value of plan assets. In accordance with the Statement, the Company has recorded in the
accompanying financial statements a non-current intangible asset of $2,526,603, and $357,520 as
of December 31, 2000 and 1999, 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 2000 and 1999.
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, 2000 and 1999, 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.
F - 17
In November 1997, the Company’s Board of Directors adopted a Rights Agreement which
provides for one preferred share purchase right to be associated with each share of the Company’s
outstanding common stock. Shareholders exercising these rights would become entitled to
purchase shares of Series B Junior Participating Cumulative Preferred Stock. The rights may be
exercised after the time when a person or group of persons without the approval of the Board of
Directors acquire beneficial ownership of 20 percent or more of the Company’s common stock or
announce the initiation of a tender or exchange offer which if successful would cause such person
or group to beneficially own 20 percent or more of the common stock. Such exercise may
ultimately entitle the holders of the rights to purchase for $80 per right, common stock of the
Company having a market value of $160. The person or groups effecting such 20 percent
acquisition or undertaking such tender offer will not be entitled to exercise any rights. These rights
expire November 2007 unless earlier redeemed by the Company under circumstances permitted by
the Rights Agreement.
The Company reacquired 124,095 and 292,600 shares of common stock in 1994 and 1998 for
$1,226,059 and $2,038,118, respectively. In December 1998, the Board of Directors approved the
retirement of all shares held in treasury (total of 416,695 shares). During 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, 2000, the Company’s Board
of Directors has not authorized any additional share repurchase. There were no treasury stock
purchases in 2000.
The Company adopted a Stock Option Plan in 1992 which provides for the issuance of options to
purchase up to 400,000 common shares of the Company. On October 11, 1995, the Company
adopted the 1995 Stock Option Plan which provides for the issuance of options to purchase up to
an additional 400,000 common shares of the Company. In May 1998, the Company adopted the
Amended and Restated 1995 Stock Option Plan which provides for the issuance of options to
purchase up to an additional 500,000 common shares of the Company. All employees, officers,
directors, consultants and advisors providing services to the Company are eligible to receive
options under the Plans. In addition, the Plans provide for the annual issuance of options to
purchase 5,000 shares of common stock to each non-employee director of the Company.
F - 18
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, 1998 through December 31, 2000:
Outstanding at January 1, 1998
Issued
Exercised
Forfeited
Outstanding at December 31, 1998
Issued
Exercised
Forfeited
Outstanding at December 31, 1999
Issued
Forfeited
Weighted
Average
Exercise
Price
$
8.74
9.37
8.94
8.28
10.86
5.82
6.00
10.61
9.12
6.87
8.40
Shares
407,960
210,000
(22,890)
(34,660)
560,410
247,000
(1,500)
(112,160)
693,750
221,000
(232,250)
Outstanding at December 31, 2000
682,500
$
8.64
Options exercisable at December 31:
1998
1999
2000
359,785
386,035
444,250
$
$
$
10.01
9.27
9.37
The following table summarizes information about options outstanding at December 31, 2000:
Options Outstanding
Average
Remaining
Contractual
Life
Number
Range of
Exercise
Prices
$4.50 - $6.75
$7.50 - $9.00
$9.50 - $9.875
$13.125 - $16.875
269,750
215,750
71,500
125,500
Total
682,500
7.0
6.1
2.3
6.0
6.0
Weighted-
Average
Exercise
Price
$
$
$
$
5.75
8.05
9.75
15.22
Options Exercisable
Weighted-
Average
Exercise
Price
Number
135,500
138,625
70,500
99,625
$
$
$
$
5.97
8.28
9.75
15.23
$
8.64
444,250
$
9.37
F - 19
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 2000, 1999 and 1998, respectively;
dividend yield of 0%; expected volatility of 45%, 41% and 48%; risk-free interest rates of 6.70%,
6.66% and 5.29%; and expected life of 6 years. The weighted average grant date fair value of
options issued during 2000, 1999 and 1998 was $3.09, $3.40 and $8.55, respectively.
