þ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Ohio | No. 31-1364046 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
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PART I
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Item 1. | 3 | |||||||
Item 1A. | 11 | |||||||
Item 1B. | 16 | |||||||
Item 2. | 16 | |||||||
Item 3. | 16 | |||||||
Item 4. | 16 | |||||||
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PART II
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Item 5. | 16 | |||||||
Item 6. | 17 | |||||||
Item 7. | 17 | |||||||
Item 7A. | 26 | |||||||
Item 8. | 26 | |||||||
Item 9. | 26 | |||||||
Item 9A. | 26 | |||||||
Item 9B. | 30 | |||||||
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PART III
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Item 10. | 30 | |||||||
Item 11. | 30 | |||||||
Item 12. | 30 | |||||||
Item 13. | 30 | |||||||
Item 14. | 30 | |||||||
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PART IV
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Item 15. | 31 | |||||||
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SIGNATURES | 35 | |||||||
EX-10.8 | ||||||||
EX-23 | ||||||||
EX-24 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-99.1 | ||||||||
EX-99.2 |
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| extending our lines of footwear into additional markets with the introduction of footwear models for the work and western markets; | ||
| expanding our product offerings into complementary apparel to leverage the strength of our Rocky Outdoor Gear brand and offer our consumers a broader, head-to-toe product assortment; and | ||
| closing our continental U.S. manufacturing facility and sourcing a greater portion of our products from third party facilities overseas. |
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| Strong portfolio of brands. We believe the Rocky Outdoor Gear, Georgia Boot, Durango, Lehigh and Dickies brands are well recognized and established names that have a reputation for performance, quality and comfort in the markets they serve: outdoor, work, duty and western. We plan to continue strengthening these brands through product innovation in existing footwear markets, by extending certain of these brands into our other target markets and by introducing complementary apparel and accessories under our owned brands. | ||
| Commitment to product innovation. We believe a critical component of our success in the marketplace has been a result of our continued commitment to product innovation. Our consumers demand high quality, durable products that incorporate the highest level of comfort and the most advanced technical features and designs. We have a dedicated group of product design and development professionals, including well recognized experts in the footwear and apparel industries, who continually interact with consumers to better understand their needs and are committed to ensuring our products reflect the most advanced designs, features and materials available in the marketplace. | ||
| Long-term retailer relationships. We believe that our long history of designing, manufacturing and marketing premium quality, branded footwear has enabled us to develop strong relationships with our retailers in each of our distribution channels. We intend to reinforce these relationships by continuing to offer innovative footwear products, by continuing to meet the individual needs of each of our retailers and by working with our retailers to improve the visual merchandising of our products in their stores. We believe that strengthening our relationships with retailers will allow us to increase our presence through additional store locations and expanded shelf space, improve our market position in a consolidating retail environment and enable us to better understand and meet the evolving needs of both our retailers and consumers. | ||
| Diverse product sourcing and manufacturing capabilities. We believe our strategy of utilizing both company operated and third party facilities for the sourcing of our products offers several advantages. Operating our own facilities significantly improves our knowledge of the entire production process which allows us to more efficiently source product from third parties that is of the highest quality and at the lowest cost available. We intend to continue to source a higher proportion of our products from third party manufacturers, which we believe will enable us to obtain high quality products at lower costs per unit. |
| Expand into new target markets under existing brands. We believe there is significant opportunity to extend certain of our brands into our other target markets. We intend to continue to introduce products across varying feature sets and price points in order to meet the needs of our retailers. | ||
| Increase apparel offerings. We believe the long history and authentic heritage of our owned brands provide significant opportunity to extend each of these brands into complementary apparel. We intend to continue to increase our Rocky apparel offerings and believe that similar opportunities exist for our Georgia Boot and Durango brands in their respective markets. | ||
| Cross-sell our brands to our retailers. The acquisition of EJ Footwear expanded our distribution channels and diversified our retailer base. We believe that many retailers of our existing and acquired brands target consumers with similar characteristics and, as a result, we believe there is significant opportunity to offer each of our retailers a broader assortment of footwear and apparel that target multiple markets and span a range of feature sets and price points. | ||
| Expand our retail sales through Lehigh. We believe that our Lehigh mobile and retail stores offer us an opportunity to significantly expand our direct sales of work-related footwear. We intend to grow our Lehigh business by adding new customers, expanding the portfolio of brands we offer and increasing our footwear and apparel offerings. In addition, |
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over time, we plan to upgrade the locations of some of our mini-stores, as well as expand the breadth of products sold in these stores. | |||
| Continue to add new retailers. We believe there is an opportunity to add additional retailers in certain of our distribution channels. We have identified a number of large, national footwear retailers that target consumers whom we believe identify with the Georgia Boot, Durango and Dickies brands. | ||
| Acquire or develop new brands. We intend to continue to acquire or develop new brands that are complementary to our portfolio and could leverage our operational infrastructure and distribution network. |
| Outdoor. Our outdoor product lines consist of footwear, apparel and accessory items marketed to outdoor enthusiasts who spend time actively engaged in activities such as hunting, fishing, camping or hiking. Our consumers demand high quality, durable products that incorporate the highest level of comfort and the most advanced technical features, and we are committed to ensuring our products reflect the most advanced designs, features and materials available in the marketplace. Our outdoor product lines consist of all-season sport/hunting footwear, apparel and accessories that are typically waterproof and insulated and are designed to keep outdoorsmen comfortable on rugged terrain or in extreme weather conditions. | ||
| Work. Our work product lines consist of footwear and apparel marketed to industrial and construction workers, as well as workers in the hospitality industry, such as restaurants or hotels. All of our work products are specially designed to be comfortable, incorporate safety features for specific work environments or tasks and meet applicable federal and other standards for safety. This category includes products such as safety toe footwear for steel workers and non-slip footwear for kitchen workers. | ||
| Duty. Our duty product line consists of footwear products marketed to law enforcement, security personnel and postal employees who are required to spend a majority of time at work on their feet. All of our duty footwear styles are designed to be comfortable, flexible, lightweight, slip resistant and durable. Duty footwear is generally designed to fit as part of a uniform and typically incorporates stylistic features, such as black leather uppers in addition to the comfort features that are incorporated in all of our footwear products. | ||
| Western. Our western product line currently consists of authentic footwear products marketed to farmers and ranchers who generally live in rural communities in North America. We also selectively market our western footwear to consumers enamored with the western lifestyle. |
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| Our outdoor products are sold primarily through sporting goods stores, outdoor specialty stores, catalogs and mass merchants. | ||
| Our work-related products are sold primarily through retail uniform stores, catalogs, farm store chains, specialty safety stores, independent shoe stores and hardware stores. In addition to these retailers, we also market Dickies work-related footwear to select large, national retailers. | ||
| Our duty products are sold primarily through uniform stores and catalog specialists. | ||
| Our western products are sold through western stores, work specialty stores, specialty farm and ranch stores and more recently fashion oriented footwear retailers. |
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| the imposition of additional United States legislation and regulations relating to imports, including quotas, duties, taxes or other charges or restrictions; | ||
| foreign governmental regulation and taxation; |
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| fluctuations in foreign exchange rates; | ||
| changes in economic conditions; | ||
| transportation conditions and costs in the Pacific and Caribbean; | ||
| changes in the political stability of these countries; and | ||
| changes in relationships between the United States and these countries. |
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| general business conditions; | ||
| interest rates; | ||
| the availability of consumer credit; | ||
| weather; | ||
| increases in prices of nondiscretionary goods; | ||
| taxation; and | ||
| consumer confidence in future economic conditions. |
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ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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Quarter Ended | High | Low | ||||||
March 31, 2004
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$ | 31.95 | $ | 17.75 | ||||
June 30, 2004
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$ | 29.25 | $ | 17.96 | ||||
September 30, 2004
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$ | 23.70 | $ | 15.79 | ||||
December 31, 2004
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$ | 29.93 | $ | 17.00 | ||||
March 31, 2005
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$ | 36.44 | $ | 25.31 | ||||
June 30, 2005
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$ | 33.79 | $ | 25.00 | ||||
September 30, 2005
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$ | 32.25 | $ | 27.50 | ||||
December 31, 2005
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$ | 30.62 | $ | 21.56 |
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Five Year Financial Summary | ||||||||||||||||||||
12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 | ||||||||||||||||
Income Statement Data
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Net sales
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$ | 296,023 | $ | 132,249 | $ | 106,165 | $ | 88,959 | $ | 103,320 | ||||||||||
Gross margin (% of sales)
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37.6 | % | 29.2 | % | 30.9 | % | 26.3 | % | 22.5 | % | ||||||||||
Net income
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$ | 13,014 | $ | 8,594 | $ | 6,039 | $ | 2,843 | $ | 1,531 | ||||||||||
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Per Share
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Net income
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Basic
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$ | 2.48 | $ | 1.89 | $ | 1.44 | $ | 0.63 | $ | 0.34 | ||||||||||
