OHIO NO. 31-1364046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $95,775,838 on June 30, 2004.
There were 5,200,021 shares of the Registrant's Common Stock outstanding on March 1, 2005.
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference in Part III.
PART I
PAGE
Item 1. Business. 3
Item 2. Properties. 14
Item 3. Legal Proceedings. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuers Purchases of Equity Securities. 15
Item 6. Selected Consolidated Financial Data. 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 8. Financial Statements and Supplementary Data. 27
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. 28
Item 9A. Controls and Procedures. 28
Item 9B. Other Information. 30
PART III
Item 10. Directors and Executive Officers of the Registrant. 30
Item 11. Executive Compensation. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management. 30
Item 13. Certain Relationships and Related Transactions. 30
Item 14. Principal Accountant Fees and Services. 30
PART IV
Item 15. Exhibits and Financial Statement Schedules. 30
SIGNATURES 35
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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.
At December 31, 2004, Rocky Shoes & Boots, Inc. had three subsidiaries:
Five Star Enterprises Ltd. ("Five Star"), a Cayman Islands corporation,
which operates a manufacturing facility in La Vega, Dominican Republic; Lifestyle
Footwear, Inc. ("Lifestyle"), a Delaware corporation, which operates
a manufacturing facility in Moca, Puerto Rico; and Rocky Canada, Inc., an
Ontario corporation, a sales and distribution operation in Waterloo, Ontario.
Unless the context otherwise requires, all references to "Rocky"
or the "Company" include Rocky Shoes & Boots, Inc. and its subsidiaries.
On December 6, 2004, the Company announced a definitive agreement to
acquire EJ Footwear Group, consisting of three subsidiaries, EJ Footwear LLC,
Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC. EJ Footwear Group and its
subsidiaries were owned by SILLC Holdings LLC. The Company announced the
completion of this acquisition on January 6, 2005. (See Note 2 "Acquisitions" in
the financial statements).
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 and Chief
Executive Officer, Mike Brooks. The business was sold in 1959 to a company
headquartered in Lancaster, Ohio. John W. Brooks, the father of Mike Brooks,
remained as an employee of the business when it was sold. In 1975, John W.
Brooks formed John W. Brooks, Inc. (later known as Rocky Shoes & Boots Co.
("Rocky Co.")) as an Ohio corporation, reacquired the Nelsonville, Ohio
operating assets of the original company and moved the business's principal
executive offices back to Nelsonville, Ohio. In 1993, the Company, Rocky Co.,
Lifestyle and Five Star were parties to reorganization prior to the Company's
initial public offering. In 1996, Rocky Co. was merged with and into the
Company, and in 2003 Rocky Canada, Inc. was established resulting in the
Company's present corporate structure. In April 2003, the Company acquired
certain assets of Gates-Mills, Inc., including the Gates brand name.
In January 2005 the Company acquired EJ Footwear Group, consisting of
three subsidiaries, EJ Footwear LLC, Georgia Boot LLC, and HM Lehigh Safety Shoe
Co. LLC. EJ Footwear Group is also a licensee of the Dickies and John Deere
brands for footwear. This acquisition expanded the Company's portfolio of
branded products, and is expected to further strengthen its market position in
footwear and related apparel and accessories. The total purchase price,
including a closing date working capital adjustment, for 100% of the equity was
$91.2 million in cash plus 484,261 shares of Rocky Common Stock value at
$11,573,000 (valued at $10 million in the definitive agreement). Effective with
the closing of this transaction, Rocky entered into agreements with GMAC
Commercial Finance LLC and American Capital Strategies, Ltd. for credit
facilities totaling $148 million to fund the acquisition and replace its
existing revolving credit facility.
In the past, the Company has benefited from a relatively low effective tax
rate. Rocky and Lifestyle are subject to U.S. Federal income taxes. 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. In 2003, as a result of the
formation of Rocky Canada, Inc., the Company is now subject to Canadian income
tax. At December 31, 2004, a provision of $157,000 has been made for U.S. taxes
on the repatriation of $3,000,000 of accumulated undistributed earnings of Five
Star through December 31, 2004. At December 31, 2004, after the planned
repatriation above, approximately $6,839,000 is remaining that would become
taxable upon repatriation to the United States. During 2005, the Company will
complete its evaluation of foreign earnings and may repatriate up to an
additional $5,000,000 of accumulated undistributed earnings, which could result
in up to $260,000 of additional tax.
