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FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[ x ]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1943
Commission File Number: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of Registrant as specified in its charter)
OHIO NO. 31-1364046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
(Address of principal executive offices, including zip code)
(740) 753-1951
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value
Preferred Stock Purchase Rights
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Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $83,021,381 on March 13,
1998.
There were 5,444,025 shares of the Registrant's Common Stock
outstanding on March 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1997, are incorporated by reference in Part II.
Portions of the Registrant's Proxy Statement for 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III.
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This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business - Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
PART I
ITEM 1. BUSINESS.
Rocky Shoes & Boots, Inc. has two subsidiaries: Five Star Enterprises Ltd.
("Five Star"), a Cayman Islands corporation, which operates a manufacturing
facility in La Vega, Dominican Republic, and Lifestyle Footwear, Inc.
("Lifestyle"), a Delaware corporation, which operates a manufacturing facility
in Aquadilla, Puerto Rico. Unless the context otherwise requires, all references
to "Rocky" or the "Company" include Rocky Shoes & Boots, Inc. and its
subsidiaries.
OVERVIEW
The Company is the successor to the business of The Wm. Brooks Shoe
Company, a company established in 1932 by William Brooks, who was later joined
by F. M. Brooks, the grandfather of the Company's current Chairman, President
and Chief Executive Officer, Mike Brooks. The business was sold in 1959 to a
company headquartered in Lancaster, Ohio. John W. Brooks, the father of Mike
Brooks, remained as an employee of the business when it was sold. In 1975, John
W. Brooks formed John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co.
("Rocky Co.")) as an Ohio corporation, reacquired the Nelsonville, Ohio
operating assets of the original company and moved the business' principal
executive offices back to Nelsonville, Ohio. In 1993, the Company, Rocky Co.,
Lifestyle and Five Star were parties to a reorganization, and in 1996, Rocky Co.
was merged with and into the Company, resulting in the Company's present
corporate structure.
Following completion of the Company's initial public offering in 1993, the
Company began to convert all of its factories to a modular "Team Pass-Through"
manufacturing system. This system substantially increased total manufacturing
capacity and operating efficiencies. Most of the Company's footwear is
manufactured in the Company's facilities located in Nelsonville, Ohio, the
Dominican Republic and Puerto Rico. The Company purchases raw materials from a
number of domestic and foreign sources. The principal raw materials used in the
production of the Company's footwear, in terms of dollar value, are leather,
GORE-TEX waterproof fabric, CORDURA nylon fabric and soling materials. The
Company's footwear is distributed nationwide and in Canada from the Company's
warehouse located in Nelsonville, Ohio. The Company stores finished goods in the
warehouse until they are used to fill an order. If the product ordered is in
inventory, it can be shipped to customers within one week of the order; however,
a majority of the Company's orders for rugged outdoor footwear are placed in
January through April for delivery in July through October.
In the past, the Company has benefited from a relatively low effective tax
rate. The Company receives favorable tax treatment on income earned by its
subsidiary in Puerto Rico and benefits from local tax abatements available to
such subsidiary. During the fourth quarter of Fiscal 1996, the Company elected
to repatriate future earnings of its subsidiary in the Dominican Republic. The
repatriation of earnings from its subsidiary in the Dominican Republic is
subject to federal income tax, but is exempt from state and local taxation.
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ROCKY(R) is a federally registered trademark of Rocky Shoes & Boots, Inc. This
report also refers to trademarks of corporations other than the Company. See
"Business - Patents, Trademarks and Trade Names."
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STRATEGY
The Company's objective is to increase sales within its core product
categories and markets and to leverage the ROCKY brand into new market segments
with products that emphasize the reputation of the Company's footwear for
quality, comfort and durability. Key elements of the Company's strategy are as
follows:
Maintain Innovation and Quality. Innovation and quality are hallmarks of
the ROCKY brand. The Company believes it has developed a competitive advantage
through its ability to produce high quality footwear incorporating premium
materials such as GORE-TEX waterproof breathable fabric. The Company continually
strives to develop new products and to introduce innovations in each of its
footwear market segments. The Company stresses quality control at every stage of
its manufacturing process. Each manufacturing facility is staffed with trained
quality assurance personnel, and a portion of each manufacturing employee's
compensation is based on the level of product quality of each employee's
respective work group.
Increase Awareness of the ROCKY Brand. The Company believes that its
long-term reputation for quality has increased awareness of the ROCKY brand. To
increase the strength of its brand, the Company has reformulated its advertising
strategy by shifting its focus from the retail trade directly to the consumer. A
key component of this new strategy includes advertising through cost-effective
cable broadcasts aimed at audiences which share the demographic profile of the
Company's typical customers. Similarly, the Company is shifting its national
print advertising campaign to more consumer-oriented publications. Management
believes that by directly targeting the consumer it can convey a broader and
more consistent image of the ROCKY brand, thereby increasing demand for its
products at higher retail prices.
Leverage the ROCKY Brand. The Company believes that the ROCKY brand has
become a recognizable and established brand name for quality-conscious consumers
in the rugged outdoor and occupational segments of the men's footwear market.
The Company intends to continue to leverage the ROCKY brand with a major
emphasis on broadening its share of the handsewn casual market segment. The
Company has discontinued private label manufacturing of handsewn casual footwear
in favor of producing a line of ROCKY brand products in this market segment.
Additionally, the Company licenses the ROCKY brand for use on certain
complementary products, such as socks and hats, in an effort to expand brand
recognition.
Develop an Exclusive Rocky-Focused Sales Force. The Company has
historically sold its footwear through manufacturers' representatives who
carried ROCKY brand products as well as other non-competing products. In an
effort to ensure full representation of its complete product line and consistent
support of its customers, late in 1995, the Company began replacing its
manufacturers' representatives with exclusive sales representatives who sell
only ROCKY brand products. Currently, 60% of the Company's sales force is
comprised of exclusive sales representatives. The Company's objective is for at
least 80% sales force to be exclusive sales representatives.
Capitalize on Manufacturing Process. The Company manufactures its products
under a twin-plant concept by producing its labor intensive "upper portion" in
its lower wage rate plants in the Dominican Republic and Puerto Rico and
completing its footwear in Puerto Rico and Nelsonville, Ohio where it uses
state-of-the-art bottoming techniques. The Company utilizes a modular "Team
Pass-Through" manufacturing system in each of its manufacturing facilities. The
Company believes that this system, which allows each person to perform a number
of different tasks, is superior to a traditional assembly line approach, which
requires each person to perform a single repetitive task. This system increases
the number of pairs of footwear produced per square foot of manufacturing space,
reduces work-in-process inventory and direct labor and improves the Company's
production yields. In addition, the Company believes that its manufacturing
process allows it to respond quickly to changes in product demand and consumer
preferences.
Expand Product Sourcing. In 1997 the Company sourced approximately 8.1% of
its products in the Far East. The Company sources products to reach price points
that it cannot obtain with products manufactured in its own facilities. A
greater portion of the Company's products may be sourced in the future if the
Company expands and reaches capacity in its manufacturing facilities. The
Company employs a full-time quality assurance staff to inspect each shipment
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sourced in the Far East. All of the Company's sourced footwear is designed by
the Company's design and engineering team.
PRODUCT LINES
The Company's product lines consist of rugged outdoor, occupational and
handsewn casual footwear. ROCKY brand products emphasize quality, patented
materials, such as GORE-TEX waterproof breathable fabric, CORDURA nylon fabric,
CAMBRELLE cushioned lining and THINSULATE thermal insulation. The following
table summarizes the Company's product lines:
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<CAPTION>
RUGGED OUTDOOR OCCUPATIONAL HANDSEWN CASUAL
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TARGET MARKET....... Hunters and outdoorsmen Law enforcement personnel, Retail customers of premium
security guards, postal workers, casual wear
paramedics and factory and
construction workers
SUGGESTED RETAIL
PRICE RANGE........ $89 - $239 $69 - $179 $79 - $149
DISTRIBUTION
CHANNELS........... Sporting goods stores, outdoor Retail uniform stores, mail Independent retail stores,
specialty stores and mail order order catalogs, specialty safety department store chains, mail
catalogs stores and independent retail order catalogs and sporting
stores goods stores
COMPANY'S LEADING
BRAND NAMES........ BEAR CLAW, SNOW ELIMINATOR, ROCKY 911 TUFF TERRAINERS and
STALKER, SERIES, ALPHA, OUTBACKS
SUPERSTALKERS and CROSSTECH, WORKSMART
MOUNTAIN STALKERS and BEAR CLAW STEEL TOE
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Rugged Outdoor Footwear. Rugged outdoor footwear, which is the Company's
largest product line in terms of total net sales, represented $49.8 million, or
52.4%, of fiscal 1997 net sales. The Company's rugged outdoor footwear consists
of all season sport/hunting boots that are typically waterproof and insulated.
These products are designed to keep outdoorsmen comfortable in extreme
conditions. Most of the Company's rugged outdoor footwear have outsoles which
are designed to provide excellent cushioning and traction. Although Rocky's
rugged outdoor footwear is regularly updated to incorporate new camouflage
patterns, the Company believes its products in this category are relatively
insensitive to changing fashion trends. For example, two of the Company's most
popular current boot styles were introduced in 1984 and 1988, respectively.
Occupational Footwear. Occupational footwear, which is the Company's second
largest product line, represented $23.1 million, or 24.3%, of Fiscal 1997 net
sales. All occupational footwear styles are designed to be comfortable,
flexible, lightweight, slip resistant and durable and are typically worn by
people who are required to spend a majority of their time at work on their feet.
The Company recently began to incorporate Gore's CROSSTECH fabric, which is
resistant to blood born pathogens, into certain styles of its occupational
footwear. Several of the Company's occupational footwear products are similar in
design to certain of the Company's rugged outdoor footwear styles, except the
Company's occupational footwear is primarily black in color and features
innersole support systems. This product category includes work/steel toe
footwear designed for industrial, construction and manufacturing workers who
demand leather work boots that are durable, flexible and comfortable. Many
companies require their workers to wear steel toe boots and often provide
purchase programs for their employees' footwear needs.
Handsewn Casual Footwear. Aggregate sales of the Company's handsewn casual
footwear were $7.8 million in Fiscal 1997, accounting for 8.2% of net sales. The
Company's handsewn casual products target the upscale segment of the market and
include well-styled, comfortable leather shoes of a variety of constructions,
including traditional handsewn. Most of the Company's footwear in this segment
is waterproof and highly functional for outdoor activity. The Company has placed
increased emphasis on expanding its market share within the casual segment by
increasing the number of its product offerings and more directly targeting the
retail consumer. The Company currently offers 20
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styles of footwear within this market segment. Prior to Fiscal 1996, the Company
manufactured handsewn casual products primarily on a private label basis. The
Company discontinued manufacturing on a private label basis in order to
manufacture handsewn casual footwear exclusively under the ROCKY brand.
Other. The Company manufactures and/or markets a variety of accessories,
including GORE-TEX waterproof oversocks, GORE-TEX waterproof booties, innersole
support systems, foot warmers, laces and foot powder. GORE-TEX waterproof
oversocks are sold under the ROCKY brand and as private label products.
Additionally, the Company periodically contracts its excess manufacturing
capacity for shoe uppers and bottoms to other shoe manufacturers. Aggregate
sales of other products, including contract manufacturing, were $9.4 million in
Fiscal 1997, representing 9.9% of net sales.
Net Sales Composition. The following table indicates the percentage of net
sales derived from each major product line and the factory outlet store for the
periods indicated. Historical percentages may not be indicative of the Company's
future product mix.
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TRANSITION
FISCAL 1995 PERIOD FISCAL 1996 FISCAL 1997
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Rugged outdoor footwear..................... 57.6% 65.7% 57.8% 52.4%
Occupational footwear....................... 24.0 20.9 23.3 24.3
Handsewn casual footwear.................... 8.1 2.1 5.7 8.2
Factory outlet store........................ 6.1 7.6 6.6 5.2
Other. . ................................... 4.2 3.7 6.6 9.9
--- --- --- ---
100.0% 100.0% 100.0% 100.0%
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PRODUCT DESIGN AND DEVELOPMENT
Product design and development are initiated both internally by the Company's
development staff and externally by customers and suppliers. The Company's
product development personnel, marketing personnel and sales representatives
work closely to identify opportunities for new styles, camouflage patterns,
design improvements and the incorporation of new materials. These opportunities
are reported to the Company's development staff which oversees the development
and testing of the new footwear. The Company also receives design and product
innovation ideas from tradeshows and from its customers and suppliers who work
with the Company to design footwear incorporating desired features or product
innovations. The Company strives to develop products which respond to the
changing needs and tastes of consumers under time constraints imposed by the
market. As part of the design process, the Company maintains a computer aided
design (CAD) system, which significantly shortens the development period for new
footwear styles. Once the product design has been approved for production, a
last (a reusable form utilized in the manufacture of footwear) is developed by
the Company and then reproduced by a third-party supplier.
SALES, MARKETING AND ADVERTISING
The Company has developed comprehensive marketing and advertising programs to
gain national exposure for its ROCKY brand products in its targeted markets. By
creating strong brand awareness, the Company seeks to increase the general level
of retail prices for its products, expand its customer base and increase brand
loyalty. The Company's footwear is sold by more than 2,600 retail and mail order
companies in the United States and Canada. The Company's largest customers
include: Cabela's, Inc., Bass Pro Shops, Inc. and Dick's Clothing and Sporting
Goods for rugged outdoor footwear; Fecheimer Brothers Uniforms, Inc. and R & R
Uniforms, Inc. for occupational footwear; and J.C. Penney Company, Inc. for
handsewn casual footwear. No single customer accounted for more than 10% of the
Company's revenues in Fiscal 1997.
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The Company's sales and marketing personnel are responsible for developing
and implementing all aspects of advertising and promotion of the Company's
products. In addition, the Company maintains a network of 48 exclusive sales
representatives and manufacturers' representatives, operating in 14 geographic
territories, who sell the Company's products throughout the United States and in
Canada. The Company has historically sold its products through manufacturers'
representatives who carried ROCKY brand products as well as other non-competing
products. In an effort to ensure full representation of its complete product
line and consistent support of its customers, late in 1995, the Company began
replacing its manufacturers' representatives with exclusive sales
representatives who sell only ROCKY brand products. Currently, 60% of the
Company's sales force is comprised of exclusive sales representatives. The
Company's objective is for at least 80% of its sales force to be exclusive sales
representatives. The Company also changed its sales and manufacturing
representatives compensation program by setting performance goals based on sales
growth, development of new accounts and increased penetration of existing
accounts with new products. The Company's exclusive sales representatives and
manufacturers' representatives are paid on a commission basis and are
responsible for sales, service and follow-up.
The Company advertises and promotes the ROCKY brand through a variety of
methods, including product packaging, national print advertising and a
telemarketing operation. In addition, the Company attends numerous tradeshows.
The Company's marketing personnel have developed a product list, product catalog
and dealer support system which includes attractive point-of-sale displays and
co-op advertising programs. In the future, the Company plans to attend a greater
number of tradeshows, which have historically been an important source of new
orders, in response to increasing demand and favorable results received from
attending such shows.
The Company believes that its long-term reputation for quality has increased
awareness of the ROCKY brand. To further increase the strength of its brand, the
Company has reformulated its advertising strategy by shifting its focus from the
retail trade directly to the consumer. A key component of this new strategy
includes advertising through cost-effective cable broadcasts aimed at audiences
which share the demographic profile of the Company's typical customers.
Similarly, the Company is shifting its national print advertising campaign to
more consumer-oriented publications. The Company places full page advertisements
in a number of magazines and other publications having national and
international circulations, including Sports Afield, Field & Stream, North
American Hunter, Outdoor Life, North American Fisherman, Police and Security
News, Rescue and Law and Order. The Company's print advertisements and
television commercials emphasize the waterproof nature of the Company's footwear
as well as its high quality, comfort, functionality and durability. Management
believes that by directly targeting the consumer it can create a more
recognizable, consistent image of the ROCKY brand, thereby increasing demand for
its products at higher retail prices.
All of the Company's advertisements include a toll free number for consumers
to inquire about the Company's products and to locate their nearest retailer.
The Company's national telemarketing operation is a "store-locator" system. A
potential customer calls into the telemarketing center where trained
telemarketing representatives, who are familiar with all styles of ROCKY
footwear, respond to questions and refer the caller to one to three retailers in
or near the caller's area according to ZIP code. The telemarketing
representative records the name, address and telephone number of the caller, and
a letter is sent to the potential customer thanking him or her for the inquiry,
again identifying the nearby retailers and inviting the caller to visit the
stores to try on a pair of ROCKY shoes or boots. An additional letter is sent to
each of the retailers who were recommended to the caller, providing the
retailers with the name, address and telephone number of the caller and
requesting that their staff contact the potential customer and personally invite
them to the store to shop for ROCKY footwear. A ROCKY postcard is provided for
the retailer's convenience. A similar process is used with reader service cards
placed in various publications which advertise the Company's products.
MANUFACTURING AND SOURCING
The Company manufactures its products under a twin-plant concept by producing
the labor intensive "upper portions" in its lower wage rate plants in the
Dominican Republic and Puerto Rico and completing its footwear in Puerto Rico
and Nelsonville, Ohio where it uses state-of-the-art bottoming techniques. The
Company utilizes a modular "Team
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Pass-Through" manufacturing system in each of its manufacturing facilities. The
Company believes that this system, which allows each person to perform a number
of different tasks, is superior to a traditional assembly line approach, which
requires each person to perform a single repetitive task. This system increases
the number of pairs of footwear produced per square foot of manufacturing space,
reduces work-in-process inventory and direct labor and improves the Company's
production yields. In addition, the Company believes that its manufacturing
process allows it to respond quickly to changes in product demand and consumer
preferences.
Quality control is stressed at every stage of the manufacturing process and
is monitored by trained quality assurance personnel at each of the Company's
manufacturing facilities. Every pair of ROCKY footwear, or its component parts,
produced at the Company's facilities is inspected at least five times during the
manufacturing process with some styles inspected up to nine times. Every
GORE-TEX waterproof fabric bootie liner is individually tested by filling it
with compressed air and submerging it in water to verify that it is waterproof.
Quality control personnel at the Nelsonville, Ohio warehouse conduct quality
control testing on incoming sourced finished goods and raw materials and inspect
random samples from the finished goods inventory from each of the Company's
manufacturing facilities to ensure that all items meet the Company's high
quality standards. A portion of each manufacturing employee's compensation is
based on the level of product quality of each employee's respective work group.