Diluted
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$ | 2.33 | $ | 1.74 | $ | 1.32 | $ | 0.62 | $ | 0.34 | ||||||||||
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Weighted average number of common
shares outstanding
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Basic
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5,258 | 4,557 | 4,190 | 4,500 | 4,489 | |||||||||||||||
Diluted
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5,585 | 4,954 | 4,561 | 4,590 | 4,549 | |||||||||||||||
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Balance Sheet Data
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Inventories
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$ | 75,387 | $ | 32,959 | $ | 38,068 | $ | 23,182 | $ | 27,714 | ||||||||||
Total assets
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$ | 236,134 | $ | 96,706 | $ | 86,175 | $ | 68,417 | $ | 74,660 | ||||||||||
Working capital
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$ | 119,278 | $ | 55,612 | $ | 54,210 | $ | 41,751 | $ | 44,267 | ||||||||||
Long-term debt, less current maturities
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$ | 98,972 | $ | 10,045 | $ | 17,515 | $ | 10,488 | $ | 16,976 | ||||||||||
Stockholders equity
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$ | 99,093 | $ | 71,371 | $ | 58,385 | $ | 52,393 | $ | 51,043 |
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
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| Net sales, led by increases of approximately $163.8 million from the acquisition of the EJ Footwear Group, rose to $296.0 million from $132.2 million in 2004. | ||
| Our gross profit increased to $111.2 million from $38.6 million the prior year. Gross profit margin was 37.6% versus 29.2% in 2004, primarily due to the acquisition of the EJ Footwear Group and the resulting increase in higher margin retail sales coupled with an increased mix of work and western footwear sales that carry higher margins. | ||
| Net income rose to $13.0 million compared to $8.6 million the prior year. Diluted earnings per common share rose 34% to $2.33 in 2005 versus $1.74 per diluted share in 2004. | ||
| Capital expenditures were $6.0 million in 2005 and $5.5 million in 2004. 2005 expenditures included the renovation of the factory outlet store and executive buildings to accommodate the consolidations of several operating departments and relocation of the Lehigh corporate operations, to Nelsonville OH, following the EJ Footwear Group acquisition. | ||
| Debt (total debt minus cash, cash equivalents) was $103.8 million or 50.7% of total capitalization at December 31, 2005 compared to $11.5 million or 13.1% of total capitalization at year-end 2004. Total debt was $105.4 million or 51.5% of total capitalization at December 31, 2005 compared to $16.5 million or 18.8% of total capitalization at December 31, 2004. The increased debt was due to the acquisition of the EJ Footwear Group in January 2005. |
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Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Net sales
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100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of goods sold
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62.4 | % | 70.8 | % | 69.1 | % | ||||||
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Gross margin
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37.6 | % | 29.2 | % | 30.9 | % | ||||||
SG&A expense
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28.1 | % | 19.4 | % | 21.9 | % | ||||||
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Income from operations
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9.5 | % | 9.8 | % | 9.0 | % | ||||||
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($ in millions) | 2005 | 2004 | 2003 | |||||||||
Cash provided by (used in):
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Operating activities
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$ | 8.4 | $ | 7.6 | $ | (1.6 | ) | |||||
Investing activities
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(99.4 | ) | (5.5 | ) | (7.0 | ) | ||||||
Financing activities
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87.5 | 0.8 | 6.5 | |||||||||
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Net change in cash and cash equivalents
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$ | (3.5 | ) | $ | 2.9 | $ | (2.1 | ) | ||||
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December 31, | ||||||||
($ in millions) | 2005 | 2004 | ||||||
Revolving credit facility
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$ | 59.6 | $ | 11.5 | ||||
Term loans
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41.3 | |||||||
Real estate and other obligations
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4.5 | 5.0 | ||||||
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Total debt
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105.4 | 16.5 | ||||||
Less current maturities
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6.4 | 6.5 | ||||||
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Net long-term debt
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$ | 99.0 | $ | 10.0 | ||||
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Payments due by Year | ||||||||||||||||||||
$ millions | ||||||||||||||||||||
Less Than | Over 5 | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | Years | ||||||||||||||||
Long-term debt
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$ | 105.4 | $ | 6.4 | $ | 16.2 | $ | 21.1 | $ | 61.7 | ||||||||||
Pension benefits (1)
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4.5 | 0.3 | 0.7 | 0.7 | 2.8 | |||||||||||||||
Minimum operating lease commitments
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6.2 | 2.5 | 2.6 | 1.1 | | |||||||||||||||
Expected cash requirements for interest (2)
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32.0 | 8.8 | 15.9 | 6.9 | 0.4 | |||||||||||||||
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Total contractual obligations
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148.1 | $ | 18.0 | $ | 35.4 | $ | 29.8 | $ | 64.9 | |||||||||||
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(1) | Assumes no plan termination and includes estimated pension plan contributions. | |
(2) | Assumes the following interest rates: (1) 7.0% on the $100 million revolving credit facility; (2) 7.5% on the $ 18 million three-year term loan; (3) 12.5% on the $30 million six-year term loan; and (4) 8.275% on the $4.9 million mortgage loans. |
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation under the framework in Internal Control Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Management excluded from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, EJ Footwear Groups internal control over financial reporting, as of and for the year ended December 31, 2005. EJ Footwear Group was acquired on January 6, 2005, and its financial statements reflect total assets and revenues constituting 59% and 55%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005. |
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Rocky Shoes & Boots, Inc.
Table of Contents
March 14, 2006
Table of Contents
30
31
32
33
34
(a)
THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule.
Exhibit
Number
Description
Purchase and Sale of Equity Interests Agreement by and among Rocky Shoes & Boots, Inc.,
SILLC Holdings, LLC, a Delaware limited liability company and Strategic Industries, LLC,
dated as of December 6, 2004 (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K dated December 6, 2004, filed with the Securities and Exchange
Commission on December 8, 2004).
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
Companys Amended and Restated Articles of Incorporation (see Exhibit 3.1).
Articles I and II of the Companys Code of Regulations (see Exhibit 3.2).
Table of Contents
Exhibit
Number
Description
Form of Employment Agreement, dated July 1, 1995, for executive officers (incorporated by
reference to Exhibit 10.1 to the Companys 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 Companys 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.
Amended and Restated Lease Agreement, dated March 1, 2002, between Rocky Shoes & Boots
Co. and William Brooks Real Estate Company regarding Nelsonville factory (incorporated by
reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2002).
Companys Amended and Restated 1995 Stock Option Plan (incorporated by reference to
Exhibit 4(a) to the Registration Statement on Form S-8, registration number 333-67357).
Form of Stock Option Agreement under the 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.28 to the 1995 Form 10-K).
Form of Employment Agreement, dated September 7, 1995, for executive officers
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
Information covering Employment Agreements substantially similar to Exhibit 10.23
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
Lease Contract dated December 16, 1999, between Lifestyle Footwear, Inc. and The Puerto
Rico Industrial Development Company (incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
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).
Table of Contents
Exhibit
Number
Description
Companys Second Amended and Restated 1995 Stock Option Plan (incorporated by reference
to the Companys Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders
held on May 15, 2002, filed on April 15, 2002).
Companys 2004 Stock Incentive Plan (incorporated by reference to the Companys
Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, held on May 11,
2004, filed on April 6, 2004).
Renewal of Lease Contract, dated June 24, 2004, between Five Star Enterprises Ltd. and
the Dominican Republic Corporation for Industrial Development (incorporated by reference
to Exhibit 10.14 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2004).
Second Amendment to Lease Agreement, dated as of July 26, 2004, between Rocky Shoes &
Boots, Inc. and the William Brooks Real Estate Company (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004).
Form of Option Award Agreement under the Companys 2004 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K dated
January 3, 2005, filed with the Securities and Exchange Commission on January 7, 2005).
Form of Restricted Stock Award Agreement relating to the Retainer Shares issued under the
Companys 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K dated January 3, 2005, filed with the Securities and Exchange
Commission on January 7, 2005).
Loan and Security Agreement, dated as of January 6, 2005, by and among Rocky Shoes &
Boots, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC,
Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety
Shoe Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as
Borrowers, GMAC Commercial Finance LLC, as Agent and as Lender (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K dated January 6, 2005, filed with the
Securities and Exchange Commission on January 12, 2005).
Note Purchase Agreement, dated as of January 6, 2005, by and among Rocky Shoes & Boots,
Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia
Boot LLC, Georgia Boot Properties LLC, Durango Boot Company LLC, Northlake Boot Company
LLC, Lehigh Safety Shoe Co. LLC, and Lehigh Safety Shoe Properties LLC, as Loan Parties,
American Capital Financial Services, Inc., as Agent, and American Capital Strategies,
Ltd., as Purchaser (incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K dated January 6, 2005, filed with the Securities and Exchange Commission on
January 12, 2005).
Amendment No. 1 to Loan and Security Agreement and Consent, dated as of January 19, 2005,
by and among Rocky Shoes & Boots, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM
Lehigh Safety Shoe Co. LLC, Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot
Company LLC, Lehigh Safety Shoe Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety
Shoe Properties LLC, as Borrowers, GMAC Commercial Finance LLC, as administrative agent
and sole lead arranger for the Lenders, Bank of America, N.A., as syndication agent and
Royal Bank of Scotland PLC, as documentation agent (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K dated January 19, 2005, filed with the Securities
and Exchange Commission on January 21, 2005).