The Company operates in one financial reporting segment, footwear and
related apparel and accessories. Financial information, including revenues,
pre-tax income, and assets are included in the consolidated financial
statements.
ROCKY(R), GATES(R), DURANGO(R), GEORGIA BOOT(R), AND LEHIGH(R) are federally registered
trademarks of Rocky Shoes & Boots, Inc. This report also refers to trademarks
of corporations other than the Company. See "Business - Patents, Trademarks
and Trade Names."
STRATEGY
The Company's objective is to design, supply and market innovative, high
performance, branded footwear and related apparel and accessories that enhance
shareholder value while improving the quality of life of our employees,
customers and the communities in which we operate. Key elements of the Company's
strategy are as follows:
Leverage the portfolio of brands. The Company believes the ROCKY, GATES,
DURANGO, GEORGIA BOOT and LEHIGH SAFETY SHOES brands are recognizable and
established names for performance and quality conscious consumers in the rugged
outdoor and occupational segments of the men's footwear market. Additionally,
the Company is a licensee of the Dickies and John Deere brands. The Company
plans to continue leveraging these brands with emphasis on the rugged outdoor
and occupational shoe markets, including recent product introductions in the
western work boot segment of the occupational market, and complementary apparel
and accessories in an effort to extend these brands.
Build customer and consumer relationships. The Company plans to improve
customer and consumer relationships through innovative sales and marketing
methods. These enhanced relationships will enable the Company to better
understand and satisfy its customers' and consumers' needs.
Maximize benefit of current infrastructure. The Company plans to more
extensively utilize significant investments made in distribution and information
systems. These systems will enable the Company to better service its customers
in a more cost efficient manner.
Focus future investment. The Company plans to continue as the leader in
design and engineering of new and innovative products, especially for the rugged
outdoor and occupational markets, and to focus future investments on achieving
this goal.
Expand product sourcing. The Company plans to emphasize product sourcing
over its own manufacturing as it grows. The Company's sourced products
represented approximately 63% of net sales in 2004. EJ Footwear Group, which was
acquired in January 2005, is expected to double the Company's 2004 business and
sources 100% of its products. The Company plans to source products which are
manufactured to its specifications by independent manufacturers in the Far East.
This enables the Company to offer products for sale at price points that cannot
generally be achieved with products manufactured in its own plants in Puerto
Rico and the Dominican Republic.
PRODUCT LINES
The Company's product lines in 2004 consisted of rugged outdoor,
occupational, military and casual footwear and outdoor apparel and Gates gloves.
ROCKY branded products emphasize quality, patented materials, such as GORE-TEX
waterproof breathable fabric, CORDURA nylon fabric, CAMBRELLE cushioned lining
and THINSULATE thermal insulation. DURANGO and GEORGIA BOOT, acquired in January
2005 through the acquisition of EJ Footwear Group, include some of the same
quality materials as well as Comfort Core(R) Insole Technology and SPR(R)
leather.
The following table summarizes the Company's product lines:
Rugged Outdoor Footwear. Rugged outdoor footwear, the Company's largest product
line in Fiscal 2004, had net sales of $46.6 million, or 35.3%, of total net
sales. Warm weather conditions in the Company's markets during the fall and
winter months of Fiscal 2004 adversely impacted sales for the year. The Company's
rugged outdoor footwear line consists of all season sport/hunting boots that
are typically waterproof and insulated and a line of rubber footwear. These
products are designed to keep outdoorsmen comfortable in extreme conditions.
Most of the Company's rugged outdoor footwear styles have outsoles which are
designed to provide excellent cushioning and traction. Although Rocky's rugged
outdoor footwear is regularly updated to incorporate new camouflage patterns,
the Company believes its products in this category are relatively insensitive
to changing fashion trends.
Occupational Footwear. Occupational footwear, the Company's second largest
product line in Fiscal 2004, had sales of $40.8 million, or 30.9%, of net sales.
The growth in occupational footwear sales is attributable to solid gains in the
work category, especially work western boots. 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. 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, work
western, and black duty footwear sold to security guards and law enforcement
agents.