Most of the Company's footwear is produced in its own facilities in
Nelsonville, Ohio, the Dominican Republic and Puerto Rico. The Company sources
some footwear from manufacturers in the Far East, primarily China, which in 1997
accounted for approximately 8.1% of its products. A greater portion of the
Company's products may be sourced in the future if the Company expands and
reaches capacity in its manufacturing facilities. The Company sources products
to reach price points that it cannot obtain with products manufactured in its
own facilities. The Company will source products from outside facilities only if
the Company believes that these facilities will maintain the high quality that
has become associated with ROCKY brand footwear. All product sourcing is planned
and implemented under the direction and supervision of the Company's Director of
Sourcing.
Compliance with federal, state and local regulations with respect to the
environment has not had, nor does the Company expect it to have, any material
effect on the earnings, manufacturing process, capital expenditures or
competitive position of the Company.
SUPPLIERS
The Company purchases raw materials from a number of domestic and foreign
sources. The Company does not have any long-term supply contracts for the
purchase of its raw materials, except for limited blanket orders on leather to
protect the Company's wholesale selling prices for an extended period of time.
The principal raw materials used in the production of the Company's footwear, in
terms of dollar value, are leather, GORE-TEX waterproof breathable fabric,
CORDURA nylon fabric and soling materials. The Company believes that these
materials will continue to be available from its current suppliers, and that,
with the exception of GORE-TEX waterproof breathable fabric, there are
acceptable present alternatives to these suppliers and materials.
GORE-TEX waterproof fabric is purchased under license directly from W. L.
Gore & Associates, Inc. A majority of the Company's footwear incorporates
GORE-TEX waterproof breathable fabric. The Company, which has been a customer of
Gore since 1980, was the first footwear manufacturer licensed by Gore to
manufacture, promote, sell and distribute footwear worldwide using GORE-TEX
waterproof breathable fabric. The Company is currently one of the largest
customers of GORE-TEX waterproof breathable fabric for footwear. Although other
waterproofing techniques or materials are available, the Company places a high
value on its GORE-TEX license because the GORE-TEX trade name has high brand
name recognition and the GORE-TEX waterproof breathable fabric used in the
manufacture of ROCKY footwear has a reputation for quality and proven
performance.
Under the Company's licensing agreement with Gore, a prototype or sample of
each style of shoe or boot designed and produced by the Company that
incorporates GORE-TEX waterproof breathable fabric must be tested and approved
by Gore before the Company is permitted to manufacture or sell commercial
quantities of that style of footwear. Gore's
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testing involves immersing the Company's footwear prototype for days in a water
exclusion tester and flexing the prototype 500,000 times, simulating a 500-mile
march through several inches of water. The prototype is then placed in a sweat
absorption and transmission tester to measure "breathability," which is the
amount of perspiration that can escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be waterproof
for one year from the date of purchase. When a customer claims that a product is
not waterproof, the product is returned to the Nelsonville, Ohio manufacturing
facility for further testing. If the product fails this testing process, it is
either replaced or credit is given, at the customer's discretion. The Company
believes that, historically, the claims associated with this guarantee have been
consistent with guarantee claims in the footwear industry.
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal fluctuations in
the sale of its rugged outdoor footwear. A majority of orders for the Company's
rugged outdoor footwear are placed in January through April for delivery in July
through October. In order to meet demand, the Company must manufacture its
rugged outdoor footwear year round to be in a position to ship advance orders
during the last two quarters of each calendar year. Accordingly, average
inventory levels have been highest during the second and third quarters of each
calendar year and sales have been highest in the last two quarters of each
calendar year. Because of seasonal fluctuations, there can be no assurance that
the results for any particular interim period will be indicative of results for
the full year or for future interim periods.
Many of the Company's products, particularly its rugged outdoor footwear
line, are used by consumers in cold or wet weather. Mild or dry weather can have
a material adverse effect on sales of the Company's products, particularly if
mild or dry weather conditions occur in broad geographical areas during late
fall or early winter. Also, due to variations in weather conditions from year to
year, results for any single quarter or year may not be indicative of results
for any future quarter or year. Due to a relatively mild winter in many areas of
the United States during the last winter season, the Company believes some of
its customers may not have sold a significant portion of their inventory to
retail consumers.
Footwear retailers in general have begun placing orders closer to the selling
season. This increases the Company's business risk because it must produce and
carry inventories for relatively longer periods. In addition, the later
placement of orders may change the historical pattern of orders and sales and
increase the seasonal fluctuations in the Company's business. There can be no
assurance that the results for any particular interim period or year will be
indicative of results for the full year or for any future interim period or
year.
BACKLOG
At June 30, 1997 and June 30, 1996, the Company had unfilled orders from its
customers in the amount of approximately $32.2 million and $25.3 million,
respectively. By comparison, at December 31, 1997 and December 31, 1996, backlog
was $3.7 and $3.3 million, respectively. Because a majority of the Company's
orders are placed in January through April for delivery in July through October,
the Company's backlog is lowest during the October through December period and
peaks during the April through June period. Factors other than seasonality could
have a significant impact on the Company's backlog and, therefore, the Company's
backlog at any one point in time may not be indicative of future results.
Generally, orders may be canceled by customers prior to shipment without
penalty.
PATENTS, TRADEMARKS AND TRADE NAMES
The Company owns eighteen United States patents for shoe upper designs. The
Company has two other United States design patent applications for shoe soles
that have been allowed, but for which patents have not yet been issued. The
Company has eight additional United States design patent applications pending
for shoe soles and two for shoe uppers. The Company is not aware of any
infringement of its patents or that it is infringing any patents owned by third
parties.
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The Company owns United States federal registrations for its marks ROCKY(R),
ROCKY BOOTS(R) (which claims a ram's head Design as part of the mark), BEAR
CLAW(R), CORNSTALKERS(R), COME WALK WITH U.S. and Design(R), ROCKY 911 SERIES
and Design(R), SNOW STALKER(R), 4 WAY STOP and Design(R), and STALKERS(R).
Additional mark variations for ROCKY BOOTS(R) and Design (which claims a ram's
head Design as part of the mark), ROCKY and Design(TM) for cigars, and ROCKY
ROCKY SHOES & BOOTS INC. SINCE 1932 and Design(R) plus a detailed full ram
Design are the subject of pending United States federal applications for
registration. In addition, the Company uses and has common law rights in the
marks ROCKY(R) MOUNTAIN STALKERS(R), and other ROCKY(R) marks. During 1994, the
Company began to increase distribution of its goods in several countries,
including countries in Western Europe, Canada and Japan. The Company has applied
for trademark registration of its ROCKY(R) mark in a number of foreign
countries.
The Company also uses in its advertising and in other documents the following
trademarks owned by corporations other than the Company: GORE-TEX(R) and
CROSSTECH(R) are registered trademarks of W.L. Gore & Associates, Inc.;
CORDURA(R) is a registered trademark of E.I. DuPont de Nemours and Company;
THINSULATE(R) is a registered trademark of Minnesota Mining and Manufacturing
Company; and CAMBRELLE(R) is a trademark of Koppers Industries, Inc. The Company
is not aware of any material conflicts concerning its marks or its use of marks
owned by other corporations.
COMPETITION
The Company operates in a very competitive environment. Product function,
design, comfort, quality, technological improvements, brand awareness,
timeliness of product delivery and pricing are all important elements of
competition in the markets for the Company's footwear. The Company believes
that, based on these factors, it competes favorably in its rugged outdoor
footwear and occupational footwear market niches. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company has at least five major competitors in each of its
markets. All of these competitors have strong brand name recognition in the
markets that they serve.
The footwear industry is subject to rapid changes in consumer preferences.
The Company's handsewn casual product line and certain styles within its rugged
outdoor and occupational product lines are susceptible to fashion trends.
Therefore, the success of these products and styles are more dependent on the
Company's ability to anticipate and respond to changing fashion trends and
consumer demands within its niche market in a timely manner. The Company's
inability or failure to do so could adversely affect consumer acceptance of
these product lines and styles and could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
At December 31, 1997, the Company had approximately 1,666 full-time employees
and 30 part-time employees. Approximately 1,271 of these full-time employees are
in the Dominican Republic and Puerto Rico, including approximately 1,008 in
production and the balance in managerial and administrative positions. The
production employees at the Nelsonville, Ohio facility are represented by the
Amalgamated Clothing and Textile Workers Union. The current collective
bargaining agreement between the Company and the union was reached in May 1996
and will expire in May 1998. The Company believes the agreement is consistent
with other contracts in the footwear industry. Management considers its
relations with all of its employees, both union and non-union, to be good.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In addition
to the other information in this report, readers should carefully consider that
the following important factors, among others, in some cases have affected, and
in the future could affect, the Company's actual results and could cause the
Company's actual consolidated results of operations for 1998 and beyond, to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
- 8 -
<PAGE> 10
Changes in Consumer Demand. The footwear industry is subject to rapid changes
in consumer preferences. Demand for the Company's products, particularly the
Company's handsewn casual product line and certain styles within its rugged
outdoor and occupational product lines, may be adversely affected by changing
fashion trends. The future success of the Company will depend upon the Company's
ability to anticipate and respond to changing consumer preferences and fashion
trends in a timely manner. The Company's failure to adequately anticipate or
respond to such changes could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, sales of
the Company's products may be negatively affected by weak consumer spending as a
result of adverse economic trends or uncertainties regarding the economy. See
"Business -- Competition."
Seasonality. The Company has historically experienced, and expects to
continue to experience, significant seasonal fluctuations in the sale of its
products. The Company's operating results have varied significantly in the past,
and may vary significantly in the future, partly due to such seasonal
fluctuations. A majority of the orders for the Company's rugged outdoor footwear
are placed in January through April for delivery in July through October. To
meet demand, the Company must manufacture its products year-round. Accordingly,
average inventory levels have been highest during the second and third quarters
of each calendar year, and sales have been highest in the last two quarters of
each calendar year. The Company believes that sales of its products will
continue to follow this seasonal cycle. Additionally, the Company does not have
long-term contracts with its customers. Accordingly, there is no assurance that
the results for any particular quarter will be indicative of results for the
full year or for the future. The Company believes that comparisons of its
interim results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to the factors mentioned
above as well as factors discussed elsewhere in this Form 10-K, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock will likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Seasonality and Weather."
Impact of Weather. Many of the Company's products, particularly its rugged
outdoor footwear line, are used primarily in cold or wet weather. Mild or dry
weather may have a material adverse effect on sales of the Company's products,
particularly if mild or dry weather conditions occur in broad geographical areas
during late fall or early winter. Also, due to variations in weather conditions
from year to year, results for any single quarter or year may not be indicative
of results for any future period. See "Business -- Seasonality and Weather."
Competition. The footwear industry is intensely competitive, and the
Company expects competition to increase in the future. Many of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. The Company's ability to succeed depends on its ability to remain
competitive with respect to the quality, design, price and timely delivery of
its products. Competition could materially adversely affect the Company's
business, financial condition and results of operations. See "Business --
Competition."
Reliance on Suppliers. The Company purchases raw materials from a number of
domestic and foreign sources. The Company does not have any long-term supply
contracts for the purchase of its raw materials, except for limited blanket
orders on leather. The principal raw materials used in the production of the
Company's footwear, in terms of dollar value, are leather, GORE-TEX waterproof
fabric, CORDURA nylon fabric and soling materials. The Company believes that
currently there are acceptable alternatives to these suppliers and materials,
with the exception of the GORE-TEX waterproof fabric.
The Company is currently one of the largest customers of GORE-TEX waterproof
fabric for use in footwear. The Company's licensing agreement with W.L. Gore &
Associates, Inc. may be terminated by either party upon 90 days written notice.
Although other waterproofing techniques and materials are available, the Company
places a high value on its GORE-TEX waterproof breathable fabric license because
GORE-TEX has high brand name recognition and the GORE-TEX waterproof fabric used
in the manufacture of ROCKY footwear has a reputation for quality and proven
performance. Even though the Company does not believe that its supply of
GORE-TEX waterproof fabric will be interrupted in the future, no assurance can
be given in this regard. The Company's loss of its license to use GORE-TEX
- 9 -
<PAGE> 11
waterproof breathable fabric could materially adversely affect the Company's
competitive position, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Suppliers."
The Company delivers a majority of shipments to its customers via United
Parcel Service ("UPS"). Possible interruptions of UPS's service in the future
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Changing Retailing Trends. Historically, the Company has chosen not to sell
products to discount mass merchandisers. A continued shift in the marketplace
from traditional independent retailers to large discount mass merchandisers has
increased the pressure on many footwear manufacturers to sell products to large
discount mass merchandisers at less favorable margins. Because of competition
from large discount mass merchandisers, a number of small retailing customers of
the Company have gone out of business, and in the future more of such customers
may go out of business, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
progressive independent retailers have attempted to improve their competitive
position by joining buying groups, stressing personal service and stocking more
products that address specific local needs, a continued shift to discount mass
merchandisers could have a material adverse effect on the Company's business,
Financial condition and results of operations and could cause the Company to
reevaluate its strategy. See "Business -- Sales, Marketing and Advertising."
Reliance on Key Personnel. The development of the Company's business has
been, and will continue to be, highly dependent upon Mike Brooks, Chairman,
President and Chief Executive Officer, David Fraedrich, Executive Vice President
and Chief Financial Officer and William S. Moore, Senior Vice President -- Sales
and Marketing. Each of these executive officers has an at-will employment
agreement with the Company. Messrs. Brooks' and Fraedrich's employment
agreements provide that in the event of termination of employment with the
Company, they may not compete with the Company for a period of one year. Mr.
Moore's employment agreement provides that in the event of termination of
employment with the Company, he may not compete with the Company for a period of
three months, which period may be extended an additional six months by the
Company. The Company has obtained key man life insurance on Messrs. Brooks,
Fraedrich and Moore in the amount of $1,146,022, $1,143,602 and $888,989,
respectively. The loss of the services of any of these officers could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Reliance on Foreign Manufacturing. Most of the Company's rugged outdoor and
handsewn casual footwear uppers are produced in the Dominican Republic.
Therefore, the Company's business is subject to the risks of doing business
offshore, such as: the imposition of additional United States legislation and
regulations relating to imports, including quotas, duties, taxes or other
charges or restrictions; weather conditions in the Dominican Republic; foreign
governmental regulation and taxation; fluctuations in foreign exchange rates;
changes in economic conditions; changes in the political stability of the
Dominican Republic; and changes in relationships between the United States and
the Dominican Republic. If any such factors were to render the conduct of
business in the Dominican Republic undesirable or impracticable, the Company
would have to locate new facilities for its manufacturing operations. There can
be no assurance that additional facilities would be available to the Company or,
if available, that such facilities could be obtained on terms favorable to the
Company. Such a development would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Manufacturing and Sourcing."
Changes in Tax Rates. In past years, the Company's effective tax rate
typically has been substantially below the United States federal statutory
rates. The Company has paid minimal income taxes on income earned by its
subsidiary in Puerto Rico due to tax credits afforded the Company under Section
936 of the Internal Revenue Code and local tax abatements. However, Section 936
of the Internal Revenue Code has been repealed such that future tax credits
available to the Company will be capped beginning in 2002 and terminate in 2006.
In addition, the Company's local tax abatements in Puerto Rico are due to expire
in 2004. Prior to Fiscal 1996, the Company paid no foreign income tax on the
income generated by its subsidiary in the Dominican Republic. During the fourth
quarter of Fiscal 1996, the
- 10 -
<PAGE> 12
Company elected to repatriate future earnings of its subsidiary in the Dominican
Republic. The Company's future tax rate will vary depending on many factors,
including the level of relative earnings and tax rates in each jurisdiction in
which it operates and the repatriation of any foreign income to the United
States. Accordingly, since October 1, 1996, the Company has accrued taxes on all
amounts repatriated and will accrue taxes on future earnings as they are no
longer deemed permanently invested. The Company cannot anticipate future changes
in such laws. Increases in effective tax rates or changes in tax laws may have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Concentration of Stock Ownership; Certain Corporate Governance Measures. The
directors, executive officers and principal shareholders of the Company
beneficially own approximately 17.1% of the Company's outstanding Common Stock.
As a result, these shareholders are able to exert significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying or preventing a change in control of the
Company. The Company has also adopted certain corporate governance measures
which, individually or collectively, could delay or frustrate the removal of
incumbent directors and could make more difficult a merger, tender offer or
proxy contest involving the Company even if such events might be deemed by
certain shareholders to be beneficial to the interest of the shareholders.
Volatility of Market Price. From time to time, there may be significant
volatility in the market price of the Common Stock. The Company believes that
the current market price of its Common Stock reflects expectations that the
Company will be able to continue to market its products profitably and develop
new products with market appeal. If the Company is unable to market its products
profitably and develop new products at a pace that reflects the expectations of
the market, investors could sell shares of the Common Stock at or after the time
that it becomes apparent that such expectations may not be realized, resulting
in a decrease in the market price of the Common Stock.
In addition to the operating results of the Company, changes in earnings
estimates by analysts, changes in general conditions in the economy or the
financial markets or other developments affecting the Company or its industry
could cause the market price of the Common Stock to fluctuate substantially. In
recent years, the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies, including the Company, for reasons
unrelated to their operating performance. See "Market for the Registrant's
Common Equity and Related Matters."
Limited Protection of Intellectual Property. The Company regards certain of
its footwear designs as proprietary and relies on patents to protect those
designs. The Company believes that the ownership of the patents is a significant
factor in its business. Existing intellectual property laws afford only limited
protection of the Company's proprietary rights, and it may be possible for
unauthorized third parties to copy certain of the Company's footwear designs or
to reverse engineer or otherwise obtain and use information that the Company
regards as proprietary. The Company believes its patents provide a measure of
security against competition, and the Company intends to enforce its patents
against infringement by third parties. However, if the Company's patents are
found to be invalid, to the extent they have served, or would in the future
serve, as a barrier to entry to the Company's competitors, such invalidity could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company owns United States federal registrations for a number of its
trademarks, trade names and designs. Additional trademarks, trade names and
designs are the subject of pending federal applications for registration. The
Company also uses and has common law rights in certain trademarks. During 1994,
the Company began to increase distribution of its goods in several foreign
countries. Accordingly, the Company has applied for trademark registrations in a
number of these countries. The Company intends to enforce its trademarks and
trade names against unauthorized use by third parties. However, existing
trademark and trade name laws afford only limited protection, and the laws of
countries other than the United States may not protect the Company's proprietary
rights to as great an extent as do the laws of the United States. Accordingly,
regardless of the legal rights of the Company, it may be possible for
unauthorized third parties to use the Company's trademarks, trade names or
designs and realize monetary gain at the Company's expense. Although such
unauthorized use may be illegal, the Company may be forced to expend substantial
- 11 -
<PAGE> 13
resources to enforce its rights and nonetheless be divested of a portion of its
goodwill as a result of such unauthorized use. See "Business -- Patents,
Trademarks and Trade Names."
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS. This Annual Report on Form
10-K contains certain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which are intended to be covered by the safe harbors created thereby.