Table of Contents
Exhibit
Number
Description
Executive Employment Agreement, dated as of December 1, 2004, between Georgia Boot LLC
and Thomas R. Morrison (incorporated by reference to Exhibit 10(a) to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
Amendment No. 2 to Loan and Security Agreement and Consent, dated as of September 12,
2005, by and among Rocky Shoes & Boots, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC,
HM Lehigh Safety Shoe Co. LLC, Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot
Company LLC, Lehigh Safety Shoe Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety
Shoe Properties LLC, as Borrowers, GMAC Commercial Finance LLC, as administrative agent
and sole lead arranger for the Lenders, Bank of America, N.A., as syndication agent
(incorporated by reference to Exhibit 10(a) to the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2005).
Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
Independent Registered Public Accounting Firms Consent and Report on Schedules of
Deloitte & Touche LLP.
Powers of Attorney.
Rule 13a-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
Independent Registered Public Accounting Firms Report of Deloitte & Touche LLP on
Schedules (incorporated by reference to Exhibit 23).
Financial Statement Schedule.
*
Filed with this Annual Report on Form 10-K.
**
Furnished with this Annual Report on Form 10-K.
Table of Contents
35
ROCKY SHOES & BOOTS, INC.
By:
/s/ James E. McDonald
Signature
Title
Date
/s/ Mike Brooks
Chairman, Chief Executive Officer and
Director (Principal Executive Officer)
March 16, 2006
/s/ James E. McDonald
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2006
*
Curtis A. Loveland
Secretary and Director
March 16, 2006
*
J. Patrick Campbell
Director
March 16, 2006
* Glenn E. Corlett
Director
March 16, 2006
*
Michael L. Finn
Director
March 16, 2006
* G. Courtney Haning
Director
March 16, 2006
* Harley E. Rouda
Director
March 16, 2006
*
James L. Stewart
Director
March 16, 2006
* By: /s/ Mike Brooks
Table of Contents
AND SUBSIDIARIES
F-1
F-2 - F-3
F-4
F-5
F-6
F-7 - F-28
Table of Contents
F - 1
Rocky Shoes & Boots, Inc.:
March 14, 2006
Table of Contents
December 31, | ||||||||
2005 | 2004 | |||||||
CURRENT ASSETS:
|
||||||||
Cash and cash equivalents
|
$ | 1,608,680 | $ | 5,060,859 | ||||
Trade
receivables net
|
61,746,865 | 27,182,198 | ||||||
Other receivables
|
2,455,885 | 1,114,959 | ||||||
Inventories
|
75,386,732 | 32,959,124 | ||||||
Deferred income taxes
|
133,783 | 230,151 | ||||||
Income tax receivable
|
1,346,820 | 2,264,531 | ||||||
Prepaid expenses
|
1,497,411 | 588,618 | ||||||
|
||||||||
Total current assets
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144,176,176 | 69,400,440 | ||||||
|
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FIXED ASSETS
net
|
24,342,250 | 20,179,486 | ||||||
|
||||||||
DEFERRED PENSION ASSET
|
2,117,352 | 1,347,824 | ||||||
|
||||||||
IDENTIFIED INTANGIBLES
|
38,320,828 | 2,561,427 | ||||||
|
||||||||
GOODWILL
|
23,963,637 | 1,557,861 | ||||||
|
||||||||
OTHER ASSETS
|
3,214,131 | 1,658,616 | ||||||
|
||||||||
|
||||||||
TOTAL ASSETS
|
$ | 236,134,374 | $ | 96,705,654 | ||||
|
F - 2
December 31, | ||||||||
2005 | 2004 | |||||||
CURRENT LIABILITIES:
|
||||||||
Accounts payable
|
$ | 12,721,214 | $ | 4,349,248 | ||||
Current maturities long term debt
|
6,400,416 | 6,492,020 | ||||||
Accrued expenses:
|
||||||||
Salaries and wages
|
1,531,336 | 1,295,722 | ||||||
Co-op advertising
|
936,438 | 263,000 | ||||||
Interest
|
724,159 | 82,904 | ||||||
Taxes other
|
603,435 | 422,692 | ||||||
Commissions
|
669,306 | 95,069 | ||||||
Other
|
1,312,203 | 787,735 | ||||||
|
||||||||
Total current liabilities
|
24,898,507 | 13,788,390 | ||||||
|
||||||||
LONG TERM DEBT-less current maturities
|
98,972,190 | 10,044,544 | ||||||
|
||||||||
DEFERRED LIABILITIES:
|
||||||||
Deferred income taxes
|
12,567,208 | 1,205,814 | ||||||
Other deferred liabilities
|
603,347 | 296,108 | ||||||
|
||||||||
TOTAL LIABILITIES
|
137,041,252 | 25,334,856 | ||||||
SHAREHOLDERS EQUITY:
|
||||||||
Preferred stock, Series A, no par
value, $.06 stated value; none
outstanding
|
||||||||
Common stock, no par value; 10,000,000 shares
authorized;
outstanding 2005 5,351,023 and
2004 - 4,694,670
|
52,030,013 | 38,399,114 | ||||||
Accumulated other comprehensive loss
|
| (1,077,586 | ) | |||||
Retained earnings
|
47,063,109 | 34,049,270 | ||||||
|
||||||||
Total shareholders equity
|
99,093,122 | 71,370,798 | ||||||
|
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
|
$ | 236,134,374 | $ | 96,705,654 | ||||
|
F - 3
F - 4
Accumulated | ||||||||||||||||||||
Common Stock | Other | Total | ||||||||||||||||||
Shares | Comprehensive | Retained | Shareholders | |||||||||||||||||
Outstanding | Amount | Loss | Earnings | Equity | ||||||||||||||||
BALANCE December 31, 2002
|
4,489,065 | $ | 35,289,038 | $ | (2,311,749 | ) | $ | 19,415,635 | $ | 52,392,924 | ||||||||||
|
||||||||||||||||||||
YEAR ENDED DECEMBER 31, 2003
|
||||||||||||||||||||
Net income
|
6,039,243 | 6,039,243 | ||||||||||||||||||
Minimum pension liability, net of tax benefit
of $154,864
|
361,349 | 361,349 | ||||||||||||||||||
|
||||||||||||||||||||
Comprehensive income
|
6,400,592 | |||||||||||||||||||
Treasury stock purchased and retired
|
(483,533 | ) | (3,106,156 | ) | (3,106,156 | ) | ||||||||||||||
Stock issued and options exercised including
related tax benefits
|
354,868 | 2,697,317 | 2,697,317 | |||||||||||||||||
|
||||||||||||||||||||
BALANCE December 31, 2003
|
4,360,400 | 34,880,199 | (1,950,400 | ) | 25,454,878 | 58,384,677 | ||||||||||||||
|
||||||||||||||||||||
YEAR ENDED DECEMBER 31, 2004
|
||||||||||||||||||||
Net income
|
8,594,392 | 8,594,392 | ||||||||||||||||||
Minimum pension liability, net of tax benefit
of $356,501
|
872,814 | 872,814 | ||||||||||||||||||
|
||||||||||||||||||||
Comprehensive income
|
9,467,206 | |||||||||||||||||||
Stock issued and options exercised including
related tax benefits
|
334,270 | 3,518,915 | 3,518,915 | |||||||||||||||||
|
||||||||||||||||||||
BALANCE December 31, 2004
|
4,694,670 | 38,399,114 | (1,077,586 | ) | 34,049,270 | 71,370,798 | ||||||||||||||
|
||||||||||||||||||||
YEAR ENDED DECEMBER 31, 2005
|
||||||||||||||||||||
Net income
|
13,013,839 | 13,013,839 | ||||||||||||||||||
Minimum pension liability, net of tax benefit
of $387,649
|
1,077,586 | 1,077,586 | ||||||||||||||||||
|
||||||||||||||||||||
Comprehensive income
|
14,091,425 | |||||||||||||||||||
Stock issued for acquisition
|
484,261 | 11,573,838 | 11,573,838 | |||||||||||||||||
Stock issued and options exercised including
related tax benefits
|
172,092 | 2,057,061 | 2,057,061 | |||||||||||||||||
|
||||||||||||||||||||
BALANCE December 31, 2005
|
5,351,023 | $ | 52,030,013 | $ | | $ | 47,063,109 | $ | 99,093,122 | |||||||||||
F - 5
F - 6
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Principles of Consolidation The accompanying consolidated financial statements include the accounts of Rocky Shoes & Boots, Inc. (Rocky) and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. (Lifestyle), Five Star Enterprises Ltd. (Five Star), Rocky Canada, Inc. (Rocky Canada), EJ Footwear LLC, Georgia Boot LLC, and Lehigh Safety Shoe Co. LLC (Lehigh), collectively referred to as the Company. All significant intercompany transactions have been eliminated. | ||
Business Activity We are a leading designer, manufacturer and marketer of premium quality footwear marketed under a portfolio of well recognized brand names including Rocky Outdoor Gear, Georgia Boot, Durango, Lehigh and Dickies. Our brands have a long history of representing high quality, comfortable, functional and durable footwear and our products are organized around four target markets: outdoor, work, duty and western. In addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage the strength and positioning of each of our brands. | ||
Our products are distributed through three distinct business segments: wholesale, retail and military. In our wholesale business, we distribute our products through a wide range of distribution channels representing over 10,000 retail store locations in the U.S. and Canada. Our wholesale channels vary by product line and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes direct sales of our products to consumers through our Lehigh mobile and retail stores (including a fleet of 78 trucks, supported by 38 small warehouses that include retail stores, which we refer to as mini-stores), our two Rocky outlet stores and our websites. We also sell footwear under the Rocky label to the U.S. military. | ||
We did not have any single customer in 2005 that accounted for more than 10% of consolidated net sales. In 2004 we had one customer , which represented sales of military footwear under a subcontracting agreement, which accounted for 14% of consolidated net sales. We did not have any single customer account for more than 10% of consolidated net sales in 2003. | ||