Military Footwear. Sales of military footwear were $18.5 million in Fiscal
2004, representing 14.0% of net sales. These sales were attributable to two
subcontracts to produce boots for the U.S. military that were awarded in
September 2003 and March 2004.
Casual Footwear. Sales of the Company's casual footwear were $2.4 million
in Fiscal 2004, representing 1.8% of net sales. The Company's casual products
target the upscale segment of the market and include well-styled, comfortable
leather shoes of a variety of constructions, including traditional hand sewn.
Most of the Company's footwear in this segment is waterproof and highly
functional for outdoor activity.
Apparel. Sales of apparel products were $8.9 million in Fiscal 2004,
representing 6.7% of net sales. The Company began marketing outdoor gear
consisting of hunting apparel in 2002 and extended this product line to the
occupational market in February 2004. Apparel is currently marketed through the
Company's rugged outdoor footwear and occupational channels, respectively, and
is designed to leverage the Company's reputation within these lines by offering
products directly complementary to the specific needs of hunters, outdoorsmen,
and occupational workers.
Gates gloves. In April 2003 the Company acquired certain assets of
Gates-Mills, Inc., including the Gates brand name. Sales of Gates branded
products were $9.6 million in Fiscal 2004, representing 7.3% of net sales. Gates
branded products are primarily hunting, ski and dress gloves.
Factory outlet stores. The Company's factory outlet stores had $4.0
million in sales for Fiscal 2004, representing 3.0% of net sales. These stores
operate in Nelsonville, Ohio and Edgefield, South Carolina. The Edgefield, South
Carolina store was opened in August 2002. The outlet stores primarily sell first
quality products, factory damaged goods and close-outs from the Company and
Rocky licensed products. Related products from other manufacturers are also sold
in these stores. Fiscal 2004 net sales were adversely impacted by warm weather
in the fall and winter months.
Other. Sales of other products were $1.4 million in Fiscal 2004,
representing 1.0% of net sales. The Company manufactures and/or markets a
variety of accessories, including innersole support systems, foot warmers, laces
and foot powder.
Net sales composition. The following table indicates the percentage of net
sales derived from each major product line and the factory outlet stores for the
periods indicated. Historical percentages may not be indicative of the Company's
future product mix.
PRODUCT DESIGN AND DEVELOPMENT
Product design and development are initiated both internally by the
Company's development staff and externally by customers and suppliers. The
Company's product development personnel, marketing personnel and sales
representatives work closely together to identify opportunities for new styles,
camouflage patterns, design improvements and the incorporation of new materials.
These opportunities are reported to the Company's development staff which
oversees the development and testing of the new products. The Company strives to
develop products which respond to the changing needs and tastes of consumers.
SALES, MARKETING AND ADVERTISING
The Company has developed comprehensive marketing and advertising programs
to gain national exposure and create brand awareness for its portfolio of
branded products in target markets. By creating strong brand awareness, the
Company seeks to increase the general level of retail demand for its products,
expand the customer base and increase brand loyalty. The Company's footwear and
apparel is sold by more than 3,000 retail and mail order companies in the United
States and Canada. One customer, which represented sales of military footwear,
accounted for 14% of the Company's revenues in Fiscal 2004. The Company believes
the loss of any single customer would not have a material adverse effect on the
Company's financial position.
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 sales representatives
who sell the Company's products throughout the United States and Canada. During
Fiscal 2004, these representatives were either independent representatives who
carried ROCKY and GATES branded products as well as other non-competing products
or company employees who carried the ROCKY and GATES branded products
exclusively.
The Company advertises and promotes its brands through a variety of
methods, including product packaging, national print and television advertising
and a telemarketing operation. In addition, the Company attends numerous
tradeshows, which have historically been an important source of new orders, and
also works to establish its portfolio of brands within the trade industry. The
Company's marketing personnel have developed a product list, product catalog and
dealer support system which includes attractive point-of-sale displays and co-op
advertising programs.
The Company believes its long-term reputation for quality has increased
awareness of its portfolio of brands. To further increase the strength of its
brands, the Company has targeted the majority of its advertising efforts toward
consumers. A key component of this strategy includes advertising through
cost-effective cable broadcasts and national print publications aimed at
audiences which share the demographic profile of the Company's typical
customers. The Company's print advertisements and television commercials
emphasize the waterproof nature of the Company's products as well as its high
quality, comfort, functionality and durability. Management believes that by
continuing to target consumers, its portfolio of brands will become more
recognizable and establish the Company as an overall leader in the industry
leading to greater retail demand for the product.