Those statements include, but may not be limited to, all statements regarding
the intent, belief and expectations of the Company and its management, such as
statements concerning the Company's future profitability and its operating and
growth strategy. Investors are cautioned that all forward-looking statements
involve risks and uncertainties including, without limitation, the factors set
forth under the caption "Business Risks" in this Annual Report on Form 10-K and
other factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate. Therefore, there can be
no assurance that the forward-looking statements included in this Annual Report
on Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
ITEM 2. PROPERTIES.
The Company's executive offices and factory outlet store are located in
Nelsonville, Ohio in a two-story 25,000 square foot building adjacent to the
Company's Nelsonville manufacturing facility. The first floor of this building,
which consists of approximately 12,500 square feet, houses the Company's factory
outlet store which was opened in late 1994. The second floor houses the
Company's executive offices. The Company also owns a 5,000 square foot building,
in Nelsonville, Ohio, subject to a mortgage, which is used to house
administrative staff.
The Company owns a 98,000 square foot distribution warehouse in Nelsonville,
Ohio. This warehouse receives and stores raw materials for all of the Company's
manufacturing facilities. Additionally, under a two-year lease entered into in
January 1997, the Company leases 18,000 square feet of warehouse space in Logan,
Ohio, which it uses to store raw materials.
The Company leases a 41,000 square foot manufacturing facility in
Nelsonville, Ohio, from the William Brooks Real Estate Company, an entity owned
by certain members of the Brooks family, including Mike Brooks and Barbara
Brooks Fuller, who are also executive officers and directors of the Company. The
lease expires in February 2002 and is renewable for one five-year term.
On a temporary basis the Company is leasing a 50,000 square foot facility in
Newark, Ohio to store overflow finished goods inventory and rubber products and
retail inventory. The Company is currently negotiating a permanent lease for
this facility.
Lifestyle leases a 20,500 square foot manufacturing facility and a 22,700
square foot manufacturing facility and warehouse in Puerto Rico from the Puerto
Rico Industrial Development Company under net noncancellable operating leases,
one of which expires in 1998 and one of which expires in 2002. These leases will
automatically renew for additional ten-year periods unless otherwise terminated.
Five Star's manufacturing facility, consisting of three connected buildings
and a stand-alone building, is located in a tax-free trade zone in the Dominican
Republic. Five Star leases 82,600 square feet of this facility from the
Dominican Republic Corporation for Industrial Development (the "DRCID") under a
Consolidation of Lease Contract, dated as of December 13, 1993, the term of
which expires on February 1, 2003. Five Star leases 32,000 square feet of this
facility from the DRCID under a temporary lease. The Company is currently
negotiating a permanent lease for the 32,000 square foot facility.
- 12 -
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation which arises in the
normal course of its business. Although the ultimate resolution of pending
proceedings cannot be determined, in the opinion of management, the resolution
of such proceedings in the aggregate will not have a material adverse effect on
the Company's financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "RCKY." The following table sets forth the range of high and low sales
prices for the Common Stock for the periods indicated, as reported by the Nasdaq
National Market:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
March 31, 1996......................................... 6.75 5.00
June 30, 1996.......................................... 8.50 5.50
September 30, 1996..................................... 8.25 6.75
December 31, 1996...................................... 10.00 6.75
March 31, 1997......................................... 16.25 8.25
June 30, 1997.......................................... 17.38 12.63
September 30, 1997..................................... 19.38 15.88
December 31, 1997...................................... 21.50 14.38
</TABLE>
On March 13, 1998, the last reported sales price of the Common Stock on the
Nasdaq National Market was $15.25 per share. As of March 13, 1998, there were
approximately 183 shareholders of record of the Common Stock.
The Company presently intends to retain its earnings to finance the growth
and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. Future dividend policy will depend upon the
earnings and financial condition of the Company, the Company's need for funds
and other factors. Presently, the Line of Credit (as defined below) restricts
the payment of dividends on the Common Stock. At December 31, 1997,
approximately $10,450,439 of retained earnings was available for distribution.
- 13 -
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(in thousands, except for per share data)
<TABLE>
<CAPTION>
TWELVE
MONTHS SIX YEAR ENDED JUNE 30,
YEARS ENDED ENDED MONTHS
12/31/97 12/31/96 12/31/95 ENDED
-------- -------- -------- -----
(UNAUDITED) 12/31/95 1995 1994 1993
----------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............................ $95,027 $73,148 $60,384 $36,124 $60,227 $52,895 $41,205
Income (loss) before extraordinary
loss and cumulative effect of change
in accounting principle........... 4,761 2,806 (537) (490) 1,433 1,820 1,767
Net income (loss).................... $4,761 $2,806 $(537) $(490) $1,433 $1,820 $1,753
BALANCE SHEET DATA
Total assets......................... $80,955 $58,090 $49,081 $49,081 $59,458 $51,943 $38,528
Total long-term debt................. 13,407 19,520 16,554 16,554 15,503 17,357 5,251
Shareholders' equity................. 59,197 26,375 23,569 23,569 24,059 22,627 21,594
PER SHARE
Income (loss) before extraordinary
loss and cumulative effect of change
in accounting principle:
Basic.......................... $1.16 $0.77 $(0.15) $(0.13) $0.39 $0.49 $0.63
Diluted........................ $1.10 $0.74 $(0.15) $(0.13) $0.38 $0.48 $0.60
Net income (loss):
Basic.......................... $1.16 $0.77 $(0.15) $(0.13) $0.39 $0.49 $0.63
Diluted........................ $1.10 $0.74 $(0.15) $(0.13) $0.38 $0.48 $0.60
Weighted average number of
shares outstanding:
Basic.......................... 4,088 3,666 3,666 3,666 3,666 3,707 2,793
Diluted........................ 4,330 3,776 3,666 3,666 3,762 3,831 2,906
</TABLE>
Note: During fiscal 1993, the Company retired all outstanding 13.25%
subordinated debentures originally due 2005 resulting in an
extraordinary loss of $148,400. Also in fiscal 1993, the Company
changed its method of accounting for income taxes resulting in the
cumulative effect of an increase in net income of $134,000.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included under the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Company's Annual Report to Shareholders and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial balance sheets as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholder's
equity, and cash flow for the years ended December 31, 1997 and 1996, the six
months ended December 31, 1995, and the year ended June 30, 1995, together with
the independent auditors' report thereon appear in the Company's Annual Report
to Shareholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS" and "INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE
OFFICERS, AND PRINCIPAL SHAREHOLDERS - EXECUTIVE OFFICERS" and "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders (the "Proxy Statement") to be held on
May 19, 1998, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - MEETINGS, COMMITTEES, AND COMPENSATION OF THE BOARD OF
DIRECTORS," "- EXECUTIVE COMPENSATION," and "- COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION" in the Company's Proxy Statement, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - OWNERSHIP OF COMMON STOCK BY MANAGEMENT" and "- OWNERSHIP OF
COMMON STOCK BY PRINCIPAL SHAREHOLDERS," in the Company's Proxy Statement, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in
the Company's Proxy Statement, and is incorporated herein by reference.
- 16 -
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) The following Financial Statements are included in the Company's Annual
Report to Shareholders and are incorporated herein by reference.
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996
Consolidated Statements of Operations for the fiscal years
ended December 31, 1997 and December 31, 1996, the
six months ended December 31, 1995, and the fiscal
year ended June 30, 1995
Consolidated Statements of Shareholders' Equity for the fiscal
years ended December 31, 1997 and December 31, 1996,
the six months ended December 31, 1995, and the
fiscal year ended June 30, 1995
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1997 and December 31, 1996, the
six months ended December 31, 1995, and the fiscal
year ended June 30, 1995
Notes to Consolidated Financial Statements for the fiscal
years ended December 31, 1997 and December 31, 1996,
the six months ended December 31, 1995, and the
fiscal year ended June 30, 1995
Independent Auditors' Report
(2) The following financial statement schedule for the fiscal years ended
December 31, 1997, December 31, 1996, the six months ended December 31,
1995, and the fiscal year ended June 30, 1995 is included in this
Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements contained in the Annual Report.
Schedule II -- Consolidated Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the Consolidated Financial Statements or the
notes thereto.
- 17 -
<PAGE> 19
(3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Second Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Code of Regulations of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registration Statement).
4.1 Form of Stock Certificate for the Registrant (incorporated by reference to Exhibit
4.1 to the Registration Statement).
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth
of the Registrant's Amended and Restated Articles of Incorporation (see Exhibit
3.1).
4.3 Articles I and II of the Registrant's Code of Regulations (see Exhibit 3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for executive officers
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1995 (the "1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially similar to Exhibit
10.1.
10.3 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).
10.4 Information concerning Deferred Compensation Agreements substantially similar to
Exhibit 10.3.
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the
Registration Statement).
10.7 Revolving Credit Loan Agreement, dated January 28, 1997, among Rocky Shoes &
Boots, Inc., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One
Columbus, N.A., The Huntington National Bank, and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "1996 Form 10- K")).
10.8 Term Loan Agreement and First Amendment to Revolving Credit Loan Agreement, dated
as of April 18, 1997, between the Registrant, Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., Bank One, Columbus, N.A., the Huntington National Bank,
and Bank One, Columbus, N.A., as Agent (incorporated by reference to Exhibit 10.8
to Form S-2 filed September 11, 1997, registration number 333-35391).
</TABLE>
- 18 -
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.9 Buy-Sell Agreement, dated December 21, 1992, among the Registrant, Mike Brooks,
Charles Stuart Brooks, Jay W. Brooks, Barbara Brooks Fuller, and Patricia H. Robey
(incorporated by reference to Exhibit 10.8 to the Registration Statement).
10.10 First Amendment to Buy-Sell Agreement, dated as of March 30, 1995, among the
Registrant, Mike Brooks, Barbara Brooks Fuller, Patricia H. Robey, Jay W. Brooks
and Charles Stuart Brooks (incorporated by reference to Exhibit No. 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (the
"March 31, 1995 Form 10-Q")).
10.11 Second Amendment to Buy-Sell Agreement, dated as of June 30, 1996, among the
Registrant, Mike Brooks, Barbara Brooks Fuller, Patricia H. Robey, Jay W. Brooks
and Charles Stuart Brooks (incorporated by reference to Exhibit 10.11 to Form S-2
filed September 11, 1997, registration number 333-35391).
10.12 Master Agreement, dated as of February 1, 1996, by and between Bank One, Columbus,
N.A., and Rocky Shoes & Boots Co. (incorporated by reference to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the transition period ended December
31, 1995).
10.13 Indemnification Agreement, dated December 21, 1992, between the Registrant and
Mike Brooks (incorporated by reference to Exhibit 10.10 to the Registration
Statement).
10.14 Information concerning Indemnification Agreements substantially similar to Exhibit
10.13 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1993 (the "1993 Form 10-K")).
10.15 Trademark License Agreement and Manufacturing Certification Agreement, each dated
May 14, 1994, between Rocky Shoes & Boots Co. and W. L. Gore & Associates, Inc.
(incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1994 (the "1994 Form 10-K")).
10.16 Decree of Tax Exemption from the Government of the Commonwealth of Puerto Rico
(incorporated by reference to Exhibit 10.13 to the Registration Statement).
10.16A English Translation of Addendum to Exhibit 10.16 (incorporated by reference to
Exhibit 10.13A to the Registration Statement).
10.17 Lease Agreement, dated March 1, 1987, as amended, between Rocky Shoes & Boots Co.
and William Brooks Real Estate Company regarding Nelsonville factory (incorporated
by reference to Exhibit 10.14 to the Registration Statement).
10.18 Lease Contract, dated August 31, 1988, between Lifestyle Footwear, Inc. and The
Puerto Rico Industrial Development Company regarding factory location 1
(incorporated by reference to Exhibit 10.15 to the Registration Statement).
</TABLE>
- 19 -
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.19 Lease Contract, undated, between Lifestyle Footwear, Inc. and The Puerto Rico
Industrial Development company regarding factory location 2 (incorporated by
reference to Exhibit 10.16 to the Registration Statement).
10.19A English translation of Exhibit 10.19 (incorporated by reference to Exhibit 10.16A
to the Registration Statement).
10.20 Lease Agreement, dated December 13, 1993, between Five Star Enterprises Ltd. and
the Dominican Republic Corporation for Industrial Development regarding buildings
and annexes of a combined manufacturing surface of 75,526 square feet, located in
the Industrial Free Zone of La Vega (incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995 (the "September 30, 1995 Form 10-Q")).
10.20A English translation of Exhibit 10.20 (incorporated by reference to Exhibit 10.2A
to the September 30, 1995 Form 10-Q).
10.21 Continuing Security Agreement, dated January 28, 1997, among Rocky Shoes & Boots,
Inc., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and Bank One,
Columbus, N.A., as Agent (incorporated by reference to Exhibit 10.18 to the 1996
Form 10-K).
10.22 Loan Purchase, Assignment and Master Amendment Agreement, dated as of February 1,
1996, among Bank One Columbus, N.A., NBD Bank, NBD Bank, as Agent, Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots, Co., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the transition period ended December 31, 1995).
10.23 Installment Business Loan Note, dated August 19, 1993, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.20 to the 1994 Form
10-K).
10.24 Second Amendment to Business Loan Note, dated January 28, 1997, among Rocky Shoes
& Boots, Inc., Five Star Enterprises Ltd., and Lifestyle Footwear, Inc.
(incorporated by reference to Exhibit 10.21 to the 1996 Form 10-K).
10.25 Term Lease Master Agreement, dated April 27, 1993, between Rocky Shoes & Boots,
Inc. and IBM Credit Corporation (incorporated by reference to Exhibit 10.22 to the
1993 Form 10-K).
10.26 Fourth Amendment to Promissory Note, dated January 28, 1997, among Rocky Shoes & Boots,
Inc., Five Star Enterprises Ltd., and Lifestyle Footwear, Inc. (incorporated by
reference to Exhibit 10.23 to the 1996 Form 10-K).
10.27 Acceptance Credit Agreement, dated May 4, 1993, among Rocky Shoes & Boots, Inc.,
Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and
NBD Bank (incorporated by reference to Exhibit 10.24 to the 1994 Form 10-K).
</TABLE>
- 20 -
<PAGE> 22
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.28 Adjustable Rate Note, dated May 23, 1988, between Nelsonville Home and Savings
Association and Rocky Shoes & Boots Co. (incorporated by reference to Exhibit
10.25 to the Registration Statement).
10.29 First Amendment to Acceptance Credit Agreement, dated October 20, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.26
to the 1994 Form 10-K).
10.30 Form of Company's 1995 Stock Option Plan (incorporated by reference to Exhibit
10.27 to the 1995 Form 10-K).
10.31 Form of Stock Option Agreement under the 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.28 to the 1995 Form 10-K).
10.32 Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated
March 30, 1995, between Rocky Shoes & Boots Co. and NBD Bank, as Agent
(incorporated by reference to Exhibit No. 10.3 to the March 31, 1995 Form 10-Q).
10.33 Installment Business Loan Note, dated May 11, 1994, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.30 to the 1994 Form
10-K).
10.34 Construction and Term Loan Agreement, dated October 27, 1993, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.31 to the
1994 Form 10-K).
10.35 Promissory Note, dated October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD
Bank (incorporated by reference to Exhibit 10.32 to the 1994 Form 10- K).
10.36 Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated
October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.33 to the 1994 Form 10-K).
10.37 First Amendment to Construction and Term Loan Agreement, dated January 28, 1994,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.34 to the 1994 Form 10-K).
10.38 First Amendment to Promissory Note, dated January 28, 1994, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.35 to the
1994 Form 10-K).
</TABLE>
- 21 -
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.39 First Amendment to Open-End Mortgage, Security Agreement and Assignment of Rents
and Leases, dated January 28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes &
Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.36 to the 1994 Form 10-K).
10.40 Letter Agreement between the Registrant and the Kravetz Group, dated August 3,
1994 (incorporated by reference to Exhibit No. 10.6 to the March 31, 1995 Form
10-Q).
10.41 Amended and Restated Master Business Loan Note, dated March 30, 1995, among the
Registrant, Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit No. 10.4 to the March 31,
1995 Form 10-Q).
10.42 Third Amendment to Construction and Term Loan Agreement, dated as of March 30,
1995, among the Registrant, Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
and Lifestyle Footwear, Inc. (incorporated by reference to Exhibit No. 10.5 to the
March 31, 1995 Form 10-Q).
10.43 Loan Agreement, dated as of October 7, 1994, between the Director of Development
of the State of Ohio and Rocky Shoes & Boots Co. (incorporated by reference to
Exhibit 10.43 to the 1995 Form 10-K).
10.44 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots Co. to the Director
of Development of the State of Ohio (incorporated by reference to Exhibit 10.44 to
the 1995 Form 10-K).
10.45 Security Agreement, dated as of October 7, 1994, between the Director of
Development of the State of Ohio and Rocky Shoes & Boots Co. (incorporated by
reference to Exhibit 10.45 to the 1995 Form 10-K).
10.46 Form of Employment Agreement, dated September 7, 1995, for executive officers
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
10.47 Information covering Employment Agreements substantially similar to Exhibit 10.46
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
13 Portions of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form
S-2 filed September 11, 1997, registration number 333-35391).
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- 22 -
<PAGE> 24
The Registrant agrees to furnish to the Commission upon its request copies
of any omitted schedules or exhibits to any Exhibit filed herewith.
(B) REPORTS ON FORM 8-K
Form 8-K, dated November 5, 1997, filed November 14, 1997, regarding
shareholders rights plan (Item 5.)
(C) EXHIBITS
The exhibits to this report begin on page _____.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent auditors' report
thereon are included on the following pages.
- 23 -
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Rocky Shoes & Boots, Inc.