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 and Cash Equivalents We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Our cash and cash equivalents are primarily held in four banks. |
F - 7
Trade Receivables Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $985,000 and $715,000 at December 31, 2005 and 2004, respectively. | ||
Concentration of Credit Risk We have significant transactions with a large number of customers. No customer represented 10% of total accounts receivable trade balance as of December 31, 2005. Accounts receivable from one customer, which represented sales of military footwear under a subcontracting agreement, represented 11.5% of the Companys total accounts receivable trade balance as of December 31, 2004. Our exposure to credit risk is impacted by the economic climate affecting the retail shoe industry. We manage this risk by performing ongoing credit evaluations of our customers and maintain reserves for potential uncollectible accounts. | ||
Supplier and Labor Concentrations We purchase raw materials from a number of domestic and foreign sources. We currently buy the majority of our waterproof fabric, a component used in a significant portion of our shoes and boots, from one supplier (GORE-TEX Ò ). We have had a relationship with this supplier for over 20 years and have no reason to believe that such relationship will not continue. | ||
We produce a portion of our shoes and boots in our Dominican Republic operation. We are not aware of any governmental or economic restrictions that would alter its current operations. | ||
We source a significant portion of our footwear, apparel and gloves from manufacturers in the Far East, primarily China. We are 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 our periodic estimates of NRV. | ||
Fixed Assets The Company records fixed assets at historical cost and generally utilizes the straight-line method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as follows: |
Years | ||
Building and improvements
|
5-40 | |
Machinery and equipment
|
3-8 | |
Furniture and fixtures
|
3-8 | |
Lasts, dies, and patterns
|
3 |
For income tax purposes, the Company generally computes depreciation utilizing accelerated methods. | ||
Goodwill and Trademarks Goodwill and trademarks are considered indefinite lived assets and are not amortized. All goodwill relates to our wholesale segment. | ||
Advertising We expense advertising costs as incurred. Advertising expense was approximately $7,851,000, $2,265,000, and $1,777,000 for 2005, 2004 and 2003, respectively. |
F - 8
Revenue Recognition Revenue and related cost of goods sold are recognized at the time products are shipped to the customer and title transfers. Revenue is recorded net of estimated sales discounts and returns based upon specific customer agreements and historical trends. All sales are final upon shipment. | ||
Shipping and Handling Costs In accordance with the Emerging Issues Tax Force (EITF) No. 00-10 Accounting For Shipping and Handling Fees And Costs, all shipping and handling costs billed to customers have been included in net sales. Shipping and handling costs are included in selling, general and administrative costs and totaled approximately $6,433,000, $1,789,000, and $1,470,000 in 2005, 2004 and 2003, respectively. Our gross profit may not be comparable to other entities whose shipping and handling is a component of cost of sales. | ||
Per Share Information Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the dilutive effect of stock options. A reconciliation of the shares used in the basic and diluted income per share computations is as follows: |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Basic weighted average shares outstanding
|
5,257,530 | 4,557,283 | 4,189,794 | |||||||||
|
||||||||||||
Dilutive securities stock options
|
327,241 | 396,246 | 370,969 | |||||||||
|
||||||||||||
|
||||||||||||
Diluted weighted average shares outstanding
|
5,584,771 | 4,953,529 | 4,560,763 | |||||||||
|
||||||||||||
|
||||||||||||
Anti-Diluted securities stock options
|
125,000 | 84,000 | | |||||||||
|
Asset Impairments Annually, or more frequently if events or circumstances change, a determination is made by management, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, to ascertain whether property and equipment and certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will recognize an impairment loss in an amount necessary to write down the assets to fair value as determined from expected future discounted cash flows. | ||
In accordance with SFAS No. 142, Goodwill and Other Intangibles, we test intangible assets with indefinite lives and goodwill for impairment annually or when conditions indicate an impairment may have occurred. | ||
Recently Issued Financial Accounting Standards In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The statement supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123. The statement requires that the cost resulting from all share-based payment transactions be |
F - 9
recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. SFAS 123(R) applies to all awards granted after the required effective date (the beginning of the first annual reporting period that begins after June 15, 2005 in accordance with the Securities and Exchange Commissions delay of the original effective date of SFAS 123(R)) and to awards modified, repurchased or canceled after that date. As a result, beginning January 1, 2006, we will adopt SFAS 123(R) and begin reflecting the stock option expense determined under fair value based methods in our consolidated statement of income rather than as pro forma disclosure in the notes to the consolidated financial statements. Based on stock options outstanding at December 31, 2005, we expect to record compensation expense resulting from the adoption of SFAS 123(R) of approximately $400,000 during 2006 related to options issued prior to December 31, 2005. Any options issued subsequent to December 31, 2005 would result in an additional expense. | ||
In November 2005, the FASB issued FASB Staff Position FAS 123( R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (FSP 123 (R )-3). FSP 123 (R )-3 provides an elective alternative method that establishes a computation component to arrive at the beginning balance of the accumulated paid-in capital pool related to employee compensation and a simplified method to determine the subsequent impact on the accumulated paid-in capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS No 123 (R ). The Company is currently evaluating this transition method. | ||
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47) as a interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations (SFAS 143). This interpretation clarifies that the term conditional asset retirement obligation as used in SFAS 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event though uncertainty exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonable estimated. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. There is no material effect to the consolidated financial statements from adoption of FIN 47. | ||
Stock-Based Compensation We apply APB Opinion No. 25 and related Interpretations in accounting for our stock option plans. Accordingly, no compensation cost has been recognized for the stock option plans because the exercise price under the plan is equal to the market value of this underlying common stock on the date of grant. Had compensation costs for our 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, our net income and net income per share would have resulted in the amounts as shown below. |
F - 10
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Net income as reported
|
$ | 13,013,839 | $ | 8,594,392 | $ | 6,039,243 | ||||||
|
||||||||||||
Deduct: Stock based employee
compensation expense determined under fair
value based method for all awards, net of tax
|
1,488,928 | 1,003,446 | 454,299 | |||||||||
|
||||||||||||
|
||||||||||||
Pro forma net income
|
$ | 11,524,911 | $ | 7,590,946 | $ | 5,584,944 | ||||||
|
||||||||||||
|
||||||||||||
Earnings per share:
|
||||||||||||
|
||||||||||||
Basic as reported
|
$ | 2.48 | $ | 1.89 | $ | 1.44 | ||||||
Basic pro forma
|
$ | 2.19 | $ | 1.67 | $ | 1.33 | ||||||
|
||||||||||||
Diluted as reported
|
$ | 2.33 | $ | 1.74 | $ | 1.32 | ||||||
Diluted pro forma
|
$ | 2.06 | $ | 1.53 | $ | 1.24 |
The pro forma amounts are not representative of the effects on reported net income for future years. | ||