MANUFACTURING AND SOURCING
The Company manufactures footwear in the Company's facilities located in
the Dominican Republic and Puerto Rico, and sources footwear, apparel and
accessories from factories in the Far East.
Approximately 37% of the Company's Fiscal 2004 net sales were attributable
to products produced in its own facilities in the Dominican Republic and Puerto
Rico. The Company also sources products from manufacturers in the Far East,
primarily China, which accounted for approximately 63% of net sales in Fiscal
2004. A greater portion of the Company's products are expected to be sourced in
the future following the acquisition of EJ Footwear Group in January 2005
because substantially all EJ Footwear Group's products are sourced. The Company
can generally achieve higher initial gross margins on sourced products. The
Company sources products from manufacturers who have demonstrated the intent and
ability to maintain the high quality that has become associated with its
portfolio of brands.
Quality control is stressed at every stage of the manufacturing process and
is monitored by trained quality assurance personnel at each of the Company's
manufacturing facilities. Every pair of ROCKY footwear, or its component parts,
produced at the Company's facilities is inspected at least five times during
the manufacturing process with some styles inspected up to nine times. Every
GORE-TEX waterproof fabric bootie liner is individually tested by filling
it with compressed air and submerging it in water to verify that it is waterproof.
Quality control personnel at the finished goods distribution facility located
near Logan, Ohio conduct quality control testing on incoming sourced finished
goods and raw materials and inspect random samples from the finished goods
inventory from each of the Company's manufacturing facilities to ensure that
all items meet the Company's high quality standards. A portion of the manufacturing
employees' compensation is based on the level of product quality of their
work group.
As part of the Company's quality control process, the Company uses employees
in its China office to visit foreign factories to conduct quality control
reviews of raw materials, work in process inventory, and finished goods. In
addition, upon arrival at the Company's Ohio distribution center, another
inspection of sourced products is conducted by the Director of Quality Control.
The Company does not use hedging instruments with respect to foreign sourced
products.
Compliance with federal, state and local regulations with respect to the
environment has not had any material effect on the earnings, manufacturing
process, capital expenditures or competitive position of the Company. Compliance
with such laws or changes therein could have a negative impact.
The Company's products are distributed nationwide and in Canada from the
Company's finished goods distribution facilities located near Logan, Ohio
and Waterloo, Ontario, respectively. With the acquisition of EJ Footwear Group,
the Company's products are also distributed nationwide from an outsourced
distribution facility in Tunkhannock, Pennsylvania.
SUPPLIERS
The Company purchases raw materials from a number of domestic and foreign
sources. The Company does not have any long-term supply contracts for the
purchase of its raw materials, except for limited blanket orders on leather
to protect wholesale selling prices for an extended period of time. The principal
raw materials used in the production of the Company's products, in terms of
dollar value, are leather, GORE-TEX waterproof breathable fabric, CORDURA
nylon fabric and soling materials. The Company believes that these materials
will continue to be available from its current suppliers and, with the possible
exception of GORE-TEX waterproof breathable fabric, there are acceptable alternatives
to these suppliers and materials.
GORE-TEX waterproof fabric is purchased under license directly from W. L.
Gore & Associates, Inc. ("Gore"). A majority of the Company's
footwear incorporates GORE-TEX waterproof breathable fabric. The Company,
which has been a customer of Gore since 1980, was the first footwear manufacturer
licensed by Gore to manufacture, promote, sell and distribute footwear worldwide
using GORE-TEX waterproof breathable fabric. The Company is currently one
of the largest customers of GORE-TEX waterproof breathable fabric for footwear.
Although other waterproofing techniques or materials are available, the Company
places a high value on its GORE-TEX license because the GORE-TEX trade name
has high brand name recognition and the GORE-TEX waterproof breathable fabric
used in the manufacture of ROCKY and GEORGIA BOOT 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 ROCKY shoe or boot designed and produced by the Company that
incorporates GORE-TEX waterproof breathable fabric must be tested and approved
by Gore before the Company is permitted to manufacture or sell commercial
quantities of that style of footwear. Gore's testing involves immersing the
Company's footwear prototype for days in a water exclusion tester and flexing
the prototype 500,000 times, simulating a 500-mile march through several inches
of water. The prototype is then placed in a sweat absorption and transmission
tester to measure "breathability," which is the amount of perspiration
that can escape from the footwear.