We have audited the consolidated financial statements of Rocky Shoes & Boots,
Inc. and subsidiaries as of December 31, 1997 and 1996, and for the years ended
December 31, 1997 and 1996, the six months ended December 31, 1995, and the year
ended June 30, 1995, and have issued our report thereon dated March 6, 1998;
such financial statements and report are included in your 1997 Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the consolidated financial statement schedule of Rocky Shoes & Boots, Inc. and
subsidiaries, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statements schedule, when considered in relation to the basic
consolidated financial statement taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
March 6, 1998
Columbus, Ohio
- 24 -
<PAGE> 26
ROCKY SHOES & BOOTS, INC. SCHEDULE II
AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS DECEMBER 31, 1997
and 1996, THE SIX MONTHS ENDED DECEMBER 31, 1995, AND
FISCAL YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions Charged To
--------------------
Balance at Balance at
Beginning Costs and Other End of
DESCRIPTION of Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1997 $291,000 $413,678 $(214,678) $490,000
Year ended December 31, 1996 $156,000 $384,813 $(249,813) $291,000
Six months ended December 31, 1995 $285,000 $119,940 $(248,940) $156,000
Fiscal year ended June 30, 1995 $180,000 $189,385 $ (84,385) $285,000
RESERVE FOR OBSOLETE INVENTORY:
Year ended December 31, 1997 $642,000 $291,000 $(642,000) $291,000
Year ended December 31, 1996 $ 0 $642,000 $ 0 $642,000
</TABLE>
- 25 -
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: March 26, 1998 By: /s/ Dave Fraedrich
-----------------------------------
Dave Fraedrich, Executive Vice
President, Treasurer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman, President and Chief March 26, 1997
Executive Officer (Principal
* Mike Brooks Executive Officer)
- --------------------------------------------
Mike Brooks
/s/ Dave Fraedrich Executive Vice President, Treasurer, March 26, 1997
- -------------------------------------------- Chief Financial Officer and Director
Dave Fraedrich (Principal Financial and Accounting
Officer)
* Curtis A. Loveland Secretary and Director March 26, 1997
- --------------------------------------------
Curtis A. Loveland
* Leonard L. Brown Director March 26, 1997
- --------------------------------------------
Leonard L. Brown
* Barbara Brooks Fuller Director March 26, 1997
- --------------------------------------------
Barbara Brooks Fuller
* Stanley I. Kravetz Director March 26, 1997
- --------------------------------------------
Stanley I. Kravetz
* James L. Stewart Director March 26, 1997
- --------------------------------------------
James L. Stewart
* Robert D. Stix Director March 26, 1997
- --------------------------------------------
Robert D. Stix
*By: /s/ Dave Fraedrich
- --------------------------------------------
Dave Fraedrich, Attorney-in-Fact
</TABLE>
<PAGE> 28
ROCKY SHOES & BOOTS, INC.
------------------------
EXHIBIT INDEX
TO
ANNUAL REPORT
ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
---------------------------
- 27 -
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Second Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Code of Regulations of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registration Statement).
4.1 Form of Stock Certificate for the Registrant (incorporated by reference to Exhibit
4.1 to the Registration Statement.
4.2 Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth
of the Registrant's Amended and Restated Articles of Incorporation (see Exhibit
3.1).
4.3 Articles I and II of the Registrant's Code of Regulations (see Exhibit 3.2).
10.1 Form of Employment Agreement, dated July 1, 1995, for executive officers
(incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1995 (the "1995 Form 10-K")).
10.2 Information concerning Employment Agreements substantially similar to Exhibit
10.1.
10.3 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).
10.4 Information concerning Deferred Compensation Agreements substantially similar to
Exhibit 10.3.
10.5 Form of Company's amended 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the
Registration Statement).
10.7 Revolving Credit Loan Agreement, dated January 28, 1997, among Rocky Shoes &
Boots, Inc., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., Bank One
Columbus, N.A., The Huntington National Bank, and Bank One, Columbus, N.A., as
Agent (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (the "1996 Form 10- K")).
10.8 Term Loan Agreement and First Amendment to Revolving Credit Loan Agreement, dated
as of April 18, 1997, between the Registrant, Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., Bank One, Columbus, N.A., the Huntington National Bank,
and Bank One, Columbus, N.A., as Agent (incorporated by reference to Exhibit 10.8
to Form S-2 filed September 11, 1997, registration number 333-35391).
10.9 Buy-Sell Agreement, dated December 21, 1992, among the Registrant, Mike Brooks,
Charles Stuart Brooks, Jay W. Brooks, Barbara Brooks Fuller, and Patricia H. Robey
(incorporated by reference to Exhibit 10.8 to the Registration Statement).
</TABLE>
- 28 -
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.10 First Amendment to Buy-Sell Agreement, dated as of March 30,
1995, among the Registrant, Mike Brooks, Barbara Brooks Fuller,
Patricia H. Robey, Jay W. Brooks and Charles Stuart Brooks
(incorporated by reference to Exhibit No. 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995 (the "March 31, 1995 Form 10-Q")).
10.11 Second Amendment to Buy-Sell Agreement, dated as of June 30,
1996, among the Registrant, Mike Brooks, Barbara Brooks Fuller,
Patricia H. Robey, Jay W. Brooks and Charles Stuart Brooks
(incorporated by reference to Exhibit 10.8 to Form S-2 filed
September 11, 1997, registration number 333-35391).
10.12 Master Agreement, dated as of February 1, 1996, by and between
Bank One, Columbus, N.A., and Rocky Shoes & Boots Co.
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the transition period ended
December 31, 1995).
10.13 Indemnification Agreement, dated December 21, 1992, between the Registrant and
Mike Brooks (incorporated by reference to Exhibit 10.10 to the Registration
Statement).
10.14 Information concerning Indemnification Agreements substantially similar to Exhibit
10.13 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1993 (the "1993 Form 10-K")).
10.15 Trademark License Agreement and Manufacturing Certification Agreement, each dated
May 14, 1994, between Rocky Shoes & Boots Co. and W. L. Gore & Associates, Inc.
(incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1994 (the "1994 Form 10-K")).
10.16 Decree of Tax Exemption from the Government of the Commonwealth of Puerto Rico
(incorporated by reference to Exhibit 10.13 to the Registration Statement).
10.16A English Translation of Addendum to Exhibit 10.16 (incorporated by reference to
Exhibit 10.13A to the Registration Statement).
10.17 Lease Agreement, dated March 1, 1987, as amended, between Rocky Shoes & Boots Co.
and William Brooks Real Estate Company regarding Nelsonville factory (incorporated
by reference to Exhibit 10.14 to the Registration Statement).
10.18 Lease Contract, dated August 31, 1988, between Lifestyle Footwear, Inc. and The
Puerto Rico Industrial Development Company regarding factory location 1
(incorporated by reference to Exhibit 10.15 to the Registration Statement).
10.19 Lease Contract, undated, between Lifestyle Footwear, Inc. and The Puerto Rico
Industrial Development company regarding factory location 2 (incorporated by
reference to Exhibit 10.16 to the Registration Statement).
10.19A English translation of Exhibit 10.19 (incorporated by reference to Exhibit 10.16A
to the Registration Statement).
</TABLE>
- 29 -
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.20 Lease Agreement, dated December 13, 1993, between Five Star Enterprises Ltd. and
the Dominican Republic Corporation for Industrial Development regarding buildings
and annexes of a combined manufacturing surface of 75,526 square feet, located in
the Industrial Free Zone of La Vega (incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995 (the "September 30, 1995 Form 10-Q")).
10.20A English translation of Exhibit 10.20 (incorporated by reference to Exhibit 10.2A
to the September 30, 1995 Form 10-Q).
10.21 Continuing Security Agreement, dated January 28, 1997, among Rocky Shoes & Boots,
Inc., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and Bank One,
Columbus, N.A., as Agent (incorporated by reference to Exhibit 10.18 to the 1996
Form 10-K).
10.22 Loan Purchase, Assignment and Master Amendment Agreement, dated as of February 1,
1996, among Bank One Columbus, N.A., NBD Bank, NBD Bank, as Agent, Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots, Co., Five Star Enterprises Ltd., and Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the transition period ended December 31, 1995).
10.23 Installment Business Loan Note, dated August 19, 1993, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.20 to the 1994 Form
10-K).
10.24 Second Amendment to Business Loan Note, dated January 28, 1997, among Rocky Shoes
& Boots, Inc., Five Star Enterprises Ltd., and Lifestyle Footwear, Inc.
(incorporated by reference to Exhibit 10.21 to the 1996 Form 10-K).
10.25 Term Lease Master Agreement, dated April 27, 1993, between Rocky Shoes & Boots,
Inc. and IBM Credit Corporation (incorporated by reference to Exhibit 10.22 to the
1993 Form 10-K).
10.26 Fourth Amendment to Promissory Note, dated January 28, 1997, among Rocky Shoes &
Boots, Inc., Five Star Enterprises Ltd., and Lifestyle Footwear, Inc.
(incorporated by reference to Exhibit 10.23 to the 1996 Form 10-K).
10.27 Acceptance Credit Agreement, dated May 4, 1993, among Rocky Shoes & Boots, Inc.,
Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and
NBD Bank (incorporated by reference to Exhibit 10.24 to the 1994 Form 10-K).
10.28 Adjustable Rate Note, dated May 23, 1988, between Nelsonville Home and Savings
Association and Rocky Shoes & Boots Co. (incorporated by reference to Exhibit
10.25 to the Registration Statement).
10.29 First Amendment to Acceptance Credit Agreement, dated October 20, 1993, among
Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.26
to the 1994 Form 10-K).
</TABLE>
- 30 -
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.30 Form of Company's 1995 Stock Option Plan (incorporated by reference to Exhibit
10.27 to the 1995 Form 10-K).
10.31 Form of Stock Option Agreement under the 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.28 to the 1995 Form 10-K).
10.32 Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated
March 30, 1995, between Rocky Shoes & Boots Co. and NBD Bank, as Agent
(incorporated by reference to Exhibit No. 10.3 to the March 31, 1995 Form 10-Q).
10.33 Installment Business Loan Note, dated May 11, 1994, among Rocky Shoes & Boots,
Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear,
Inc., and NBD Bank (incorporated by reference to Exhibit 10.30 to the 1994 Form
10-K).
10.34 Construction and Term Loan Agreement, dated October 27, 1993, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.31 to the
1994 Form 10-K).
10.35 Promissory Note, dated October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky
Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD
Bank (incorporated by reference to Exhibit 10.32 to the 1994 Form 10- K).
10.36 Open-End Mortgage, Security Agreement and Assignment of Rents and Leases, dated
October 27, 1993, among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five
Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by
reference to Exhibit 10.33 to the 1994 Form 10-K).
10.37 First Amendment to Construction and Term Loan Agreement, dated January 28, 1994,
among Rocky Shoes & Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises
Ltd., Lifestyle Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit
10.34 to the 1994 Form 10-K).
10.38 First Amendment to Promissory Note, dated January 28, 1994, among Rocky Shoes &
Boots, Inc., Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc., and NBD Bank (incorporated by reference to Exhibit 10.35 to the
1994 Form 10-K).
10.39 First Amendment to Open-End Mortgage, Security Agreement and Assignment of Rents
and Leases, dated January 28, 1994, among Rocky Shoes & Boots, Inc., Rocky Shoes &
Boots Co., Five Star Enterprises Ltd., Lifestyle Footwear, Inc., and NBD Bank
(incorporated by reference to Exhibit 10.36 to the 1994 Form 10-K).
10.40 Letter Agreement between the Registrant and the Kravetz Group, dated August 3,
1994 (incorporated by reference to Exhibit No. 10.6 to the March 31, 1995 Form
10-Q).
</TABLE>
- 31 -
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.41 Amended and Restated Master Business Loan Note, dated March 30, 1995, among the
Registrant, Rocky Shoes & Boots Co., Five Star Enterprises Ltd., Lifestyle
Footwear, Inc. (incorporated by reference to Exhibit No. 10.4 to the March 31,
1995 Form 10-Q).
10.42 Third Amendment to Construction and Term Loan Agreement, dated as of March 30,
1995, among the Registrant, Rocky Shoes & Boots Co., Five Star Enterprises Ltd.,
and Lifestyle Footwear, Inc. (incorporated by reference to Exhibit No. 10.5 to the
March 31, 1995 Form 10-Q).
10.43 Loan Agreement, dated as of October 7, 1994, between the Director of Development
of the State of Ohio and Rocky Shoes & Boots Co. (incorporated by reference to
Exhibit 10.43 to the 1995 Form 10-K).
10.44 Promissory Note, dated October 7, 1994, by Rocky Shoes & Boots Co. to the Director
of Development of the State of Ohio (incorporated by reference to Exhibit 10.44 to
the 1995 Form 10-K).
10.45 Security Agreement, dated as of October 7, 1994, between the Director of
Development of the State of Ohio and Rocky Shoes & Boots Co. (incorporated by
reference to Exhibit 10.45 to the 1995 Form 10-K).
10.46 Form of Employment Agreement, dated September 7, 1995, for executive officers
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
10.47 Information covering Employment Agreements substantially similar to Exhibit 10.46
(incorporated by reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
13 Portions of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form
S-2 filed September 11, 1997, registration number 333-35391).
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- 32 -
<PAGE> 1
Exhibit 3.1
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ROCKY SHOES & BOOTS, INC.
(adopted November 5, 1997)
Mike Brooks, President, and Curtis A. Loveland, Secretary, of Rocky
Shoes & Boots, Inc. (the "Corporation"), with its principal offices located at
Nelsonville, Athens County, Ohio, do hereby certify that pursuant to the
authority conferred upon the Board of Directors by the Amended and Restated
Articles of Incorporation of the Corporation, the Board of Directors on November
5, 1997, adopted a resolution creating a series of 125,000 (one hundred-twenty
five thousand) shares of Voting Preferred Stock, no par value, designated as
Series B Junior Participating Cumulative Preferred Stock, and that the Amended
and Restated Articles of Incorporation have been amended and restated as
follows:
FIRST: The name of the Corporation shall be Rocky Shoes & Boots, Inc.
SECOND: The place in Ohio where its principal office is to be located
is Athens County, the City of Nelsonville, Ohio.
THIRD: The purposes for which it is formed are to engage in any
business or activity for which corporations may be formed under Sections 1701.01
to 1701.98, inclusive, of the Revised Code of Ohio.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is Ten Million Five Hundred
Thousand (10,500,000) consisting of:
1. Ten Million (10,000,000) shares of Common Stock, without
par value (the "Common Stock");
2. Two Hundred Fifty Thousand (250,000) shares of Voting
Preferred Stock, without par value (the "Voting Preferred Stock"); and
3. Two Hundred Fifty Thousand (250,000) shares of Non-Voting
Preferred Stock, without par value (the "Non-Voting Preferred Stock").
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<PAGE> 2
A. COMMON STOCK
------------
The holders of the Common Stock are entitled at all times to one vote
for each share and to such dividends as the Board of Directors may in
its discretion from time to time legally declare, subject, however, to
the voting and dividend rights, if any, of the holders of the Voting
Preferred Stock and the Non-Voting Preferred Stock. In the event of any
liquidation, dissolution or winding up of the Corporation, the
remaining assets of the Corporation after the payment of all debts and
necessary expenses shall be distributed among the holders of the Common
Stock pro rata in accordance with their respective holdings, subject,
however, to the rights of the holders of the Voting Preferred Stock and
the Non-Voting Preferred Stock then outstanding. The Common Stock is
subject to all of the terms and provisions of the Voting Preferred
Stock and the Non-Voting Preferred Stock as fixed by the Board of
Directors as hereinafter provided.
B. VOTING PREFERRED STOCK
----------------------
The Board of Directors is hereby expressly authorized to adopt
amendments to the Articles of Incorporation to provide for the issuance
of one or more series of Voting Preferred Stock, to establish from time
to time the number of shares to be included in each such series, to fix
the designation, powers, preferences and rights of the shares of each
such series and any qualifications, limitations or restrictions
thereof, including without limitation the following, and the shares of
each series may vary from the shares of any other series in the
following respects:
(a) the division of such shares into series and the
designation and authorized number of shares of each
series;
(b) the annual dividend rate on the shares;
(c) the dates of payment of dividends, whether the dividends
shall be cumulative and, if cumulative, the date from
which dividends shall accumulate;
(d) the redemption price or prices for the particular series,
if redeemable, and the terms and conditions of such
redemption;
(e) sinking fund requirements, if any;
(f) the preference, if any, of the shares of such series in
the event of any voluntary or involuntary liquidation,
dissolution, or winding up of affairs of the Corporation;
(g) the right, if any, of the shares of such series to be
converted into shares of any other series or class and the
terms and conditions of such conversion; and
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<PAGE> 3
(h) any other relative rights, preferences, and
limitations of that series.
The holders of Voting Preferred Stock shall be entitled at all times to
one vote for each share, voting as a class.
C. NON-VOTING PREFERRED STOCK
--------------------------
The Board of Directors is hereby expressly authorized to adopt
amendments to the Articles of Incorporation to provide for the issuance
of one or more series of Non-Voting Preferred Stock, and to establish
from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or
restrictions thereof, including without limitation the following, and
the shares of each series may vary from the shares of any other series
in the following respects:
(a) the division of such shares into series and the
designation and authorized number of shares of each
series;
(b) the annual dividend rate on the shares;
(c) the dates of payment of dividends, whether the dividends
shall be cumulative and, if cumulative, the date from
which dividends shall accumulate;
(d) the redemption price or prices for the particular series,
if redeemable, and the terms and conditions of such
redemption;
(e) sinking fund requirements, if any;
(f) the preference, if any, of the shares of such series in
the event of any voluntary or involuntary liquidation,
dissolution, or winding up of affairs of the Corporation;
(g) the right, if any, of the shares of such series to be
converted into shares of any other series or class and the
terms and conditions of such conversion; and
(h) any other relative rights, preferences, and limitations of
that series.
Except as otherwise required by law, no holders of Non-Voting Preferred
Stock shall be entitled to vote on any matter submitted to the
shareholders of the Corporation.
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<PAGE> 4
D. SERIES A CONVERTIBLE NON-VOTING PREFERRED STOCK
-----------------------------------------------
There shall be created out of the authorized number of shares of
Non-Voting Preferred Stock of the Corporation a series of Non-Voting
Preferred Stock designated as Series A Non-Voting Convertible Preferred
Stock (the "Series A Stock"), to consist of 125,000 shares, with a
stated value of $.06 per share, of which the preferences and relative
and other rights, and the qualifications, limitations or restrictions
thereof, shall be (in addition to those set forth elsewhere in this
Article FOURTH) as follows:
1. CERTAIN DEFINITIONS. Unless the context otherwise requires,
the terms defined in this paragraph shall have, for the purposes of
this paragraph and paragraphs 2 through 10 below, the meanings herein
specified.
COMMON STOCK. The term "Common Stock" shall mean all shares now
or hereafter authorized of any class of Common Stock of the
Corporation and any other shares of the Corporation, howsoever
designated, authorized after the Issue Date, which have the
right (subject always to prior rights of any class or series of
Voting and Non-Voting Preferred Stock) to participate in the
distribution of the assets and earnings of the Corporation
without limit as to per share amount.
ISSUE DATE. The term "Issue Date" shall mean the date that
shares of Series A Stock are first issued by the Corporation.
JUNIOR STOCK. The term "Junior Stock" shall mean the Common
Stock and any class or series of shares of the Corporation
issued after the Issue Date not entitled to receive any assets
upon the liquidation, dissolution or winding up of the affairs
of the Corporation until the shares of Series A Stock shall have
received the Stated Value of all outstanding shares of Series A
Stock as of the date of such liquidation, dissolution or winding
up, plus any accrued and unpaid dividends to such date.