Comprehensive Income Comprehensive income includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income is composed of two subsets net income and other comprehensive income (loss). Included in other comprehensive income (loss) is a minimum pension liability adjustment, which is recorded net of a related tax effect. This adjustment is accumulated within the Consolidated Statements of Shareholders Equity under the caption Accumulated Other Comprehensive Loss. | ||
2. | ACQUISITIONS | |
EJ Footwear Group | ||
On January 6, 2005, we completed the purchase of 100% of the issued and outstanding voting limited interests of the EJ Footwear Group from SILLC Holdings LLC. | ||
The EJ Footwear Group was acquired to expand the Companys branded product lines, principally occupational products, and provide new channels for our existing product lines. The aggregate purchase price for the interests of EJ Footwear Group, including closing date working capital adjustments, was $93.1 million in cash plus 484,261 shares of our common stock valued at $11,573,838. Common stock value was based on the average closing share price during the three days preceding and three days subsequent to the date of the acquisition agreement. | ||
We have allocated the purchase price to the tangible and intangible assets and liabilities acquired based upon the fair values and income tax basis determined with the assistance of independent appraisals. Goodwill resulting from the transaction is not tax deductible. The purchase price has been allocated as follows: |
F - 11
Purchase price allocation:
|
||||
|
||||
Cash
|
$ | 91,298,435 | ||
Common shares - 484,261 shares
|
11,573,838 | |||
Transaction costs
|
1,799,488 | |||
|
||||
|
$ | 104,671,761 | ||
|
||||
|
||||
Allocated to:
|
||||
Current assets
|
$ | 64,727,065 | ||
Fixed assets and other assets
|
2,781,379 | |||
Identified intangibles
|
36,000,000 | |||
Goodwill
|
22,405,776 | |||
Liabilities
|
(11,307,184 | ) | ||
Deferred taxes
|
(9,935,275 | ) | ||
|
||||
|
$ | 104,671,761 | ||
|
The following unaudited pro-forma information for the year ended December 31, 2004 presents results as if the acquisition occurred on January 1, 2004: |
Net sales
|
$ | 279,051,000 | ||
Net income
|
12,782,000 | |||
Earning per share:
|
||||
Basic
|
$ | 2.54 | ||
Diluted
|
$ | 2.35 |
F - 12
Gates-Mills, Inc. | ||
On April 15, 2003, we completed the purchase of certain assets from Gates-Mills, Inc. (Gates). Under the terms of the purchase agreement, Rocky acquired all of the intellectual property of Gates, including ownership of the Gates® trademark, selected raw material and finished goods inventory, and certain records in connection with the Gates business in exchange for $3,510,070 plus a deferred purchase price if sales by the Company related to the Gates product line from the date of purchase through December 31, 2003 reach certain performance targets. The Company recorded an additional purchase price of $1,324,400 because net sales of the product line have exceeded the performance targets established for 2003. No additional payments are required. The acquisition was accounted for under the purchase method and results of operations of the Gates business have been included in the Companys results of operations since the date of acquisition. Unaudited pro-forma results of operations for the year ended December 31, 2003 are not presented due to the unavailability of information from Gates-Mills, Inc. Goodwill resulting from the transaction is deductible for tax purposes. Final allocation of the purchase price is follows: |
Inventory
|
$ | 2,040,070 | ||
Goodwill
|
1,032,400 | |||
Trademarks
|
1,762,000 | |||
Total acquisition cost
|
$ | 4,834,470 | ||
Transaction costs
|
91,580 | |||
Total
|
$ | 4,926,050 |
3. | INVENTORIES | |
Inventories are comprised of the following: |
December 31, | ||||||||
2005 | 2004 | |||||||
Raw materials
|
$ | 7,833,780 | $ | 4,711,014 | ||||
Work-in-process
|
583,963 | 564,717 | ||||||
Finished goods
|
67,453,668 | 27,833,393 | ||||||
Reserve for obsolescence or
lower of cost or market
|
(484,679 | ) | (150,000 | ) | ||||
|
||||||||
Total
|
$ | 75,386,732 | $ | 32,959,124 | ||||
|
F - 13
4. | IDENTIFIED INTANGIBLE ASSETS | |
A schedule of identified intangible assets is as follows: |
Gross | Accumulated | Carrying | ||||||||||
December 31, 2005 | Amount | Amortization | Amount | |||||||||
Trademarks (not subject to amortization):
|
||||||||||||
Wholesale
|
$ | 28,933,009 | $ | 28,933,009 | ||||||||
Retail
|
6,900,000 | 6,900,000 | ||||||||||
Patents
|
2,188,736 | $ | 500,917 | 1,687,819 | ||||||||
Customer Relationships
|
1,000,000 | 200,000 | 800,000 | |||||||||
|
||||||||||||
Total Intangibles
|
$ | 39,021,745 | $ | 700,917 | $ | 38,320,828 | ||||||
|
Gross | Accumulated | Carrying | ||||||||||
December 31, 2004 | Amount | Amortization | Amount | |||||||||
Trademarks (Wholesale)
|
$ | 2,225,887 | $ | 2,225,887 | ||||||||
Patents
|
467,336 | $ | 131,796 | 335,540 | ||||||||
|
||||||||||||
Total Intangibles
|
$ | 2,693,223 | $ | 131,796 | $ | 2,561,427 | ||||||
|
December 31, | ||||||||
2005 | 2004 | |||||||
Deferred financing costs
|
$ | 2,417,342 | $ | 933,502 | ||||
Other
|
796,789 | 725,114 | ||||||
|
||||||||
Total
|
$ | 3,214,131 | $ | 1,658,616 | ||||
|
F - 14
6. | FIXED ASSETS | |
Fixed assets are comprised of the following: |
December 31, | ||||||||
2005 | 2004 | |||||||
Land
|
$ | 871,839 | $ | 572,838 | ||||
Building and improvements
|
16,545,606 | 15,484,035 | ||||||
Machinery and equipment
|
26,596,383 | 22,730,530 | ||||||
Furniture and fixtures
|
4,051,134 | 3,472,210 | ||||||
Lasts, dies and patterns
|
11,955,304 | 9,911,316 | ||||||
Construction work-in-progress
|
943,445 | 561,967 | ||||||
|
||||||||
Total
|
60,963,711 | 52,732,896 | ||||||
Less accumulated depreciation
|
(36,621,461 | ) | (32,553,410 | ) | ||||
|
||||||||
Net fixed assets
|
$ | 24,342,250 | $ | 20,179,486 | ||||
|
7. | LONG-TERM DEBT | |
Long-term debt is comprised of the following: |
December 31, | ||||||||
2005 | 2004 | |||||||
Bank revolving credit facility
|
$ | 59,580,171 | $ | 11,552,109 | ||||
Term loans
|
41,300,000 | |||||||
Equipment and other obligations
|
123,300 | |||||||
Real estate obligations
|
4,492,435 | 4,861,155 | ||||||
|
||||||||
Total
|
105,372,606 | 16,536,564 | ||||||
Less current maturities
|
6,400,416 | 6,492,020 | ||||||
|
||||||||
Net long-term debt
|
$ | 98,972,190 | $ | 10,044,544 | ||||
|
On January 6, 2005, to fund the acquisition of EJ Footwear Group, the Company entered into a loan and security agreement with GMAC Commercial Finance LLC, refinancing its former $45,000,000 revolving line of credit, for certain extensions of credit (the Credit Facility). The Credit Facility is comprised of (i) a five-year revolving credit facility up to a principal amount of $100,000,000 with an interest rate of LIBOR plus two and a half percent (2.5%) or prime plus one percent (1.0%) and (ii) a three-year term loan in the principal amount of $18,000,000 with an interest rate of LIBOR plus three and a quarter percent (3.25%) or prime plus one and three quarters percent (1.75%). The Credit Facility is secured by a first priority perfected security interest in all presently owned and hereafter acquired domestic personal property of the Company, subject to specified exceptions. The credit facility restricts the payment of dividends. At December 31, 2005, the Company has no retained earnings available for distribution. |
F - 15
Also on January 6, 2005, the Company entered into a note agreement (the Note Purchase Agreement) with American Capital Financial Services, Inc., as agent, and American Capital Strategies, Ltd., as lender (collectively, ACAS), regarding $30,000,000 in six-year Senior Secured Term B Notes with an interest rate of LIBOR plus eight percent (8.0%). The Note Purchase Agreement provides, among other terms, that (i) the ACAS Second Lien Term Loan will be senior indebtedness of the Company, secured by essentially the same collateral as the Credit Facility, (ii) such note facility will be last out in the event of liquidation of the Company and its subsidiaries, and (iii) principal payments on such note facility will begin in the fourth year of such note facility. | ||
Our debt is subject to various covenants, including a minimum fixed charge coveragae, a minimum total leverage ratio, minimum EBITDA, maximum senior leverage ratio, and maximum capital expenditures. At December 31, 2005 we were not in compliance with the senior leverage ratio and the total capital expenditures covenants for which we have obtained waivers. | ||
Long-term debt maturities are as follows for the years ended December 31: |
2006
|
$ | 6,400,416 | ||
2007
|
5,734,837 | |||
2008
|
10,472,216 | |||
2009
|
10,512,809 | |||
2010
|
10,556,890 | |||
Thereafter
|
61,695,438 | |||
|
||||
Total
|
$ | 105,372,606 | ||
|
8. | OPERATING LEASES | |