Net income (loss):
As reported
Pro forma
Income (loss) per share:
As reported:
Basic
Diluted
Pro forma:
Basic
Diluted
Year Ended December 31,
2000
1999
1998
$
$
96,542
(99,255)
$
$
(5,129,757)
(5,201,230)
$
$
2,262,197
1,301,976
$
$
0.02
0.02
$
$
(1.09)
(1.09)
$
$
0.42
0.41
$
$
(0.02)
(0.02)
$
$
(1.10)
(1.10)
$
$
0.24
0.24
The pro forma amounts are not representative of the effects on reported net income for future
years.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as follows:
Year Ended December 31,
1999
2000
1998
Interest
$
3,279,905
$
2,547,104
$
1,756,078
Federal, state and local
income taxes - net of refunds
$
(3,450,000)
$
2,370,588
$
1,210,445
The Company entered into no capital lease arrangements during the years ended December 31,
2000, 1999 and 1998. Accounts payable at December 31, 2000, 1999 and 1998 include a total of
$12,098, $189,659 and $418,278, respectively, relating to the purchase of fixed assets.
F - 20
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years
ended December 31, 2000 and 1999:
2000
Net sales
Gross margin
Net income (loss)
Net income (loss) per
common share:
Basic
Diluted
1999
Net sales
Gross margin
Net income (loss)
Net income (loss) per
common share
Basic
Diluted
1st Quarter
2nd Quarter 3rd Quarter 4th Quarter Total Year
$14,842,111
$22,918,457
$36,994,402
$27,696,406 $102,451,376
3,243,760
5,276,084
8,508,498
6,805,942
23,834,284
(1,615,568)
343,288
1,262,972
105,850
96,542
($0.36)
($0.36)
$0.08
$0.08
$0.28
$0.28
$0.02
$0.02
$0.02
$0.02
$13,622,730
$23,200,428
$34,458,907
$26,817,119
$98,099,184
3,178,670
5,963,422
8,784,203
(3,083,879)
14,842,416
(321,973)
587,650
1,818,221
(7,213,655)
(5,129,757)
($0.06)
($0.06)
$0.12
$0.12
$0.40
$0.40
($1.55)
($1.55)
($1.09)
($1.09)
No cash dividends were paid during 2000 and 1999.
* * * * * *
F - 21
MARKET MAKERS
The following broker-dealer firms are market makers in the Company's Common Stock:
Herzog, Heine, Geduld, Inc.
Instinet Corporation
Knight Securities, Inc.
McDonald & Company Securities, Inc.
Mitchell Securities Corporation of Oregon
NDB Capital Markets, Inc.
Spear Leeds & Kellogg Capital Markets
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Wednesday, May 23, 2001, at 9:30 a.m., at the Company’s
Finished Goods Distribution Center, located at 37601 Rocky Boots Way, Logan, Ohio.
Mike Brooks
Chairman of the Board,
President and
Chief Executive Officer
BOARD OF DIRECTORS
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
Robert D. Rockey
Chairman and Chief Executive
Officer
Duck Head Apparel Company, Inc.
James L. Stewart
Proprietor
Rising Wolf Ranch, Inc.
Glenn E. Corlett
Dean and Philip J. Gardner, Jr.
Leadership Professor of the
College of Business at Ohio
University
Curtis A. Loveland
Secretary, Partner,
Porter, Wright, Morris &
Arthur LLP
Mike Brooks
Chairman of the Board,
President and
Chief Executive Officer
Corporate Offices
39 E. Canal Street
Nelsonville, Ohio 45764
(614) 753-1951
OFFICERS
David Fraedrich
Executive Vice President,
Treasurer and
Chief Financial Officer
Stock Listing
NASDAQ National Market
Symbol: RCKY
David Sharp
Vice President of Sales and
Marketing
Internet
Corporate and Investor
information on Rocky Shoes &
Boots, Inc. can be accessed on
the Internet at:
http://www.rockyboots.com
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 and Chief Financial Officer
Rocky Shoes & Boots, Inc.
39 E. Canal Street
Nelsonville, Ohio 45764