PARITY STOCK. The term "Parity Stock" shall mean, for purposes
of paragraph 3 below, any class or series of shares of the
Corporation issued after the Issue Date entitled to receive
assets upon the liquidation, dissolution or winding up of the
affairs of the Corporation on a parity with the Series A Stock.
SENIOR STOCK. The term "Senior Stock" shall mean any class or
series of shares of the Corporation issued after the Issue Date
ranking senior to the Series A Stock in respect of the right to
receive dividends, as discussed in paragraph 2 below, or assets
upon the liquidation, dissolution or winding up of the affairs
of the Corporation, as discussed in paragraph 3 below.
STATED VALUE. The term "Stated Value" when used in reference to
the Series A Stock shall mean $.06 per share of Series A Stock.
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<PAGE> 5
2. DIVIDEND RATE; PAYMENT. The dividend rate and dates of
payment for Series A Stock shall be identical to the Common Stock.
3. DISTRIBUTIONS UPON LIQUIDATION, DISSOLUTION OR WINDING UP. In
the event of any voluntary or involuntary liquidation, subject to the
prior preferences and other rights of any shares of Senior Stock, but
before any distribution or payment shall be made to the holders of
Junior Stock, the holders of the shares of Series A Stock shall be
entitled to be paid the Stated Value of all outstanding shares of
Series A Stock as of the date of such liquidation or dissolution or
such other winding up, plus any accrued and unpaid dividends thereon to
such date, in cash or in property taken at its fair value as determined
by the Board of Directors, or both, at the election of the Board of
Directors. If such payment shall have been made in full to the holders
of the Series A Stock, and if payment shall have been made in full to
the holders of any Senior Stock and Parity Stock of all amounts to
which such holders shall have a preference, then the remaining assets
and funds of the Corporation shall be distributed pro rata, on a
share-for-share basis, among the holders of shares of Series A Stock,
Parity Stock and Junior Stock. If, upon any such liquidation,
dissolution or other winding up of the affairs of the Corporation, the
net assets of the Corporation distributable among the holders of all
outstanding shares of Series A Stock and of any shares of Parity Stock
shall be insufficient to permit the payment in full to such holders of
the preferential amounts to which they are entitled, then the entire
net assets of the Corporation remaining after the distributions to
holders of any shares of Senior Stock of the full amounts to which they
may be entitled shall be distributed among the holders of the shares of
Series A Stock and of any Parity Stock ratably in proportion to the
full amounts to which they would otherwise be respectively entitled.
Neither the consolidation nor merger of the Corporation into or with
another corporation or corporations, nor the sale of all or
substantially all of the assets of the Corporation to another
corporation shall be deemed a liquidation, dissolution or winding up of
the affairs of the Corporation within the meaning of this paragraph 3.
4. VOTING RIGHTS. Except as otherwise required by law, no holder
of the Series A Stock shall be entitled to vote on any manner submitted
to the shareholders of the Corporation.
5. CONVERSION. Each share of Series A Stock may, at the option
of the holder, be converted into one share of Common Stock of the
Corporation at any time after the second anniversary of the Issue Date.
All remaining issued and outstanding shares of Series A Stock shall,
without further action by the holders thereof, convert into an equal
number of shares of Common Stock on the fifth anniversary of the Issue
Date.
6. ADJUSTMENTS FOR STOCK SPLITS OR COMBINATIONS. If the
Corporation shall at any time or from time to time after the Issue Date
of the shares of Series A Stock, effect a stock split or stock dividend
or other subdivision of the Common Stock, the Series A Stock shall be
proportionately subdivided. Conversely, if the Corporation shall at any
time or from time to time after the Issue Date of the Series A Stock,
effect a combination of the Common
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<PAGE> 6
Stock, the Series A Stock shall be proportionately combined. In
addition to the foregoing adjustment to the number of Series A Stock,
the Stated Value shall be proportionately adjusted with any subdivision
or combination of the Series A Stock. Any adjustment under this
paragraph 6 shall become effective as of the close of business on the
date the subdivision or combination becomes effective.
7. OTHER TERMS. Except as may otherwise be provided in this
Article FOURTH or as required by law, the terms of the Series A Stock
shall be identical to those of the Common Stock.
8. HEADINGS OF SUBDIVISIONS. The headings of the paragraphs 1
through 10 hereof are for convenience of reference only and shall not
affect the interpretation of the provisions hereof.
9. SEVERABILITY OF PROVISIONS. If any right, preference or
limitation of the Series A Stock set forth in paragraphs 1 through 10
hereof (as may be amended from time to time) is invalid, unlawful or
incapable of being enforced by reason of any rule of law or public
policy, all other rights, preferences and limitations set forth in
paragraphs 1 through 10 hereof (as so amended) which can be given
effect without the invalid, unlawful and unenforceable right,
preference or limitation shall, nevertheless, remain in full force and
effect, and no right, preference or limitation herein set forth shall
be deemed dependent upon any other such right, preference or limitation
unless so expressed herein.
10. STATUS OF REACQUIRED SHARES. Upon conversion or redemption
of all issued and outstanding shares of Series A Stock, shares reserved
for the Series A Stock shall (upon compliance with any applicable
provisions of the laws of the State of Ohio) have the status of
authorized and unissued Non-Voting Preferred Stock issuable in series
undesignated as to series and may be redesignated and reissued.
E. SERIES B JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK.
---------------------------------------------------------
There shall be created out of the authorized number of shares of Voting
Preferred Stock of the Corporation a series of Voting Preferred Stock
designated as Series B Junior Participating Cumulative Preferred Stock
(the "Series B Preferred Stock"), to consist of 125,000 shares, without
par value, of which the preferences and relative and other rights, and
the qualifications, limitations or restrictions thereof, shall be (in
addition to those set forth elsewhere in this Article FOURTH) as
follows:
1. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Series B Preferred Stock, in
preference to the holders of shares of Common Stock,
without par value, of the Corporation (the "Common Stock")
and of any other junior stock of the Corporation that may
be
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<PAGE> 7
outstanding, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in
cash on the tenth day of January, April, July and October
in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series B
Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (i) $0.25 per share
($1.00 per annum), or (ii) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock, or a
subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common
Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series B Preferred Stock.
In the event that the Corporation shall at any time
declare or pay any dividend on Common Stock payable in
shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then
and in each such event, the amount to which the holder of
each share of Series B Preferred Stock was entitled
immediately prior to such event under clause (ii) of the
preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after
such event, and the denominator of which is the number of
shares of Common Stock that were outstanding immediately
prior to such event.
(b) The Corporation shall declare a dividend or
distribution on the Series B Preferred Stock as provided
in paragraph (a) of this Section 1 immediately after it
declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock);
provided, however, that in the event no dividend or
distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $0.25 per share ($1.00 per annum) on
the Series B Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series B Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of
issue of such shares of Series B Preferred Stock, unless
the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date
of issue is a
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<PAGE> 8
Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of
Series B Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date,
in either of which cases such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall cumulate
but shall not bear interest. Dividends paid on the shares
of Series B Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date
for the determination of holders of shares of Series B
Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall
be not more than 60 days prior to the date fixed for the
payment thereof.
2. VOTING RIGHTS. The holders of shares of Series B Preferred
Stock shall have the following voting rights:
(a) Each share of Series B Preferred Stock shall entitle
the holder thereof to 100 votes (and each one
one-hundredth of a share of Series B Preferred Stock shall
entitle the holder thereof to one vote) on all matters
submitted to a vote of the shareholders of the
Corporation. In the event that the Corporation shall at
any time declare or pay any dividend on Common Stock
payable in shares of Common Stock or effect a subdivision
or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then
and in each such event, the number of votes per share to
which holders of shares of Series B Preferred Stock were
entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of
which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which
is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided in the Second Amended and
Restated Articles of Incorporation of the Corporation or
by law, the holders of shares of Series B Preferred Stock
and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote
of shareholders of the Corporation.
(c) In addition, the holders of shares of Series B
Preferred Stock shall have the following special voting
rights:
(i) In the event that at any time dividends on
Series B Preferred Stock, whenever accrued and
whether or not consecutive, shall not have been
paid
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<PAGE> 9
or declared and a sum sufficient for the payment
thereof set aside, in an amount equivalent to six
quarterly dividends on all shares of Series B
Preferred Stock at the time outstanding, then and
in each such event, the holders of shares of Series
B Preferred Stock and each other series of
preferred stock now or hereafter issued that shall
be accorded such class voting right by the Board of
Directors and that shall have the right to elect
one director (or, in the event any such other
series is entitled to a greater number of
directors, such number of directors, which shall be
cumulative with and not in addition to the director
provided for herein, such director or directors
being hereinafter referred to as "Special
Directors") as the result of a prior or subsequent
default in payment of dividends on such series
(each such other series being hereinafter called
"Other Series of Preferred Stock"), voting
separately as a class without regard to series,
shall be entitled to elect the Special Director at
the next annual meeting of shareholders of the
Corporation, in addition to the directors to be
elected by the holders of all shares of the
Corporation entitled to vote for the election of
directors, and the holders of all shares (including
the Series B Preferred Stock) otherwise entitled to
vote for directors, voting separately as a class,
shall be entitled to elect the remaining members of
the Board of Directors, provided that the Series B
Preferred Stock and each Other Series of Preferred
Stock, voting as a class, shall not have the right
to elect more than one Special Director (in
addition to any Special Director to which the
holders of any Other Series of Preferred Stock are
then entitled). Such special voting right of the
holders of shares of Series B Preferred Stock may
be exercised until all dividends in default on the
Series B Preferred Stock shall have been paid in
full or declared and funds sufficient therefor set
aside, and when so paid or provided for, such
special voting right of the holders of shares of
Series B Preferred Stock shall cease, but subject
always to the same provisions for the vesting of
such special voting rights in the event of any such
future dividend default or defaults.
(ii) At any time after such special voting rights
shall have so vested in the holders of shares of
Series B Preferred Stock, the Chairman of the
Board, President, or Chief Executive Officer of the
Corporation may, and upon the written request of
the holders of record of 10% or more in number of
the shares of Series B Preferred Stock and each
Other Series of Preferred Stock then outstanding
addressed to the President at the principal
executive office of the Corporation shall, call a
special meeting of the holders of shares of
Preferred Stock so entitled to vote, for the
election of the Special Directors to be elected by
them as herein provided, to be held within 60 days
after such call and at the place and upon the
notice provided by law and in the Code of
Regulations for the holding of meetings of
shareholders; provided, however, that the Chairman
of the Board, President, or Chief Executive
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<PAGE> 10
Officer shall not be required to call such special
meeting in the case of any such request received
less than 90 days before the date fixed for any
annual meeting of shareholders, and if in such case
such special meeting is not called or held, the
holders of shares of Preferred Stock so entitled to
vote shall be entitled to exercise the special
voting rights provided in this paragraph at such
annual meeting. If any such special meeting
required to be called as above provided shall not
be called by the Chairman of the Board, President,
or Chief Executive Officer within 30 days after
receipt of any such request, then the holders of
record of 10% or more in number of the shares of
Series B Preferred Stock and each Other Series of
Preferred Stock then outstanding may designate in
writing one of their number to call such meeting,
and the person so designated may, at the expense of
the Corporation, call such meeting to be held at
the place and upon the notice given by such person,
and for that sole purpose shall have access to the
stock books of the Corporation. No such special
meeting and no adjournment thereof shall be held on
a date later than 60 days before the annual meeting
of shareholders. If, at any meeting so called or at
any annual meeting held while the holders of shares
of Series B Preferred Stock have the special voting
rights provided for in this paragraph, the holders
of not less than 10% of the aggregate voting power
of Series B Preferred Stock and each Other Series
of Preferred Stock then outstanding are present in
person or by proxy, which percentage shall be
sufficient to constitute a quorum for the election
of additional directors as herein provided, the
then authorized number of directors of the
Corporation shall be increased by the number of
Special Directors to be elected, as of the time of
such special meeting or the time of the first such
annual meeting held while such holders have special
voting rights and such quorum is present, and the
holders of shares of Series B Preferred Stock and
each Other Series of Preferred Stock, voting as a
class, shall be entitled to elect the Special
Director or Directors so provided for. If the
directors of the Corporation are then divided into
classes under provisions of the Second Amended and
Restated Articles of Incorporation of the
Corporation or the Code of Regulations, the Special
Director or Directors shall belong to each class of
directors in which a vacancy is created as a result
of such increase in the authorized number of
directors. If the foregoing expansion of the size
of the Board of Directors shall not be valid under
applicable law, then the holders of shares of
Series B Preferred Stock and of each Other Series
of Preferred Stock, voting as a class, shall be
entitled, at the meeting of shareholders at which
they would otherwise have voted, to elect a Special
Director or Directors to fill any then existing
vacancies on the Board of Directors, and shall
additionally be entitled, at such meeting and each
subsequent meeting of shareholders at which
directors are elected, to elect all of the
directors then
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<PAGE> 11
being elected until by such class vote the
appropriate number of Special Directors has been so
elected.
(iii) Upon the election at such meeting by the
holders of shares of Series B Preferred Stock and
each Other Series of Preferred Stock, voting as a
class, of the Special Director or Directors they
are entitled so to elect, the persons so elected,
together with such persons as may be directors or
as may have been elected as directors by the
holders of all shares (including Series B Preferred
Stock) otherwise entitled to vote for directors,
shall constitute the duly elected directors of the
Corporation. Each Special Director so elected by
holders of shares of Series B Preferred Stock and
each Other Series of Preferred Stock, voting as a
class, shall serve until the next annual meeting or
until their respective successors shall be elected
and qualified, or if any such Special Director is a
member of a class of directors under provisions
dividing the directors into classes, each such
Special Director shall serve until the annual
meeting at which the term of office of such Special
Director's class shall expire or until such Special
Director's successor shall be elected and shall
qualify, and at each subsequent meeting of
shareholders at which the directorship of any
Special Director is up for election, said special
class voting rights shall apply in the reelection
of such Special Director or in the election of such
Special Director's successor; provided, however,
that whenever the holders of shares of Series B
Preferred Stock and each Other Series of Preferred
Stock shall be divested of the special rights to
elect one or more Special Directors as above
provided, the terms of office of all persons
elected as Special Directors, or elected to fill
any vacancies resulting from the death,
resignation, or removal of Special Directors shall
forthwith terminate (and the number of directors
shall be reduced accordingly).
(iv) If, at any time after a special meeting of
shareholders or an annual meeting of shareholders
at which the holders of shares of Series B
Preferred Stock and each Other Series of Preferred
Stock, voting as a class, have elected one or more
Special Directors as provided above, and while the
holders of shares of Series B Preferred Stock and
each Other Series of Preferred Stock shall be
entitled so to elect one or more Special Directors,
the number of Special Directors who have been so
elected (or who by reason of one or more
resignations, deaths or removals have succeeded any
Special Directors so elected) shall by reason of
resignation, death or removal be reduced the
vacancy in the Special Directors may be filled by
any one or more remaining Special Director or
Special Directors. In the event that such election
shall not occur within 30 days after such vacancy
arises, or in the event that there shall not be
incumbent at least one Special Director, the
Chairman of the Board, President, or Chief
Executive Officer
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<PAGE> 12
of the Corporation may, and upon the written
request of the holders of record of 10% or more in
number of the shares of Series B Preferred Stock
and each Other Series of Preferred Stock then
outstanding addressed to the Secretary at the
principal office of the Corporation shall, call a
special meeting of the holders of shares of Series
B Preferred Stock and each Other Series of
Preferred Stock so entitled to vote, for an
election to fill such vacancy or vacancies, to be
held within 60 days after such call and at the
place and upon the notice provided by law and in
the Code of Regulations for the holding of meetings
of shareholders; provided, however, that the
Chairman of the Board, President, or Chief
Executive Officer shall not be required to call
such special meeting in the case of any such
request received less than 90 days before the date
fixed for any annual meeting of shareholders, and
if in such case such special meeting is not called,
the holders of shares of Preferred Stock so
entitled to vote shall be entitled to fill such
vacancy or vacancies at such annual meeting. If any
such special meeting required to be called as above
provided shall not be called by the Chairman of the
Board, President, or Chief Executive Officer within
30 days after receipt of any such request, then the
holders of record of 10% or more in number of the
shares of Series B Preferred Stock and each Other
Series of Preferred Stock then outstanding may
designate in writing one of their number to call
such meeting, and the person so designated may, at
the expense of the Corporation, call such meeting
to be held at the place and upon the notice above
provided, and for that purpose shall have access to
the stock books of the Corporation; no such special
meeting and no adjournment thereof shall be held on
a date later than 60 days before the annual meeting
of shareholders.
(d) Nothing herein shall prevent the directors or
shareholders from taking any action to increase the number
of authorized shares of Series B Preferred Stock, or
increasing the number of authorized shares of Preferred
Stock of the same class as the Series B Preferred Stock or
the number of authorized shares of Common Stock, or
changing the par value of the Common Stock or Preferred
Stock, or issuing options, warrants or rights to any class
of stock of the Corporation as authorized by the Second
Amended and Restated Articles of Incorporation of the
Corporation, as they may hereafter be amended.
(e) Except as set forth herein, holders of shares of
Series B Preferred Stock shall have no special voting
rights and their consent shall not be required (except to
the extent they are entitled to vote as set forth in the
Second Amended and Restated Articles of Incorporation of
the Corporation or by law) for taking any corporate
action.
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<PAGE> 13
3. CERTAIN RESTRICTIONS.
(a) Whenever any dividends or other distributions payable
on the Series B Preferred Stock as provided in paragraph 1
hereof are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not
declared, on shares of Series B Preferred Stock
outstanding shall have been paid in full, the Corporation
shall not, directly or indirectly:
(i) declare or pay dividends on, or make any other
distributions with respect to, any shares of stock
ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the
Series B Preferred Stock;
(ii) declare or pay dividends on, or make any other
distributions with respect to, any shares of stock
ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the
Series B Preferred Stock, except dividends paid
ratably on shares of the Series B Preferred Stock
and all such parity stock on which dividends are
payable or in arrears in proportion to the total
amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) with the Series B
Preferred Stock, provided that the Corporation may
at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series B
Preferred Stock; or
(iv) purchase or otherwise acquire for
consideration any shares of Series B Preferred
Stock, or any shares of stock ranking on a parity
with the Series B Preferred Stock, except in
accordance with a purchase offer made in writing or
by publication (as determined by the Board of
Directors) to all holders of such shares upon such
terms as the Board of Directors, after
consideration of the respective annual dividend
rates and other relative rights and preferences of
the respective series and classes, shall determine
in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for
consideration, directly or indirectly, any shares of stock
of the Corporation unless the Corporation could, under
paragraph (a) of this paragraph 3, purchase or otherwise
acquire such shares at such time and in such manner.