We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal options. We incurred approximately $3,349,000, $918,000, and $793,000 in rent expense under operating lease arrangements for 2005, 2004 and 2003, respectively. | ||
Included in total rent expense above are payments of $60,000 for 2004, and 2003 for our former Ohio manufacturing and clearance center facility leased from an entity in which the owners are also shareholders of the Company. We purchased the facility in January 2005 and relocated our factory outlet store in Nelsonville, Ohio to this location. | ||
Future minimum lease payments under non-cancelable operating leases are as follows for the years ended December 31: |
2006
|
$ | 2,496,000 | ||
2007
|
1,523,000 | |||
2008
|
1,078,000 | |||
2009
|
819,000 | |||
2010
|
290,000 | |||
|
||||
Total
|
$ | 6,206,000 | ||
|
F - 16
9. | INCOME TAXES | |
We, our domestic subsidiaries, and our wholly-owned subsidiary doing business in Puerto Rico, Lifestyle, are subject to U.S. Federal income taxes; however, our 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. Rocky Canada began operations in July 2003 and is subject to Canadian income taxes. | ||
At December 31, 2004, a provision of $157,000 was made for U.S. taxes on the repatriation of $3,000,000 of accumulated undistributed earnings of Five Star through December 31, 2004. At December 31, 2005, after the repatriation above, approximately $8,584,000 remained that would become taxable upon repatriation to the United States. During 2005, the Company repatriated $3,000,000 of accumulated undistributed earnings, such tax was recorded in 2004. In addition we have provided Puerto Rico tollgate taxes on approximately $3,684,000 of accumulated undistributed earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if such earnings were repatriated to the United States. If the Five Star and Lifestyle undistributed earnings were distributed to the Company in the form of dividends, the related taxes on such distributions would be approximately $2,394,000 and $379,000, respectively. In 2001, the Company received abatement for Puerto Rico tollgate taxes on all earnings subsequent to June 30, 1994. This resulted in the Company reducing its deferred tax liability by $408,000. | ||
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes , which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred income taxes have been provided for the temporary differences between the financial reporting and the income tax basis of the Companys assets and liabilities by applying enacted statutory tax rates applicable to future years to the basis differences. |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Federal:
|
||||||||||||
Current
|
$ | 3,994,381 | $ | 1,836,232 | $ | 2,308,011 | ||||||
Deferred
|
1,087,396 | 1,173,870 | (93,011 | ) | ||||||||
|
||||||||||||
Total Federal
|
5,081,777 | 3,010,102 | 2,215,000 | |||||||||
|
||||||||||||
State & local:
|
||||||||||||
Current
|
844,857 | 146,858 | 229,000 | |||||||||
Deferred
|
47,444 | 142,195 | (20,750 | ) | ||||||||
|
||||||||||||
Total Federal
|
892,301 | 289,053 | 208,250 | |||||||||
|
||||||||||||
Foreign (current)
|
283,969 | 176,845 | 11,000 | |||||||||
|
||||||||||||
|
||||||||||||
Total
|
$ | 6,258,047 | $ | 3,476,000 | $ | 2,434,250 | ||||||
|
F - 17
A reconciliation of recorded Federal income tax expense (benefit) to the expected expense (benefit) computed by applying the applicable Federal statutory rate for all periods to income before income taxes follows: |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Expected expense at statutory rate
|
$ | 6,745,160 | $ | 4,224,637 | $ | 2,880,988 | ||||||
Increase (decrease) in income taxes resulting
from:
|
||||||||||||
Exempt income from operartions in Puerto
Rico, net of toolgate taxes
|
(560,000 | ) | (560,000 | ) | ||||||||
Exempt income from Dominican Republic
operations
|
(610,771 | ) | (580,009 | ) | (545,792 | ) | ||||||
Tax on repatriated earnings from Dominican
Republic operations
|
157,000 | |||||||||||
State and local income taxes
|
579,993 | 187,884 | 132,796 | |||||||||
Other net
|
103,665 | 46,488 | (33,742 | ) | ||||||||
|
||||||||||||
|
||||||||||||
Total
|
$ | 6,258,047 | $ | 3,476,000 | $ | 2,434,250 | ||||||
|
December 31, | ||||||||
2005 | 2004 | |||||||
Deferred tax assets:
|
||||||||
Asset valuation allowances and accrued expenses
|
$ | 2,165,517 | $ | 580,503 | ||||
Inventories
|
965,006 | 275,397 | ||||||
State and local income taxes
|
956,779 | 50,256 | ||||||
Net operating losses
|
1,810,740 | |||||||
|
||||||||
Total deferred tax assets
|
5,898,042 | 906,156 | ||||||
Valuation Allowances
|
(314,332 | ) | ||||||
|
||||||||
Total deferred tax assets
|
5,583,710 | 906,156 | ||||||
|
||||||||
Deferred tax liabilities:
|
||||||||
Fixed assets
|
(1,295,038 | ) | (806,642 | ) | ||||
Intangible assets
|
(15,377,356 | ) | ||||||
Prepaid assets
|
(189,333 | ) | (210,525 | ) | ||||
Pension and deferred compensation
|
(776,137 | ) | (485,381 | ) | ||||
Tollgate tax on Lifestyle earnings
|
(379,271 | ) | (379,271 | ) | ||||
|
||||||||
Total deferred tax liabilities
|
(18,017,135 | ) | (1,881,819 | ) | ||||
|
||||||||
Net deferred tax liability
|
$ | (12,433,425 | ) | $ | (975,663 | ) | ||
|
A valuation allowance related to certain state and local income taxes was established in the acquisition of the EJ Footwear Group. |
F - 18
10. | RETIREMENT PLANS | |
We sponsor a noncontributory defined benefit pension plan covering our non-union workers in our Ohio and Puerto Rico operations. 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. On December 31, 2005 we froze the noncontributory defined benefit pension plan for all non-U.S. territorial employees. As a result of freezing the plan, we will recognize a charge for previously unrecognized service costs of approximately $0.4 million in the first quarter of 2006. | ||
We sponsored a non-contributory defined benefit plan for certain union employees. The plan was frozen in September 2001 and terminated March 2004. The settlement of the plan resulted in a gain of $63,228 in 2004. |
F - 19
The funded status of the Companys plans and reconciliation of accrued pension cost at December 31, 2005 and 2004 is presented below (information with respect to benefit obligations and plan assets is as of September 30): |
December 31, | ||||||||
2005 | 2004 | |||||||
Change in benefit obligation:
|
||||||||
Projected benefit obligation at beginning of the year
|
$ | 9,629,031 | $ | 11,121,263 | ||||
Service cost
|
523,863 | 512,317 | ||||||
Interest cost
|
529,059 | 646,052 | ||||||
Actuarial loss
|
183,868 | 152,722 | ||||||
Exchange (gain)/loss
|
(449,366 | ) | 352,612 | |||||
Benefits paid
|
(378,977 | ) | (403,330 | ) | ||||
Settlement
|
(2,752,605 | ) | ||||||
|
||||||||
Projected benefit obligation at end of year
|
$ | 10,037,478 | $ | 9,629,031 | ||||
|
||||||||
|
||||||||
Change in plan assets:
|
||||||||
Fair value of plan assets at beginning of year
|
$ | 8,709,031 | $ | 8,791,904 | ||||
Actual return on plan assets
|
1,827,475 | 1,953,062 | ||||||
Employer contribution
|
1,120,000 | |||||||
Benefits paid
|
(378,977 | ) | (403,330 | ) | ||||
Settlement
|
(2,752,605 | ) | ||||||
|
||||||||
Fair value of plan assets at end of year
|
$ | 10,157,529 | $ | 8,709,031 | ||||
|
||||||||
|
||||||||
Funded status:
|
||||||||
Over/(unfunded)
|
$ | 120,051 | $ | (920,000 | ) | |||
Remaining unrecognized benefit obligation existing at transition
|
801,176 | 57,073 | ||||||
Unrecognized prior service costs due to plan amendments
|
1,155,358 | 1,290,751 | ||||||
Unrecognized net loss
|
40,767 | 2,296,041 | ||||||
Adjustment required to recognize minimum liability
|
(2,813,060 | ) | ||||||
|
||||||||
Accrued pension cost
|
$ | 2,117,352 | $ | (89,195 | ) | |||
|
||||||||
|
||||||||
Amounts recognized in the consolidated financial statements:
|
||||||||
Deferred pension asset
|
$ | (2,117,352 | ) | $ | (1,347,824 | ) | ||
Deferred pension liability and curtailment liability
|
2,723,865 | |||||||
Accumulated other comprehensive loss
|
(1,465,236 | ) | ||||||
|
||||||||
Net amount recognized
|
$ | (2,117,352 | ) | $ | (89,195 | ) | ||
|
||||||||
|
||||||||
Accumulated benefit obligation
|
$ | 9,141,359 | $ | 8,798,226 | ||||
|
SFAS No. 87, Employers Accounting for Pensions, generally requires the Company to recognize a minimum liability in instances in which a plans accumulated benefit obligation exceeds the fair value of plan assets. In accordance with the statement, we have recorded in the accompanying consolidated financial statements a non-current deferred pension asset of $2,117,352 and $1,347,824 as of December 31, 2005 and 2004, respectively. In addition, under SFAS No. 87, if the minimum liability exceeds the unrecognized prior service cost and the remaining unrecognized benefit obligation at transition, the excess is reported in other comprehensive income, which is $0 for 2005 and $872,814 net of a deferred tax of $356,501 for 2004. |
F - 20
Net pension cost of the Companys plans is as follows: |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Service cost
|
$ | 523,863 | $ | 512,317 | $ | 387,692 | ||||||
Interest cost
|
529,059 | 646,052 | 603,481 | |||||||||
Expected return on assets
|
(683,722 | ) | (684,297 | ) | (552,988 | ) | ||||||
Amortization of unrecognized net loss
|
85,614 | 141,642 | 178,641 | |||||||||
Amortization of unrecognized transition obligation
|
16,306 | 16,306 | 16,306 | |||||||||
Amortization of unrecognized prior service cost
|
135,393 | 135,393 | 135,393 | |||||||||
|
||||||||||||
Net periodic pension cost
|
$ | 606,513 | $ | 767,413 | $ | 768,525 | ||||||
|
Our unrecognized benefit obligation existing at the date of transition for the non-union plan is being amortized over 21 years. Actuarial assumptions used in the accounting for the plans were as follows: |
December 31, | ||||||||
2005 | 2004 | |||||||
Discount rate
|
5.75 | % | 5.75 | % | ||||
|
||||||||
Average rate increase in compensation levels
|
3.00 | % | 3.00 | % | ||||
|
||||||||
Expected long-term rate of return on plan assets
|
8.00 | % | 8.00 | % |
Our pension plans weighted-average asset allocations at December 31, 2005 and 2004 by asset category are: |
December 31, | ||||||||
2005 | 2004 | |||||||
Rocky common stock
|
20.1 | % | 19.3 | % | ||||
Other equity securities
|
63.9 | % | 61.2 | % | ||||
Debt securities
|
6.2 | % | ||||||
Mutual funds bonds
|
12.6 | % | 13.3 | % | ||||
Cash and cash equivalents
|
3.4 | % | ||||||
|
||||||||
|
||||||||
Total
|
100.0 | % | 100.0 | % | ||||
|
Our investment objectives are (1) to maintain the purchasing power of the current assets and all future contributions; (2) to maximize return within reasonable and prudent levels of risk; (3) to maintain an appropriate asset allocation policy (approximately 80% equity securities and 20% debt securities) that is compatible with the actuarial assumptions, while still having the potential to produce positive returns; and (4) to control costs of administering the plan and managing the investments. |
F - 21
The expected benefit payments for pensions are as follows for the years ended December 31: |
2006
|
$ | 300,000 | ||
2007
|
345,000 | |||
2008
|
356,000 | |||
2009
|
357,000 | |||
2010
|
367,000 | |||
Thereafter
|
2,737,000 | |||
|
||||
|
||||
Total
|
$ | 4,462,000 | ||
|
We do not anticipate making any contributions to the pension plan in 2006. | ||
Our desired investment result is a long-term rate of return on assets that is at least 8%. The target rate of return for the plans have been based upon the assumption that returns will approximate the long-term rates of return experienced for each asset class in our investment policy. Our investment guidelines are based upon an investment horizon of greater than five years, so that interim fluctuations should be viewed with appropriate perspective. Similarly, the Plans strategic asset allocation is based on this long-term perspective. | ||
The Company also sponsors 401(k) savings plans for substantially all of its employees. The Company provides contributions to the plans on a discretionary basis for workers covered under the defined benefits pension plan, and matches eligible employee contributions up to 4% of applicable salary for qualified employees not covered by the defined benefits pension plan. Total Company contributions to 401(k) plans were $0.5 million in 2005 and none in 2004 or 2003. | ||
11. | COMMITMENTS AND CONTINGENCIES | |
We are, 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 our financial position, results of operations, or liquidity. | ||
12. | 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, 2005 and 2004, respectively. |
F - 22
In November 1997, our Board of Directors adopted a Rights Agreement, which provides for one preferred share purchase right to be associated with each share of our 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 our 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, our common stock 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 us under circumstances permitted by the Rights Agreement. | ||
In September 2002, our Board of Directors authorized the repurchase of up to 500,000 common shares outstanding in open market or privately negotiated transactions through December 31, 2004. Purchases of stock under this program were funded with borrowings from our credit facility. There were 16,400 shares repurchased and retired in 2002 for $84,540 . The Company completed the repurchase program during the first quarter 2003 and retired the remaining shares. There were 483,533 shares repurchased and retired in 2003 for $3,106,156 . | ||
On October 11, 1995, we adopted the 1995 Stock Option Plan which provides for the issuance of options to purchase up to 400,000 common shares. In May 1998, we 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. In addition in May 2002, our shareholders approved the issuance of a total of 400,000 additional common shares of our stock under the 1995 Stock Option Plan. All employees, officers, directors, consultants and advisors providing services to us are eligible to receive options under the Plans. On May 11, 2004 our shareholders approved the 2004 Stock Incentive Plan. The 2004 Stock Incentive Plan includes 750,000 of our common shares that may be granted for stock options and restricted stock awards. As of December 31, 2005, the Company is authorized to issue 467,500 options under the 2004 Stock Incentive Plan; no options can be granted under the amended and restated 1995 Stock Option Plan. |
F - 23
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 stock option transactions from January 1, 2003 through December 31, 2005: |
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Outstanding at January 1, 2003
|
1,023,000 | $ | 6.92 | |||||
Issued
|
224,000 | 6.59 | ||||||
Exercised
|
(334,500 | ) | 7.46 | |||||
Forfeited
|
(61,000 | ) | 6.80 | |||||
|
||||||||
|
||||||||
Outstanding at December 31, 2003
|
851,500 | 6.63 | ||||||
Issued
|
175,000 | 20.78 | ||||||
Exercised
|
(330,700 | ) | 6.79 | |||||
Forfeited
|
(16,250 | ) | 7.57 | |||||
|
||||||||
|
||||||||
Outstanding at December 31, 2004
|
679,550 | 10.03 | ||||||
Issued
|
202,000 | 27.37 | ||||||
Exercised
|
(182,699 | ) | 8.60 | |||||
Forfeited
|
(40,000 | ) | 28.84 | |||||
|
||||||||
|
||||||||
Outstanding at December 31, 2005
|
658,851 | $ | 14.49 | |||||
|
||||||||
|
||||||||
Options exercisable at December 31:
|
||||||||
2003
|
515,250 | $ | 6.97 | |||||
2004
|
402,926 | $ | 7.07 | |||||
2005
|
373,789 | $ | 8.73 | |||||
|
||||||||
Fair value of options granted during the year:
|
||||||||
2003
|
$ | 2.79 | ||||||
2004
|
$ | 8.97 | ||||||
2005
|
$ | 11.99 |
F - 24
The following table summarizes information about options outstanding at December 31, 2005: |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
Remaining | Average | Average | ||||||||||||||||||
Range of | Contractual | Exercise | Exercise | |||||||||||||||||
Exercise Prices | Number | Life | Price | Number | Price | |||||||||||||||
$3.875 $5.25
|
149,700 | 4.2 | $ | 4.85 | 129,200 | $ | 4.79 | |||||||||||||
$5.26 $6.00
|
122,151 | 2.9 | 5.80 | 120,901 | 5.80 | |||||||||||||||
$6.01 $7.00
|
25,750 | 3.7 | 6.49 | 15,875 | 6.52 | |||||||||||||||
$7.01 $9.00
|
24,500 | 2.2 | 7.82 | 23,250 | 7.75 | |||||||||||||||
$9.01 $16.00
|
26,250 | 5.7 | 11.68 | 13,125 | 11.68 | |||||||||||||||
$16.01 $30.00
|
310,500 | 6.2 | 23.98 | 71,438 | 21.08 | |||||||||||||||
|
||||||||||||||||||||
|
||||||||||||||||||||
|
658,851 | $ | 14.49 | 373,789 | $ | 8.73 | ||||||||||||||
|
In determining the estimated fair value of each option granted on the date of grant we use the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2005, 2004 and 2003, respectively: dividend yields of 0%, 0% and 0%; expected volatility of 51%, 51% and 44 %; risk-free interest rates of 4.13%, 3.28% and 2.80% and expected life of 4 years, 4 years, and 6 years. | ||
Our option plans permit an optionee to tender shares of Company stock in lieu of cash for exercise of stock options with the prior consent the Board of Directors or the Compensation Committee. In 2005, 15,952 shares of our common stock were tendered for exercise of 25,000 options. | ||
13. | CLOSURE OF MANUFACTURING OPERATIONS | |
In September 2001, the Board of Directors approved a restructuring plan to consolidate and realign the Companys footwear manufacturing operations. Under this plan, the Company moved the footwear manufacturing operations at its Nelsonville, Ohio factory to the Companys factory in Puerto Rico. The restructuring plan was completed in the fourth quarter of 2001. | ||
A reconciliation of the plant closing costs and accrual is as follows: |
Accrued | Accrued | 2004 Expense | ||||||||||||||||||