- 13 -
<PAGE> 14
4. REACQUIRED SHARES. Any shares of Series B Preferred Stock
purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of preferred stock, without
designation as to series, and may be reissued as part of any series of
preferred stock created by resolution or resolutions of the Board of
Directors (including Series B Preferred Stock), subject to the
conditions and restrictions on issuance set forth herein.
5. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be
made to:
(a) the holders of shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or
winding up) to the Series B Preferred Stock unless, prior
thereto, the holders of shares of Series B Preferred Stock
shall have received the greater of (i) $1.00 per share
($0.001 per one one-hundredth of a share), plus an amount
equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such
payment, or (ii) an aggregate amount per share, subject to
the provision for adjustment hereinafter set forth, equal
to 100 times the aggregate amount to be distributed per
share to holders of shares of Common Stock; or
(b) the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution
or winding up) with the Series B Preferred Stock, except
distributions made ratably on the Series B Preferred Stock
and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up.
In the event that the Corporation shall at any time
declare or pay any dividend on Common Stock payable in
shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then
and in each such event, the aggregate amount to which the
holder of each share of Series B Preferred Stock was
entitled immediately prior to such event under the proviso
in clause (a) of the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding
immediately after such event, and the denominator of which
is the number of shares of Common Stock that were
outstanding immediately prior to such event.
6. CONSOLIDATION, MERGER, ETC. In the event that the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property,
or otherwise changed, then and in each such event, the shares of Series
B Preferred
- 14 -
<PAGE> 15
Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter
set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event that the Corporation shall at any
time declare or pay any dividend on Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock,
then and in each such event, the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series B
Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event, and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
7. NO REDEMPTION. The shares of Series B Preferred Stock shall
not be redeemable. Notwithstanding the foregoing, the Corporation may
acquire shares of Series B Preferred Stock in any other manner
permitted by law or the Second Amended and Restated Articles of
Incorporation of the Corporation.
8. RANK. Unless otherwise provided in the Second Amended and
Restated Articles of Incorporation of the Corporation or an amendment
of the Articles of Incorporation relating to a subsequent series of
preferred stock of the Corporation, the Series B Preferred Stock shall
rank junior to all other series of the Corporation's preferred stock as
to the payment of dividends and the distribution of assets on
liquidation, dissolution or winding up, and senior to the Common Stock
of the Corporation.
9. AMENDMENT. The Second Amended and Restated Articles of
Incorporation of the Corporation shall not be amended in any manner
that would materially and adversely alter or change the powers,
preferences or special rights of the Series B Preferred Stock without
the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series B Preferred Stock, voting together as a
single series.
10. FRACTIONAL SHARES. Series B Preferred Stock may be issued in
fractions of a share (in one one-hundredths (1/100) of a share and
integral multiples thereof) that shall entitle the holder thereof, in
proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and have the
benefit of all other rights of holders of shares of Series B Preferred
Stock.
FIFTH: The Corporation, through its Board of Directors, shall have the
right and power to repurchase any of its outstanding shares at such times, for
such consideration and upon such terms and conditions as may be agreed upon
between the Corporation and the selling shareholder or shareholders.
- 15 -
<PAGE> 16
SIXTH: No holders of shares of the Corporation shall have any
preemptive right to subscribe for or to purchase any shares of the Corporation
of any class, whether now or hereafter authorized.
SEVENTH: The provisions of Section 1701.831 of the Revised Code of
Ohio, as may be amended from time to time, relating to control share
acquisitions shall not be applicable to this Corporation.
EIGHTH: The affirmative vote of the holders of the shares entitling
them to exercise two-thirds of the voting power of the corporation shall be
required for the approval or authorization of any (i) merger or consolidation of
the Corporation with or into any other corporation or (ii) sale, lease, exchange
or other disposition of all or substantially all of the assets of the
Corporation to or with any other corporation, person or other entity; provided,
however, that such two-thirds voting requirement shall not be applicable if the
Board of Directors of the Corporation shall have approved such a transaction
described in clause (i) or (ii) by resolution adopted by two-thirds of the
members of the Board of Directors.
NINTH: It is hereby declared to be a proper corporate purpose,
reasonably calculated to benefit shareholders, for the Board of Directors to
base the response of the Corporation to any "Acquisition Proposal" on the Board
of Directors' evaluation of what is in the best interest of the Corporation and
for the Board of Directors, in evaluating what is in the best interest of the
Corporation, to consider:
(i) The best interest of the shareholders; for this purpose the
Board shall consider, among other factors, not only the
consideration being offered in the Acquisition Proposal, in
relation to the then current market price, but also in
relation to the then current value of the Corporation in a
freely negotiated transaction and in relation to the Board of
Directors' then estimate of the future value of the
Corporation as an independent entity, the business and
financial conditions and earnings prospects of the acquiring
person or persons, and the competence, experience and
integrity of the acquiring person or persons and its or their
management; and
(ii) such other factors as the Board of Directors determines to be
relevant, including, among other factors, the social, legal
and economic effects of the Acquisition Proposal upon
employees, suppliers, customers and business.
"Acquisition Proposal" means any proposal of any person (a)
for a tender offer or exchange offer for any equity security
of the Corporation, (b) to merge or consolidate the
Corporation with another corporation, or (c) to purchase or
otherwise acquire all or substantially all of the properties
and assets of the Corporation.
- 16 -
<PAGE> 17
TENTH: Indemnification and Insurance.
The Corporation may indemnify any director, officer, incorporator or
any former director or officer of the Corporation and any person who is or has
served at the request of the Corporation as a director, officer or trustee of
another corporation, partnership, joint venture, trust or other enterprise (and
his heirs, executors and administrators) against expenses, including attorneys
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him by reason of the fact that he is or was such director, officer,
incorporator or trustee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, to the full extent and according to the procedures and
requirements set forth in the Ohio General Corporation Law as the same may be in
effect from time to time. The indemnification provided for herein shall not be
deemed to restrict the right of the Corporation to (i) indemnify employees,
agents and others as permitted by such Law, (ii) purchase and maintain insurance
or provide similar protection on behalf of the directors, officers or such other
persons against liabilities asserted against them or expenses incurred by them
arising out of their service to the Corporation as contemplated herein, and
(iii) enter into agreements with such directors, officers, incorporators,
employees, agents or others indemnifying them against any and all liabilities
(or such lesser indemnification as may be provided in such agreements) asserted
against them or incurred by them arising out of their service to the Corporation
as contemplated herein.
ELEVENTH: Notwithstanding any provision of Chapter 1701 of the Ohio
Revised Code, now or hereafter in effect, no shareholder shall have the right to
vote cumulatively in the election of directors.
TWELFTH: The provisions of Chapter 1704 of the Ohio Revised Code, now
or hereafter in effect, shall be applicable to this corporation.
THIRTEENTH: These Amended and Restated Articles may be amended by the
affirmative vote of the holders of shares entitling them to exercise a majority
of the voting power of the Corporation on the proposal; provided, however, that
the provisions set forth in Articles Seventh, Eighth, Ninth, Eleventh, Twelfth
and Thirteenth, herein, may not be repealed or amended in any respect unless
such action is approved by the affirmative vote of the holders of shares
entitling them to exercise two-thirds of the voting power of the Corporation on
the proposal.
FOURTEENTH: These Second Amended and Restated Articles of Incorporation
take the place of and supersede the existing Amended and Restated Articles of
Incorporation as heretofore amended.
- 17 -
<PAGE> 18
IN WITNESS WHEREOF, Mike Brooks, President, and Curtis A. Loveland,
Secretary, of Rocky Shoes & Boots, Inc., acting for and on behalf of the
Corporation, have hereunto subscribed their names this 5th day of November,
1997.
ROCKY SHOES & BOOTS, INC.
By: /s/ Mike Brooks
-----------------------------------
Mike Brooks, President
By: /s/ Curtis A. Loveland
-----------------------------------
Curtis A. Loveland, Secretary
- 18 -
<PAGE> 1
EXHIBIT 10.2
INFORMATION CONCERNING EMPLOYMENT AGREEMENTS SUBSTANTIALLY
- ----------------------------------------------------------
SIMILAR TO EXHIBIT 10.1.
- ------------------------
<TABLE>
<CAPTION>
Employee Title Salary
-------- ----- ------
<S> <C> <C>
Mike Brooks Chairman, Chief Executive $167,000
Officer, and President
David S. Fraedrich Executive Vice President, $125,000
Chief Financial Officer,
and Treasurer
</TABLE>
<PAGE> 1
EXHIBIT 10.4
INFORMATION CONCERNING DEFERRED COMPENSATION AGREEMENTS
- -------------------------------------------------------
SUBSTANTIALLY SIMILAR TO EXHIBIT 1O.3
- -------------------------------------
The following employees have entered into Deferred Compensation
Agreements with Rocky Shoes & Boots, Inc., substantially similar to the Deferred
Compensation Agreement filed as Exhibit 10.3:
<TABLE>
<CAPTION>
Effective Date
Employee of Agreement Monthly Benefit
-------- ------------ ---------------
<S> <C> <C>
David S. Fraedrich 5/1/84 $2,083.33
Allen Sheets 5/1/84 $1,250.00
</TABLE>
<PAGE> 1
EXHIBIT 10.14
INFORMATION CONCERNING INDEMNIFICATION AGREEMENTS SUBSTANTIALLY
- ---------------------------------------------------------------
SIMILAR TO EXHIBIT 10.13
- ------------------------
The following persons have entered into Indemnification Agreements with
the Registrant substantially similar to the Indemnification Agreed filed as
Exhibit 10.10:
Indemnitees Date of Agreement
----------- -----------------
David S. Fraedrich December 21, 1992
Barbara Brooks Fuller December 21, 1992
Curtis A. Loveland December 21, 1992
Allen Sheets December 21, 1992
Stanley I. Kravetz February 28, 1993
Robert D. Stix February 28, 1993
Leonard L. Brown February 28, 1993
James L. Stewart August 7, 1996
<PAGE> 1
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
References to Fiscal 1997 and Fiscal 1996 are to fiscal years of the Company
ended December 31 of the respective year
PERCENTAGE OF NET SALES
TWELVE MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1995
---- ---- ----
(UNAUDITED)
Net Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 72.9 75.3 81.7
----- ----- -----
Gross Margin 27.1 24.7 18.3
Selling, General and
Administrative Expenses 17.3 16.9 17.5
----- ----- -----
Income from Operations 9.8% 7.8% 0.8%
===== ===== =====
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net sales increased $21,878,965, or 29.9%, to $95,026,786 for Fiscal 1997,
versus $73,147,821 in Fiscal 1996. The increase in net sales was principally due
to increased sales of rugged outdoor footwear, which grew $7.5 million,
increased sales of occupational footwear, which grew $6.1 million, and to a
lesser extent, sales of the Company's handsewn casual footwear which grew $3.6
million. During Fiscal 1997, the Company opened 440 new accounts and continues
to benefit from diversification of its customer base with sales to new accounts
in each of its product categories. The Company principally sells its products
through mail order catalogs, outdoor specialty stores, sporting goods stores,
specialty safety stores, department store chains and independent retail stores.
Average selling prices were approximately 3% higher across the Company's product
categories in Fiscal 1997.
GROSS MARGIN
The Company's gross margin improved $7,682,472, or 42.6%, to $25,726,715 for
Fiscal 1997, compared with $18,044,243 for Fiscal 1996. As a percentage of net
sales, gross margin rose to 27.1% in Fiscal 1997, versus 24.7% in Fiscal 1996.
The increase in gross margin as a percentage of net sales is primarily the
result of higher production levels in all of the Company's manufacturing plants
and increased sales of newer products with higher gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $4,083,822, or
33.1%, to $16,416,341 for Fiscal 1997,, versus $12,332,519 in Fiscal 1996. As a
percentage of net sales, SG&A expenses rose to 17.3% in Fiscal 1997, from 16.9%
in Fiscal 1996. The increase in SG&A expense for Fiscal 1997 resulted from
higher sales commissions due to the growth in net sales, additional selling and
administrative salaries, and consulting expenses associated with the
implementation of new financial and production software systems.
4
<PAGE> 2
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense rose $449,176, or 21.4%, to $2,552,732 for Fiscal 1997, versus
$2,103,556 in Fiscal 1996. The increase in interest expense is attributable
primarily to higher outstanding balances during Fiscal 1997 on the Company's
line of credit. The line of credit is used to support increased inventory and
accounts receivable balances related to higher net sales. The Company benefited
from lower interest expense during the fourth quarter of Fiscal 1997 due to net
proceeds of $26.9 million from a follow-on stock offering which were used in
part to reduce outstanding debt.
INCOME TAXES
Income taxes were $2,105,000 for Fiscal 1997, versus $918,154 for Fiscal 1996.
The Company's effective tax rate was 30.7% in Fiscal 1997 versus 24.7% in Fiscal
1996. The relatively low effective tax rates result from favorable income tax
treatment afforded income earned by the Company's subsidiary in Puerto Rico. The
income of this subsidiary is exempt from taxation under Section 936 of the
Internal Revenue Code. However, Section 936 of the Internal Revenue Code has
been repealed such that future tax credits available to the Company will be
capped beginning in 2002 and terminate in 2006. Additionally, the Company
receives abatements on its commonwealth and municipal taxes on its subsidiary in
Puerto Rico. The increase in the effective tax rate in Fiscal 1997 is due to a
smaller portion of the Company's income being earned in Puerto Rico and the
Dominican Republic in Fiscal 1997 versus Fiscal 1996.
FISCAL 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1995
NET SALES
Net sales for Fiscal 1996 rose $12,764,160, or 21.1%, to $73,147,821 from
$60,383,661 for 1995. The Company's sales of rugged outdoor footwear increased
$5.8 million, sales of occupational footwear increased $2.2 million, sales of
handsewn casual footwear increased $1.4 million and sales in the factory outlet
store increased $.07 million. Net sales increased in Fiscal 1996 from further
diversification of the customer base, which included increased penetration in
certain geographic markets, the addition of many smaller customers and
substantial re-orders. The Company also began selling through new retail sales
channels which included regional and national department stores. Average selling
prices were approximately 3.0% higher in Fiscal 1996 than 1995 across the
Company's product categories.
GROSS MARGIN
The Company's gross margin increased $6,995,405, or 63.3%, to $18,044,243 for
Fiscal 1996, from $11,048,838 for the same period in 1995. As a percentage of
net sales, gross margin rose to 24.7% for Fiscal 1996, versus 18.3% for the same
period in 1995. The increase in gross margin was due to improved factory
utilization in all of the Company's manufacturing facilities as a result of
increased new orders and re-orders by a growing number of customers. In
addition, increased sales of the Company's brand handsewn casual footwear
contributed to the improved gross margin for Fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased $1,762,695, or 16.7%, to $12,332,519 for Fiscal 1996,
from $10,569,824 in 1995. As a percentage of net sales, SG&A expenses declined
to 16.9% in Fiscal 1996, from 17.5% in 1995. The decrease as a percentage of net
sales was due to increased sales volume with no increase in the fixed cost
component of SG&A expenses combined with a decrease in advertising expenses. In
1995, the Company implemented specific marketing initiatives, including
increased advertising and
5
<PAGE> 3
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
additional sales personnel. The impact of such initiatives resulted in greater
sales volumes in Fiscal 1996 with minimal additional costs.
INTEREST EXPENSE
Interest expense increased $3,187, or 0.2%, to $2,103,556 for Fiscal 1996, from
$2,100,369 in 1995. Interest expense remained relatively constant due to
improved cash flow in Fiscal 1996, similar average balances outstanding on the
Company's line of credit, and generally stable interest rates during Fiscal 1996
and 1995.
INCOME TAXES
Income taxes for Fiscal 1996 were $918,154, versus a benefit of $988,395 in
1995. The Company's relatively low effective tax rate of 24.7% for Fiscal 1996
resulted from favorable income tax treatment afforded under the Internal Revenue
Code for income earned by the Company's subsidiary in Puerto Rico and local tax
abatements available to such subsidiary. In addition, during the first three
quarters of 1996, the Company provided no income taxes on the earnings of its
Dominican Republic subsidiary as the Company intended to reinvest such earnings
in that subsidiary on a long-term basis. In the fourth quarter of 1996, the
Company determined that it would repatriate future earnings from its subsidiary
in the Dominican Republic and, accordingly, began to provide appropriate income
taxes on such earnings.
The high effective tax benefit rate in 1995 of 64.8% was due to the reasons
cited for Fiscal 1996 and to losses incurred domestically for which a full tax
benefit was obtained compared to earnings in the Puerto Rico and Dominican
Republic subsidiaries for which the related tax effect was minimal.
LIQUIDITY AND CAPITAL RESOURCES
The Company has principally funded its working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness,
and in Fiscal 1997, through issuance of additional shares of common stock.
Working capital is primarily used to support changes in accounts receivable and
inventory as a result of the Company's seasonal business cycle and business
expansion. These requirements are generally lowest in the months of January
through March of each year and highest during the months of May through October
of each year. In addition, the Company requires financing to support additions
to machinery, equipment and facilities as well as the introduction of footwear
styles.
At December 31, 1997, the Company had working capital of $55,987,571 versus
$30,608,581 on the same date in 1996. During the fourth quarter of 1997, the
Company received $26.9 million of net proceeds from a follow-on common stock
offering and the exercise of the underwriters' over-allotment option in
connection therewith. The proceeds were used to reduce outstanding debt and for
working capital.
The Company has a revolving line of credit which provides for advances based on
a percentage of eligible accounts receivable and inventory with maximum
borrowing limits of $42,000,000 until January 1, 1998, when the line decreased
to $25,000,000. The maximum available under the line of credit increases to
$42,000,000 on May 16, 1998 through January 1, 1999, when it decreases to
$25,000,000. The line of credit expires April 30, 1999. Changes in the line of
credit during the year match the Company's seasonal requirements for working
capital. As of December 31, 1997, the Company had borrowed $10,600,000 against
its available line of credit of $29,687,481. In early 1998, the Company
initiated discussions with its primary lender to re-negotiate more favorable
terms on the existing line of credit agreement.
Cash paid for capital expenditures during Fiscal 1997 was $4,462,236, which was
funded through operating cash flows, long-term debt and equity financing.
Capital expenditures for 1998 are expected to be
6
<PAGE> 4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
approximately $3,000,000 for machinery and equipment to support increased
production and for lasts, dies and patterns for new footwear styles. The Company
believes it will be able to finance such additions and meet operating
expenditure requirements in 1998 through available cash on hand, additional
long-term borrowings and operating cash flows.
INFLATION
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of raw materials, salaries
and employee benefits. The Company attempts to minimize or offset the effects of
inflation through increased selling prices, productivity improvements and cost
reductions.