Balance | Balance | Adjustments | ||||||||||||||||||
December 31, | 2003 | December 31, | 2004 | To Original | ||||||||||||||||
2002 | Payments | 2003 | Payments | Estimate | ||||||||||||||||
Severance
|
$ | 20,000 | $ | 14,500 | $ | 5,500 | $ | | $ | 5,500 | ||||||||||
|
||||||||||||||||||||
Curtailment of pension
plan benefits
|
190,000 | 190,000 | 132,272 | 57,728 | ||||||||||||||||
|
||||||||||||||||||||
|
||||||||||||||||||||
Total
|
$ | 210,000 | $ | 14,500 | $ | 195,500 | $ | 132,272 | $ | 63,228 | ||||||||||
|
F - 25
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Interest paid
|
$ | 8,312,707 | $ | 1,317,991 | $ | 1,402,743 | ||||||
|
||||||||||||
|
||||||||||||
Federal, state and local income taxes net of refunds
|
$ | 3,138,517 | $ | 5,126,694 | $ | 206,232 | ||||||
|
||||||||||||
|
||||||||||||
Stock issued for EJ Footwear Group acquisition
|
$ | 11,573,838 | ||||||||||
|
||||||||||||
|
||||||||||||
Capitalized interest
|
$ | 19,625 | ||||||||||
|
Accounts payable at December 31, 2004 and 2003 include approximately $523,000 and $46,000, respectively, relating to the additional goodwill accrued in the acquisition of certain assets of Gates-Mills, Inc. in 2003 and the purchase of fixed assets. There was no such accounts payable at December 31, 2005. In 2004, the Company agreed to purchase a building for $505,000 from a partnership 25% owned by the Companys Chairman and CEO. | ||
15. | SEGMENT INFORMATION | |
Operating Segments We operate our business through three business segments: wholesale, retail and military. | ||
Wholesale. In our wholesale segment, our products are offered in over 10,000 retail locations representing a wide range of distribution channels in the U.S. and Canada. These distribution channels vary by product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other specialty retailers. | ||
Retail. In our retail segment, we sell our products directly to consumers through our Lehigh mobile and retail stores, our two Rocky outlet stores and our websites. Our Lehigh operations include a fleet of 78 trucks, supported by 38 small warehouses that include retail stores, which we refer to as mini-stores. Through our outlet stores, we generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which typically carry lower gross margins. Prior to our acquisition of the EJ Footwear Group and its Lehigh division, our retail segment represented only a small portion of our business. |
F - 26
Military. While we are focused on continuing to build our wholesale and retail business, we also actively bid, from time to time, on footwear contracts with the U.S. military. As a result, our military sales fluctuate from year to year. At January 1, 2006 we do not have any contracts to produce goods for the U.S. military. | ||
The following is a summary of segment results for the Wholesale, Retail, and Military segments: |
Years Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
NET SALES:
|
||||||||||||
Wholesale
|
$ | 209,947,672 | $ | 109,689,040 | $ | 101,173,862 | ||||||
Retail
|
58,423,840 | 4,017,359 | 4,582,687 | |||||||||
Military
|
27,651,102 | 18,542,564 | 408,204 | |||||||||
|
||||||||||||
Total Net Sales
|
$ | 296,022,614 | $ | 132,248,963 | $ | 106,164,753 | ||||||
|
||||||||||||
|
||||||||||||
GROSS MARGIN:
|
||||||||||||
Wholesale
|
$ | 76,374,412 | $ | 34,738,851 | $ | 31,104,319 | ||||||
Retail
|
30,323,950 | 1,114,364 | 1,614,454 | |||||||||
Military
|
4,530,764 | 2,789,148 | 62,852 | |||||||||
|
||||||||||||
Total Gross Margin
|
$ | 111,229,126 | $ | 38,642,363 | $ | 32,781,625 | ||||||
|
Segment asset information is not prepared or used to assess segment performance. |
Product Group Information - The following is supplemental information on net sales by product group: |
% of | % of | % of | ||||||||||||||||||||||
2005 | Sales | 2004 | Sales | 2003 | Sales | |||||||||||||||||||
Work footwear
|
$ | 143,810,838 | 48.6 | % | $ | 13,438,818 | 10.2 | % | $ | 10,582,579 | 10.0 | % | ||||||||||||
Outdoor footwear
|
38,655,527 | 13.1 | % | 49,020,109 | 37.1 | % | 50,598,186 | 47.7 | % | |||||||||||||||
Western footwear
|
40,433,142 | 13.7 | % | 8,897,666 | 6.7 | % | 5,366,990 | 5.1 | % | |||||||||||||||
Duty footwear
|
16,803,095 | 5.7 | % | 18,501,811 | 14.0 | % | 18,610,584 | 17.5 | % | |||||||||||||||
Military footwear
|
27,651,102 | 9.3 | % | 18,542,564 | 14.0 | % | 408,204 | 0.4 | % | |||||||||||||||
Apparel
|
18,446,792 | 6.2 | % | 18,477,727 | 14.0 | % | 14,743,413 | 13.9 | % | |||||||||||||||
Other
|
10,222,118 | 3.5 | % | 5,370,268 | 4.1 | % | 5,854,797 | 5.5 | % | |||||||||||||||
|
||||||||||||||||||||||||
|
$ | 296,022,614 | 100 | % | $ | 132,248,963 | 100 | % | $ | 106,164,753 | 100 | % | ||||||||||||
|
Net sales to foreign countries, primarily Canada, represented approximately 2.7% in 2005, 2.1% in 2004, and 1.4% in 2003. |
F - 27
16. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) | |
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2005 and 2004: |
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total Year | ||||||||||||||||
2005
|
||||||||||||||||||||
Net sales
|
$ | 61,498,084 | $ | 65,519,637 | $ | 94,087,786 | $ | 74,917,107 | $ | 296,022,614 | ||||||||||
Gross margin
|
24,207,872 | 25,723,239 | 34,073,477 | 27,224,538 | 111,229,126 | |||||||||||||||
Net income
|
1,094,454 | 2,804,895 | 6,508,436 | 2,606,054 | 13,013,839 | |||||||||||||||
Net income per common share:
|
||||||||||||||||||||
Basic
|
$ | 0.21 | $ | 0.53 | $ | 1.23 | $ | 0.49 | $ | 2.48 | ||||||||||
Diluted
|
$ | 0.20 | $ | 0.50 | $ | 1.15 | $ | 0.46 | $ | 2.33 | ||||||||||
2004
|
||||||||||||||||||||
Net sales
|
$ | 21,882,089 | $ | 27,433,987 | $ | 50,052,894 | $ | 32,879,993 | $ | 132,248,963 | ||||||||||
Gross margin
|
5,618,604 | 7,776,209 | 15,996,490 | 9,251,060 | 38,642,363 | |||||||||||||||
Net income
|
72,451 | 1,447,822 | 4,887,359 | 2,186,760 | 8,594,392 | |||||||||||||||
Net income per common share:
|
||||||||||||||||||||
Basic
|
$ | 0.02 | $ | 0.32 | $ | 1.06 | $ | 0.50 | $ | 1.89 | ||||||||||
Diluted
|
$ | 0.01 | $ | 0.29 | $ | 0.98 | $ | 0.44 | $ | 1.74 | ||||||||||
No cash dividends were paid during 2005 or 2004.
|
F - 28
| Mike Brooks | |
| J. Patrick Campbell | |
| Glenn E. Corlett | |
| Michael L. Finn | |
| G. Courtney Haning | |
| Curtis A. Loveland | |
| James E. McDonald | |
| Thomas Morrison | |
| Harley E. Rouda, Jr. | |
| David Sharp | |
| James W. Stewart |
Signature | Title | |
|
||
/s/ Mike Brooks
|
Chairman, Chief Executive Officer, | |
Mike Brooks
|
and a Director (Principal Executive Officer) | |
|
||
/s/ James E. McDonald
|
Executive Vice President and Chief Financial Officer | |
James E. McDonald
|
(Principal Financial and Accounting Officer) | |
|
||
/s/ Curtis A. Loveland
|
Secretary and a Director | |
Curtis A. Loveland
|
||
|
||
/s/ J. Patrick Campbell
|
Director | |
J. Patrick Campbell
|
||
|
||
/s/ Glenn E. Corlett
|
Director | |
Glenn E. Corlett
|
||
|
||
/s/ Michael L. Finn
|
Director | |
Michael L. Finn
|
||
|
||
/s/ G. Courtney Haning
|
Director | |
G. Courtney Haning
|
||
|
||
/s/ Harley E. Rouda
|
Director | |
Harley E. Rouda
|
||
|
||
/s/ James L. Stewart
|
Director | |
James L. Stewart
|
1. | I have reviewed this annual report on Form 10-K of Rocky Shoes & Boots, Inc.; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | ||
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ Mike Brooks | ||||
Mike Brooks
Chairman and Chief Executive Officer |
1. | I have reviewed this annual report on Form 10-K of Rocky Shoes & Boots, Inc.; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | ||
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ James E. McDonald | ||||
James E. McDonald | ||||
Executive Vice President and Chief Financial Officer |
(1) | The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and | ||
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Mike Brooks | ||||
Mike Brooks | ||||
Chief Executive Officer
March 16, 2006 |
/s/ James E. McDonald | ||||
James E. McDonald | ||||
Executive Vice President and
Chief Financial Officer
March 16, 2006 |
Balance | Additions | |||||||||||||||||||||||
Balance at | Acquired | Charged to | Balance at | |||||||||||||||||||||
Beginning | From EJ | Costs and | End of | |||||||||||||||||||||
DESCRIPTION | of Period | Footwear | Expenses | Deductions | Period | |||||||||||||||||||
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Year ended December 31, 2005
|
$ | 715,000 | $ | 603,592 | $ | 106,799 | $ | (440,591 | ) | (1 | ) | $ | 984,800 | |||||||||||
|
||||||||||||||||||||||||
Year ended December 31, 2004
|
$ | 620,000 | $ | 76,189 | $ | 18,811 | (1 | ) | $ | 715,000 | ||||||||||||||
|
||||||||||||||||||||||||
Year ended December 31, 2003
|
$ | 365,000 | $ | 456,140 | $ | (201,140 | ) | (1 | ) | $ | 620,000 |
(1) | Amount charged off, net of recoveries |