INFORMATION SYSTEMS AND THE YEAR 2000
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the Year 2000 problem. The Company
is currently engaged in a comprehensive project to upgrade its information,
technology, manufacturing and facilities computer software to programs that will
consistently and properly recognize the Year 2000. Most of the Company's systems
include new packaged software recently purchased from large vendors who have
represented that these systems are already Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram or
replace and test all of its software for Year 2000 compliance, and the Company
expects to complete the project in early 1999. The estimated cost for this
project could range as high as $300,000, including the cost of new systems which
will be capitalized. This cost is being funded through operating cash flows.
Failure by the Company and/or vendors and customers to complete Year 2000
compliance work in a timely manner could have a material adverse effect on
certain of the Company's operations.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
will require adoption in 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating segments.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company has not yet
determined what, if any, impact the adoption of this Statement will have on its
financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
include statements regarding growth opportunities, fashion trends, product
acceptance, expanded use of sourced products, distribution channels, marketing
plans, sales, profitability, income taxes, working capital, and anticipated
capital expenditures and financing thereof. Investors are cautioned that such
statements involve risks and uncertainties that to many factors, including, but
not limited to, the changes in consumer demand, seasonality, impact of weather,
competition, reliance on suppliers, changing retailing trends, reliance on
foreign manufacturing, changes in tax rates, limited protection of proprietary
technology, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements.
7
<PAGE> 5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
<TABLE>
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and 1996 2-3
Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996,
the Six Months Ended December 31, 1995, the Twelve Months
Ended December 31, 1995 (unaudited), and the Year Ended June 30, 1995 4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1997 and 1996, the Six Months Ended December 31, 1995,
and the Year Ended June 30, 1995 5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996, the Six Months Ended December 31, 1995,
the Twelve Months Ended December 31, 1995 (unaudited), and the Year Ended June 30, 1995 6
Notes to Consolidated Financial Statements 7-19
</TABLE>
<PAGE> 6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Rocky Shoes & Boots, Inc.:
We have audited the accompanying consolidated balance sheets of Rocky Shoes &
Boots, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1997 and 1996, the six months ended December 31,
1995, and the year ended June 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rocky Shoes & Boots, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years ended December 31, 1997 and 1996, the six
months ended December 31, 1995, and the year ended June 30, 1995 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Columbus, Ohio
March 6, 1998
<PAGE> 7
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
------------------------------
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 8,556,883 $ 349,637
Accounts receivable - trade, net 17,789,329 12,409,920
Other receivables 475,593 678,293
Inventories 32,894,236 25,389,902
Deferred income taxes 1,474,799 926,297
Other current assets 850,018 706,097
------------ ------------
Total current assets 62,040,858 40,460,146
FIXED ASSETS, AT COST:
Property, plant and equipment 30,557,770 25,544,360
Less - accumulated depreciation (12,949,316) (10,035,763)
------------ ------------
Total fixed assets - net 17,608,454 15,508,597
DEFERRED PENSION ASSET 216,260 953,211
OTHER ASSETS 1,089,266 1,168,217
------------ ------------
TOTAL ASSETS $ 80,954,838 $ 58,090,171
============ ============
See notes to consolidated financial statements.
-2-
<PAGE> 8
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------
1997 1996
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,414,936 $ 3,036,705
Current maturities - long-term debt 1,173,840 3,609,645
Accrued taxes - other 355,134 447,203
Accrued income taxes 304,808 802,658
Accrued salaries and wages 1,118,331 921,034
Accrued other 686,238 1,034,320
----------- -----------
Total current liabilities 6,053,287 9,851,565
LONG-TERM DEBT - Less current maturities 13,406,962 19,520,029
DEFERRED LIABILITIES:
Deferred compensation 241,673 246,500
Deferred income taxes 2,049,256 1,344,507
Deferred pension liability 7,130 752,481
----------- -----------
Total deferred liabilities 2,298,059 2,343,488
----------- -----------
Total liabilities 21,758,308 31,715,082
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated
value; issued 1997 - 90,000 shares; 1996 - 100,000 shares 5,400 6,000
Common stock, no par value; 10,000,000 shares
authorized; issued 1997 - 5,476,620 shares; 1996 - 3,782,500 shares 42,604,658 14,543,947
Stock held in treasury, at cost - 116,952 common
shares and 7,143 preferred shares (1,226,059) (1,226,059)
Retained earnings 17,812,531 13,051,201
----------- -----------
Total shareholders' equity 59,196,530 26,375,089
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,954,838 $58,090,171
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 9
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS
ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, JUNE 30,
1997 1996 (UNAUDITED) 1995 1995
<S> <C> <C> <C> <C> <C>
NET SALES $95,026,786 $73,147,821 $60,383,661 $36,123,862 $60,226,827
COST OF GOODS SOLD 69,300,071 55,103,578 49,334,823 28,886,555 48,366,376
----------- ----------- ----------- ----------- -----------
GROSS MARGIN 25,726,715 18,044,243 11,048,838 7,237,307 11,860,451
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 16,416,341 12,332,519 10,569,824 6,863,623 8,629,172
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 9,310,374 5,711,724 479,014 373,684 3,231,279
----------- ----------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSES):
Interest expense (2,552,732) (2,103,556) (2,100,369) (1,211,646) (2,104,787)
Other - net 108,688 115,945 95,999 14,523 109,649
----------- ----------- ----------- ----------- -----------
Total other - net (2,444,044) (1,987,611) (2,004,370) (1,197,123) (1,995,138)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 6,866,330 3,724,113 (1,525,356) (823,439) 1,236,141
INCOME TAX EXPENSE (BENEFIT) 2,105,000 918,154 (988,395) (333,185) (196,440)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 4,761,330 $ 2,805,959 $ (536,961) $ (490,254) $ 1,432,581
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic $ 1.16 $ 0.77 $ (0.15) $ (0.13) $ 0.39
=========== =========== =========== =========== ===========
Diluted $ 1.10 $ 0.74 $ (0.15) $ (0.13) $ 0.38
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 4,087,682 3,665,548 3,665,548 3,665,548 3,665,548
=========== =========== =========== =========== ===========
Diluted 4,329,907 3,776,045 3,665,548 3,665,548 3,762,226
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 10
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL
COMMON PREFERRED RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995:
Balance, June 30, 1994 $14,543,947 $6,000 $ 9,302,915 $(1,226,059) $22,626,803
Net income 1,432,581 1,432,581
----------- ------ ----------- ----------- -----------
BALANCE, JUNE 30, 1995 14,543,947 6,000 10,735,496 (1,226,059) 24,059,384
SIX MONTHS ENDED DECEMBER 31, 1995 - Net loss (490,254) (490,254)
----------- ------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 14,543,947 6,000 10,245,242 (1,226,059) 23,569,130
YEAR ENDED DECEMBER 31, 1996 - Net income 2,805,959 2,805,959
----------- ------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 14,543,947 6,000 13,051,201 (1,226,059) 26,375,089
YEAR ENDED DECEMBER 31, 1997:
Net income 4,761,330 4,761,330
Shares issued (1,570,000) pursuant to public
offering, net of costs of $453,483 26,895,917 26,895,917
Stock options exercised 1,020,794 1,020,794
Tax benefit related to stock options 143,400 143,400
Preferred stock converted to common stock 600 (600)
----------- ------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $42,604,658 $5,400 $17,812,531 $(1,226,059) $59,196,530
=========== ====== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 11
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS
ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, JUNE 30,
1997 1996 (UNAUDITED) 1995 1995
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 4,761,330 $ 2,805,959 $ (536,961) $ (490,254) $ 1,432,581
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,925,932 2,392,716 2,053,338 1,039,829 1,815,624
Deferred income taxes 156,247 62,375 (701,200) (572,335) 34,587
Deferred compensation and pension - net (13,227) (587,852) 132,525 189,288 (56,763)
Loss on sale of fixed assets 1,213 94,614
Change in assets and liabilities:
Receivables (5,176,709) (1,780,457) (2,330,912) 2,871,466 144,463
Inventories (7,504,334) (7,053,010) 4,777,807 8,854,652 (1,809,282)
Other current assets (143,921) (72,212) 915,979 1,287,108 (1,403,781)
Other assets 78,951 198,674 (789,528) (751,521) (18,538)
Accounts payable (711,792) 1,665,330 (1,467,104) (5,336,585) 3,159,331
Accrued liabilities (740,704) 2,105,676 (173,688) (443,705) (232,169)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (6,367,014) (168,187) 1,880,256 6,647,943 3,066,053
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES - Purchase of fixed assets (4,462,236) (3,302,761) (2,695,732) (683,542) (6,546,127)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt 77,050,000 34,913,394 22,734,117 13,370,000 20,799,547
Payments on long-term debt (86,073,615) (32,946,783) (21,693,655) (17,658,248) (17,393,407)
Proceeds form issuance of stock (net of
offering expenses) 26,895,917
Proceeds from exercise of stock options,
including related tax benefit 1,164,194
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 19,036,496 1,966,611 1,040,462 (4,288,248) 3,406,140
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,207,246 (1,504,337) 224,986 1,676,153 (73,934)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 349,637 1,853,974 1,628,988 177,821 251,755
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 8,556,883 $ 349,637 $ 1,853,974 $ 1,853,974 $ 177,821
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE> 12
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, THE SIX
MONTHS ENDED DECEMBER 31, 1995 AND THE YEAR ENDED JUNE 30, 1995
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Rocky Shoes & Boots, Inc. ("Rocky
Inc.") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc.
("Lifestyle") and Five Star Enterprises Ltd. ("Five Star"), collectively
referred to as the "Company." All significant intercompany transactions
have been eliminated.
FISCAL YEAR - Effective December 31, 1995, the Company changed its fiscal
year end from June 30 to December 31. The unaudited financial information
for the twelve months ended December 31, 1995 is presented for comparative
purposes. The following presents unaudited summarized consolidated
financial information, which includes all normal recurring adjustments the
Company considers necessary for a fair presentation of such financial
information in accordance with generally accepted accounting principles,
for the six months ended December 31, 1994:
Net sales $35,967,028
Gross margin 7,832,959
Income taxes 458,770
Net income 1,479,288
Net income per share:
Basic $ 0.39
Diluted $ 0.39
BUSINESS ACTIVITY - The Company designs, manufactures, and markets high
quality men's and women's footwear primarily under the registered
trademark, ROCKY(R). The Company maintains a nationwide network of
independent and Company sales representatives who sell the Company's
products primarily through independent shoe, sporting goods, specialty,
and uniform stores and catalogs throughout the United States. The Company
did not have any customers that accounted for more than 10.0% of
consolidated net sales in 1997 and 1996. The Company had one customer that
accounted for 14.7% of consolidated net sales for the six months ended
December 31, 1995 and 11.9% of consolidated net sales for the year ended
June 30, 1995.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents. The Company's cash and cash equivalents are primarily held in
four banks.
-7-
<PAGE> 13
TRADE RECEIVABLES - Trade receivables are presented net of the related
allowance for doubtful accounts of approximately $490,000 and $291,000 at
December 31, 1997 and 1996, respectively.
CONCENTRATION OF CREDIT RISK - The Company's exposure to credit risk is
impacted by the economic climate affecting its industry. The Company
manages this risk by performing ongoing credit evaluations of its
customers and maintains reserves for potential uncollectible accounts.
SUPPLIER AND LABOR CONCENTRATIONS - The Company purchases raw materials
from a number of domestic and foreign sources. The Company currently buys
all of its waterproof fabric, a component used in a significant portion of
the Company's shoes and boots, from one supplier (GORE-TEX(R)). The
Company has had a relationship with this supplier for over 17 years and
has no reason to believe that such relationship will not continue.
A significant portion of the "uppers" for the Company's shoes and boots
are produced in the Company's Dominican Republic operations. The Company
has conducted operations in the Dominican Republic since 1987 and is not
aware of any governmental or economic restrictions that would alter its
current operations.
INVENTORIES - Inventories are valued at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
During the fiscal year ended June 30, 1995, the Company exchanged
inventory totaling approximately $1,200,000 for prepaid advertising
credits. No gain or loss was recognized on the transaction.
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 5-12
Furniture and fixtures 8-12
Lasts, dies, and patterns 7-12
For income tax purposes the Company generally computes depreciation
utilizing accelerated methods.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expense was $1,334,034 and $1,399,398 for the years ended
December 31, 1997 and 1996, respectively, $1,890,400 for the six months
ended December 31, 1995 and $1,736,617 for the year ended June 30, 1995.
REVENUE RECOGNITION - Revenue is recognized at the time footwear product
is shipped to the customer and is recorded net of estimated sales
discounts and returns.
-8-
<PAGE> 14
PER SHARE INFORMATION - Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share", which requires retroactive adoption for all periods presented.
Under SFAS No. 128, 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
including the effect of the Company's Series A preferred stock and stock
options. A reconciliation of the shares used in the basic and diluted
income per share computations is as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic - Weighted
average shares
outstanding 4,087,682 3,665,548 3,665,548 3,665,548 3,665,548
Dilutive securities:
Preferred stock 85,549 92,857 92,857
Stock options 156,676 17,640 3,821
--------- --------- --------- --------- ---------
Diluted - Weighted
average shares
outstanding 4,329,907 3,776,045 3,665,548 3,665,548 3,762,226
========= ========= ========= ========= =========
</TABLE>
Dilutive securities were not considered in the per share computations for
the twelve months and six months ended December 31, 1995 as the effect
would have been antidilutive. No adjustments to net income (loss) was
required for purposes of computing diluted per share amounts.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - In June 1997, the
Financial Accounting Standards Board issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which will
require adoption in 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating
segments. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
has not yet determined what, if any, impact the adoption of this Statement
will have on its financial statements.
2. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
----------------------------------
1997 1996
Raw materials $ 6,210,161 $ 4,482,381
Work-in-process 3,348,275 5,192,326
Manufactured finished goods 21,140,951 13,891,772
Factory outlet finished goods 2,194,849 1,823,423
----------- -----------
Total $32,894,236 $25,389,902
=========== ===========
-9-
<PAGE> 15
3. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
---------------------------
1997 1996
Land $ 224,115 $ 218,130
Building and improvements 5,769,949 5,060,207
Machinery and equipment 17,187,561 14,432,261
Furniture and fixtures 2,303,893 2,014,616
Lasts, dies and patterns 4,482,705 3,782,250
Construction work-in-progress 589,547 36,896
----------- -----------
Total 30,557,770 25,544,360
Less - accumulated depreciation (12,949,316) (10,035,763)
----------- -----------
Net fixed assets $17,608,454 $15,508,597
=========== ===========
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
---------------------------
1997 1996
Bank - revolving credit facility $10,600,000 $19,820,000
Equipment and other obligations 3,388,242 1,027,952
Real estate obligations 83,634 1,596,292
Note payable - shareholder 367,818
Other 508,926 317,612
----------- -----------
Total long-term debt 14,580,802 23,129,674
Less current maturities 1,173,840 3,609,645
----------- -----------
Net long-term debt $13,406,962 $19,520,029
=========== ===========
The Company has a loan agreement with a bank, as amended, that provides
for advances based on a percentage of eligible accounts receivable and
inventory with maximum borrowings that range from $25,000,000 to
$42,000,000 through April 30, 1999. Interest on the revolving credit
facility is payable monthly as a factor of the bank's prime rate (8.5% at
December 31, 1997) and the principal is due April 30, 1999. At December
31, 1997, $29,687,481 was available under the credit agreement of which
$10,600,000 had been borrowed. At December 31, 1997 and 1996, $0 and
$2,820,000 was classified as current based on the expected reduction in
the available line in the subsequent year in accordance with management's
projection of eligible accounts receivable and inventory balances.
Any amounts borrowed under the agreement are secured by the accounts
receivable, inventories, and equipment of the Company. The agreement
contains restrictive covenants which, among others, require the Company to
maintain a certain level of tangible net worth, as defined. At December
31, 1997 approximately $10,450,439 of retained earnings are available for
distribution.
-10-
<PAGE> 16
Equipment and other obligations at December 31, 1997 bear interest at
fixed and variable rates ranging from 3% to 8.75% and are payable in
monthly installments to 2002. The obligations are secured by equipment and
are subject to the security agreement and covenants applicable to the
revolving credit facility.
Real estate obligation at December 31, 1997 bears interest at a variable
rate of 7.875% and is payable in monthly installments through 2003. The
obligation is secured by real estate and is subject to the security
agreement and covenants applicable to the revolving credit facility.
In December 1993, the Company entered into a Stock Purchase and Pledge
Agreement with a shareholder of the Company whereby the Company purchased
116,952 shares of its common stock and 7,143 shares of preferred stock for
$1,226,059, including a note for $919,544. The note was paid in full in
1997.
At December 31, 1997, essentially all trade accounts receivable,
inventories and property are held as collateral for the Company's
long-term debt.
Long-term debt matures as follows for the years ended December 31:
1998 $ 1,173,840
1999 11,530,971
2000 1,707,328
2001 142,772
2002 18,191
Thereafter 7,700
-----------
Total $14,580,802
===========
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 1997 and 1996, based on
current market prices for the same or similar issues or on debt available
to the Company with similar rates and maturities.
5. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $643,000, $541,000, $245,000 and $455,000 in rent
expense under operating lease arrangements for the years ended December
31, 1997 and 1996, the six months ended December 31, 1995, and the year
ended June 30, 1995, respectively.
Included in total rent expense above are payments of $6,000 per month for
the Company's Ohio manufacturing facility leased from an entity in which
the owners are also shareholders of the Company.
-11-
<PAGE> 17
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
1998 $345,000
1999 225,000
2000 121,000
2001 63,000
2002 41,000
--------
Total $795,000
========
6. INCOME TAXES
Rocky Inc. and its wholly-owned subsidiary doing business in Puerto Rico,
Lifestyle, are subject to U.S. Federal income taxes; however, the
Company's income earned in Puerto Rico is allowed favorable tax treatment
under Section 936 of the Internal Revenue Code if conditions as defined
therein are met. Five Star is incorporated in the Cayman Islands and
conducts its operations in a "free trade zone" in the Dominican Republic
and, accordingly, is currently not subject to Cayman Islands or Dominican
Republic income taxes.
At December 31, 1997, a provision has not been made for U.S. taxes on the
accumulated undistributed earnings of Five Star through the third quarter
of 1996 of approximately $3,079,000 that would become payable upon
repatriation to the United States. In addition, the Company has not
provided any U.S. tollgate taxes on approximately $2,257,000 of
accumulated undistributed earnings of Lifestyle prior to the fiscal year
ended June 30, 1994, that would be payable if such earnings were
repatriated to the United States. It is the intention of the Company to
reinvest all such earnings. If the Five Star and Lifestyle undistributed
earnings were distributed to the Company in the form of dividends, the
related taxes on such distributions would be approximately $1,047,000 and
$226,000, respectively.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes.
Accordingly, deferred income taxes have been provided for the temporary
differences between the financial reporting and the income tax basis of
the Company's assets and liabilities by applying enacted statutory tax
rates applicable to future years to the basis differences.
-12-
<PAGE> 18
Income taxes (benefits) are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995
<S> <C> <C> <C> <C>
Federal:
Current $1,556,631 $640,053 $ 217,000 $(296,827)
Deferred 146,143 115,883 (635,234) 172,685
---------- -------- --------- ---------
Total Federal 1,702,774 755,936 (418,234) (124,142)
---------- -------- --------- ---------
State and local:
Current 392,122 215,726 22,150 65,800
Deferred 10,104 (53,508) 62,899 (138,098)
---------- -------- --------- ---------
Total state and local 402,226 162,218 85,049 (72,298)
---------- -------- --------- ---------
Total $2,105,000 $918,154 $(333,185) $(196,440)
========== ======== ========= =========
</TABLE>
A reconciliation of recorded Federal income tax expense (benefit) to the
expected expense computed by applying the Federal statutory rate of 34%
for all periods to income before income taxes follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995
<S> <C> <C> <C> <C>
Expected (benefit) expense at
statutory rate $2,334,552 $1,266,198 $(279,969) $ 420,288
Increase (decrease) in income
taxes resulting from:
Exempt income from operations in
Puerto Rico, net of tollgate taxes (476,493) (279,414) 8,279 (362,540)
Exempt income from Dominican
Republic operations (158,075) (72,527) (298,775)
State and local income taxes (136,757) (55,154) (28,917) 24,581
Other - net (18,528) (17,619) (45,100) 92,304
---------- ---------- --------- ---------
Total $1,702,774 $ 755,936 $(418,234) $(124,142)
========== ========== ========= =========
</TABLE>
-13-
<PAGE> 19
Deferred income taxes recorded in the consolidated balance sheets at
December 31, 1997 and 1996 consist of the following:
DECEMBER 31,
----------------------------
1997 1996
Deferred tax assets:
State and local income taxes $ 55,644 $ 38,167
Asset valuation allowances 398,959 600,973
Pension and deferred compensation 296,952 197,673
Net operating loss carryforwards 287,260 359,075
Inventories 812,437 152,423
----------- -----------
Total deferred tax assets 1,851,252 1,348,311
----------- -----------
Deferred tax liabilities:
Fixed assets (1,706,586) (1,260,837)
Tax on Five Star earnings (64,339) (64,339)
Tollgate tax on Lifestyle earnings (654,784) (441,345)
----------- -----------
Total deferred tax liabilities (2,425,709) (1,766,521)
----------- -----------
Net deferred tax liability $ (574,457) $ (418,210)
=========== ===========
At December 31, 1997, the Company has approximately $845,000 of net
operating loss carryforwards for Federal income tax purposes with annual
utilization limitations over the next four years and expiring in 2010.
Effective during 1996 the Company began to provide U.S. income taxes on
the earnings of Five Star based on the Company's intention to repatriate
these earnings in the future.
7. RETIREMENT PLANS
The Company sponsors separate noncontributory defined benefit pension
plans covering the union and non-union workers of the Company's Ohio and
Puerto Rico operations. Benefits under the union plan are primarily based
upon negotiated rates and years of service. Benefits under the non-union
plan are based upon years of service and highest compensation levels as
defined. Annually, the Company contributes to the plans at least the
minimum amount required by regulation.
Net pension cost of the Company's plans is as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995
<S> <C> <C> <C> <C>
Service cost $ 215,263 $ 182,955 $ 86,551 $ 130,310
Interest 284,420 231,140 111,767 204,551
Actual return on plan assets (953,212) (306,853) (171,109) (135,486)
Amortization and deferral 781,589 177,854 126,980 72,263
--------- --------- --------- ---------
Net pension cost $ 328,060 $ 285,096 $ 154,189 $ 271,638
========= ========= ========= =========
</TABLE>
-14-
<PAGE> 20
The funded status of the Company's plans and reconciliation of accrued
pension cost at December 31, 1997 and 1996 are presented below
(information with respect to benefit obligations and plan assets is as of
September 30):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
<S> <C> <C>
Plan assets at fair value $3,897,093 $2,669,944
---------- ----------
Actuarial present value of benefit obligations:
Vested 3,967,364 3,590,876
Nonvested 153,319 131,549
---------- ----------
Accumulated benefit obligation 4,120,683 3,722,425
Effects of salary progression 365,854 359,989
---------- ----------
Projected benefit obligation 4,486,537 4,082,414
---------- ----------
Funded status - excess of projected benefit
obligation over plan assets 589,444 1,412,470
Remaining unrecognized benefit obligation existing
at transition (316,039) (343,931)
Unrecognized prior service costs due to
plan amendments (562,859) (610,320)
Unrecognized net (loss) gain 296,784 (358,949)
Adjustment required to recognize minimum liability 216,260 953,211
Additional contributions (September 30 - December 31) (216,460) (300,000)
---------- ----------
Accrued pension cost $ 7,130 $ 752,481
========== ==========
</TABLE>
The assets of the plans consist primarily of common stocks, bonds, and
cash equivalents. The assets of the plans include 31,900 shares of the
Company's common stock with a market value of $576,210 at September 30,
1997. The Company's unrecognized benefit obligations existing at the date
of transition for the union and non-union plans are being amortized over
23 and 21 years, respectively. Actuarial assumptions used in the
accounting for the plans were as follows:
DECEMBER 31,
-------------
1997 1996
Discount rate 7.0% 7.0%
Average rate of increase in compensation levels
(non-union only) 3.0% 3.0%
Expected long-term rate of return on plan assets 9.0% 9.0%
-15-
<PAGE> 21
SFAS No. 87, "Employers' Accounting for Pensions," generally requires the
Company to recognize a minimum liability in instances in which a plan's
accumulated benefit obligation exceeds the fair value of plan assets. In
accordance with the Statement, the Company has recorded in the
accompanying financial statements a non-current pension liability and a
non-current intangible asset of $216,260 and $953,211 as of December 31,
1997 and 1996, respectively.
8. CAPITAL STOCK
The Company has authorized 250,000 shares of voting preferred stock
without par value. No shares are issued or outstanding. Also, the Company
has authorized 250,000 shares of non-voting preferred stock without par
value. Of these, 125,000 shares have been designated Series A non-voting
convertible preferred stock with a stated value of $.06 per share, of
which 90,000 and 100,000 shares are issued and 82,857 shares and 92,857
shares are outstanding at December 31, 1997 and 1996, respectively. In
accordance with its terms, all of the outstanding Series A preferred stock
was converted into common shares of the Company on a one for one basis on
February 3, 1998.
In November 1997, the Company's Board of Directors adopted a Rights
Agreement which provides for one preferred share purchase right to be
associated with each share of the Company's outstanding common stock.
Shareholders exercising these rights would become entitled to purchase
shares of Series B Junior Participating Cumulative Preferred Stock. The
rights may be exercised after the time when a person or group of persons
without the approval of the Board of Directors acquire beneficial
ownership of 20 percent or more of the Company's common stock or announce
the initiation of a tender or exchange offer which if successful would
cause such person or group to beneficially own 20 percent or more of the
common stock. Such exercise may ultimately entitle the holders of the
rights to purchase for $80 per right, common stock of the Company having a
market value of $160. The person or groups effecting such 20 percent
acquisition or undertaking such tender offer will not be entitled to
exercise any rights. These rights expire November 2007 unless earlier
redeemed by the Company under circumstances permitted by the Rights
Agreement.
-16-
<PAGE> 22
On December 21, 1992, the Company adopted the 1992 Stock Option Plan which
provides for the issuance of options to purchase up to 400,000 common
shares of the Company. On October 11, 1995, the Company adopted the 1995
Stock Option Plan which provides for the issuance of options to purchase
up to an additional 400,000 common shares of the Company. All employees,
officers, directors, consultants and advisors providing services to the
Company are eligible to receive options under the Plans. In addition, the
Plans provide for the annual issuance of options to purchase 3,000 (5,000
effective January 1, 1998) shares of common stock to each non-employee
director of the Company. The plans generally provide for grants with the
exercise price equal to fair value on the date of grant, graduated vesting
periods of up to 5 years, and lives not exceeding 8 years. The following
summarizes all stock option transactions from July 1, 1994 through
December 31, 1997:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at June 30, 1994 127,250 10.12
Issued 170,300 9.79
Forfeited (9,900) 9.82
-------
Outstanding at June 30, 1995 287,650 9.94
Issued 97,250 7.59
-------
Outstanding at December 31, 1995 384,900 9.34
Issued 93,000 6.25
Forfeited (30,000) 8.81
-------
Outstanding at December 31, 1996 447,900 8.74
Issued 85,500 9.37
Exercised (114,120) 8.94
Forfeited (11,320) 8.28
-------
Outstanding at December 31, 1997 407,960 $ 8.82
=======
Options exerciseable at December 31:
1995 171,085 $10.05
1996 240,253 $ 9.62
1997 235,140 $ 9.24
-17-
<PAGE> 23
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
<S> <C> <C> <C> <C> <C>
$5.625 - $6.00 83,250 5.5 $ 5.91 34,750 $ 5.89
$7.50 - $8.875 139,000 6.1 $ 8.61 38,250 $ 8.40
$9.50 - $10.125 171,210 3.2 $ 9.77 156,140 $ 9.77
$13.125 - $20.00 14,500 5.0 $16.38 6,000 $20.00
------- -------
Total 407,960 4.8 $ 8.82 235,140 $ 9.24
======= ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation costs for
the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have resulted in the amounts as reported below. In
determining the estimated fair value of each option granted on the date of
grant the Company uses the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in the years ended
December 31, 1997, 1996, and 1995, respectively; dividend yield of 0%;
expected volatility of 40%, 47% and 47%; risk-free interest rates of
6.40%, 6.50%, and 6.50%; and expected life of 6 years. The weighted
average grant date fair value of options issued during the years ended
December 31, 1997 and 1996 and the six months ended December 31, 1995 was
$4.62, $3.39, and $4.01, respectively.
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
1997 1996 1995
---------- ---------- -----------
Net income (loss):
As reported $4,761,330 $2,805,959 $(490,254)
Pro forma $4,498,370 $2,561,260 $(675,838)
Income (loss) per share:
As reported:
Basic $ 1.16 $ 0.77 $ (0.13)
Diluted $ 1.10 $ 0.74 $ (0.13)
Pro forma:
Basic $ 1.10 $ 0.70 $ (0.18)
Diluted $ 1.04 $ 0.68 $ (0.18)
The pro forma amounts are not representative of the effects on reported net
income (loss) for future years.
-18-
<PAGE> 24
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, JUNE 30,
1997 1996 (UNAUDITED) 1995 1995
<S> <C> <C> <C> <C> <C>
Interest $2,619,374 $2,066,365 $1,956,831 $1,262,057 $1,913,000
========== ========== ========== ========== ==========
Federal, state
and local
income taxes -
net of refunds $2,306,150 $ (813,225) $ 22,150 $ 10,150 $ 487,000
========== ========== ========== ========== ==========
</TABLE>
During the years ended December 31, 1997 and 1996, and the six months
ended December 31, 1995, the Company entered into capital lease
arrangements for certain equipment which had a present value of $474,743,
$216,832, and $111,591, respectively. Accounts payable at December 31,
1997 and 1996 include a total of $133,017 and $42,994, respectively,
relating to the purchase of fixed assets.
-19-
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-65052 and 333-4434 of Rocky Shoes & Boots, Inc. on Form S-8 of our reports
dated March 6, 1998, appearing in and incorporated by reference in this Annual
Report on Form 10-K of Rocky Shoes & Boots, Inc., for the year ended December
31, 1997.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 26, 1998
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
-----------------
Each director and officer of Rocky Shoes & Boots, Inc., an Ohio
corporation (the "Company"), whose signature appears below hereby appoints Mike
Brooks and Curtis A. Loveland, or either of them, as his or her
attorney-in-fact, to sign, in his or her name and behalf and in any and all
capacities stated below, and to cause to be filed with the Securities and
Exchange Commission, the Company's Annual Report on Form 10-K (the "Annual
Report") for the fiscal year ended December 31, 1997, and likewise to sign and
file any amendments, including post-effective amendments, to the Annual Report,
and the Company hereby also appoints such persons as its attorneys-in-fact and
each of them as its attorney-in-fact with like authority to sign and file the
Annual Report and any amendments thereto in its name and behalf, each such
person and the Company hereby granting to such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that such attorney-in-fact
or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have executed this Power of Attorney, in
counterparts if necessary, effective as of March ___, 1998.
DIRECTORS/OFFICERS:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Mike Brooks Chairman, Chief Executive Officer, and
- ------------------------------------ President (Principal Executive Officer)
Mike Brooks
/s/ David Fraedrich Executive Vice President, Chief Financial
- ------------------------------------ Officer, Treasurer and a Director (Principal
David Fraedrich Financial and Principal Accounting Officer)
/s/ Curtis A. Loveland Secretary and a Director
- ------------------------------------
Curtis A. Loveland
/s/ Stanley I. Kravetz Director
- ------------------------------------
Stanley I. Kravetz
/s/ Barbara B. Fuller Director
- ------------------------------------
Barbara B. Fuller
/s/ Leonard L. Brown Director
- ------------------------------------
Leonard L. Brown
/s/ Robert D. Stix Director
- ------------------------------------
Robert D. Stix
/s/ James L. Stewart Director
- ------------------------------------
James L. Stewart
</TABLE>
- 33 -
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895456
<NAME> ROCKY SHOES & BOOTS, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,556,883
<SECURITIES> 0
<RECEIVABLES> 19,262,320
<ALLOWANCES> 997,398
<INVENTORY> 32,894,236
<CURRENT-ASSETS> 62,040,858
<PP&E> 30,557,770
<DEPRECIATION> 12,949,316
<TOTAL-ASSETS> 80,954,838
<CURRENT-LIABILITIES> 6,053,287
<BONDS> 0
0
5,400
<COMMON> 42,604,658
<OTHER-SE> 16,586,472
<TOTAL-LIABILITY-AND-EQUITY> 80,954,838
<SALES> 95,026,786
<TOTAL-REVENUES> 95,137,090
<CGS> 69,300,071
<TOTAL-COSTS> 85,716,412
<OTHER-EXPENSES> 128,162
<LOSS-PROVISION> 523,220
<INTEREST-EXPENSE> 2,552,732
<INCOME-PRETAX> 6,866,330
<INCOME-TAX> 2,105,000
<INCOME-CONTINUING> 4,761,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,761,330
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.10
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000895456
<NAME> ROCKY SHOES & BOOTS, INC.
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 349,637 325,115 365,404 1,235,443
<SECURITIES> 0 0 0 0
<RECEIVABLES> 13,378,883 8,969,239 15,842,777 27,477,369
<ALLOWANCES> 290,670 374,672 660,460 807,106
<INVENTORY> 25,389,902 23,319,925 30,600,366 31,402,783
<CURRENT-ASSETS> 40,460,146 33,246,434 47,065,889 60,642,478
<PP&E> 25,544,360 22,732,240 23,544,873 24,044,610
<DEPRECIATION> 10,035,763 8,179,209 8,726,080 9,323,124
<TOTAL-ASSETS> 58,090,171 49,954,948 63,976,294 77,177,592
<CURRENT-LIABILITIES> 9,851,565 9,240,140 23,504,587 35,310,512
<BONDS> 19,520,029 16,110,449 14,929,124 14,852,611
0 0 0 0
6,000 6,000 6,000 6,000
<COMMON> 14,543,947 14,543,947 14,543,847 14,543,847
<OTHER-SE> 11,825,142 8,818,988 9,678,010 11,047,197
<TOTAL-LIABILITY-AND-EQUITY> 58,090,171 49,954,948 63,976,294 77,177,592
<SALES> 73,147,821 10,260,665 25,450,219 49,347,778
<TOTAL-REVENUES> 73,365,629 10,260,665 28,531,362 53,896,478
<CGS> 55,103,578 7,434,072 18,260,316 36,602,849
<TOTAL-COSTS> 67,436,097 7,434,072 18,260,316 36,602,849
<OTHER-EXPENSES> 101,863 0 42,299 24,081
<LOSS-PROVISION> 384,813 29,926 136,656 211,942
<INTEREST-EXPENSE> 2,103,556 345,517 743,006 1,422,450
<INCOME-PRETAX> 3,724,113 (250,243) 855,619 2,493,574
<INCOME-TAX> 918,154 (50,048) 196,792 465,560
<INCOME-CONTINUING> 2,805,959 (200,195) 658,827 2,028,014
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,805,959 (200,195) 658,827 2,028,014
<EPS-PRIMARY> 0.77 (0.05) 0.18 0.55
<EPS-DILUTED> 0.74 (0.05) 0.17 0.54
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000895456
<NAME> ROCKY SHOES & BOOTS, INC.
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 297,725 802,127 159,449
<SECURITIES> 0 0 0
<RECEIVABLES> 10,903,201 20,929,988 40,103,138
<ALLOWANCES> 535,858 893,036 1,068,832
<INVENTORY> 34,971,961 40,715,959 38,441,793
<CURRENT-ASSETS> 47,211,083 64,691,935 80,520,696
<PP&E> 26,259,935 27,702,902 28,869,329
<DEPRECIATION> 10,720,023 11,398,735 12,175,355
<TOTAL-ASSETS> 64,877,979 83,152,113 99,165,437
<CURRENT-LIABILITIES> 14,040,312 28,785,659 19,671,426
<BONDS> 21,492,760 19,520,029 46,879,079
0 0 0
6,000 5,400 5,400
<COMMON> 14,905,725 15,268,591 15,330,841
<OTHER-SE> 12,014,121 13,031,211 14,804,830
<TOTAL-LIABILITY-AND-EQUITY> 64,877,979 83,152,133 99,165,437
<SALES> 12,262,073 34,268,258 65,830,000
<TOTAL-REVENUES> 12,262,073 34,334,474 65,891,299
<CGS> 8,985,198 24,710,110 47,527,279
<TOTAL-COSTS> 11,561,736 31,428,254 59,339,601
<OTHER-EXPENSES> 27,709 75,351 78,645
<LOSS-PROVISION> 30,528 62,559 133,678
<INTEREST-EXPENSE> 465,267 1,106,298 1,996,277
<INCOME-PRETAX> 249,501 1,724,571 4,415,477
<INCOME-TAX> 60,522 518,502 1,435,789
<INCOME-CONTINUING> 188,979 1,206,069 2,979,688
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 188,979 1,206,069 2,979,688
<EPS-PRIMARY> 0.05 0.33 0.80
<EPS-DILUTED> 0.05 0.31 0.75
</TABLE>