All of the Company's GORE-TEX fabric footwear is guaranteed to be waterproof
for one year from the date of purchase. When a customer claims that a product
is not waterproof, the product is returned to the Company for further testing.
If the product fails this testing process, it is either replaced or credit
is given, at the customer's discretion. The Company believes that the claims
associated with this guarantee have been consistent with guarantee claims
in the footwear industry.
SEASONALITY AND WEATHER
The Company has historically experienced significant seasonal fluctuations
in the sale of rugged outdoor footwear, apparel and accessories. A majority
of orders are placed in January through April for delivery in July through
October. In order to meet demand, the Company must manufacture rugged outdoor
footwear year round to be in a position to ship advance orders for these products
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
and apparel lines, are used by consumers in cold or wet weather. Mild or dry
weather conditions can have a material adverse effect on sales of the Company's
products, particularly if they occur in broad geographical areas during late
fall or early winter. Also, due to variations in weather conditions from year
to year, results for any single quarter or year may not be indicative of results
for any future quarter or year.
Retailers in general have begun placing orders closer to the rugged outdoor
selling season. This historically increased the Company's business risk because
it had to produce and carry inventories for relatively longer periods. In
addition, the later placement of orders could 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. The acquisition of EJ Footwear Group in January
2005 is expected to double the Company's Fiscal 2004 business and is expected
to significantly increase sales of occupational products. As a result, the
Company's risk to seasonality and weather is expected to decline beginning
in Fiscal 2005 since occupational footwear is sold throughout the year.
BACKLOG
At December 31, 2004, backlog was $8.7 million, including approximately
$3.3 million related to a military contract. At December 31, 2003, backlog
was $11.4 million, including approximately $5.7 million related to a military
contract. 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. The Company's
contracts to produce boots for delivery to the U.S. military generally include
specific quantities and intervals for shipment.
PATENTS, TRADEMARKS AND TRADE NAMES
The Company owns numerous design and utility patents for footwear and footwear
components (such as insoles and outsoles) in the United States and in foreign
countries including Canada, Mexico, People's Republic of China, and Taiwan.
The Company is not aware of any infringement of its patents or that it is
infringing any patents owned by third parties.
The Company owns United States federal registrations for its marks ROCKY(R),
ROCKY BOOTS and Design(R) (which claims a ram's head Design as part of the
mark), ROCKY and Design(R) (which claim a ram's head Design as part of the
mark), ROCKY and Design(R) (which claims a mountain range and ram's head inside
a triangle), ADIRONDACK COLLECTION(R), ADVANTA-FLEX(R), ALPHA FORCE(R), AOG(R),
AQUA GUARD(R), ARCTIC TOE(R), ASTRO(R), BARCLAY(R), BARNSTORMERS and Design(R)
(which claims an airplane on a path through the word), BEACON STRATEGIC
Additional mark variations for ROCKY(TM) and Design (which claims a ram's head
Design as part of the mark), BIG MOUNTAIN(TM), CLIMATRAC(TM), CONSTRUX(TM),
G and Design(TM), GATES(TM), GATES SMART GLOVE(TM), GEORGIA GIANT(TM), MUD LITE(TM),
MUD MASTER(TM), PRO-HIKER(TM), PROTECH(TM), SMART GLOVE BY GATES(R), and WHATEVER
IT TAKES(TM), are the subject of pending United States federal applications
for registration.
In addition, the Company uses and has common law rights in the marks ROCKY(R)
MOUNTAIN STALKERS(R), and other ROCKY(R) marks.
With the acquisition of EJ Footwear Group, the Company has increased distribution
of its goods in several foreign countries, including individual countries
in Western Europe (as well as the European Union), Canada, Japan, People's
Republic of China, Taiwan, and Australia. The Company has received trademark
registrations of its marks COMFORT CORE(R), DURANGO(R), FARM & RANCH(R),
FIT FOR SAFETY(R), FIT FOR WORK(R), GEORGIA BOOT(R), LEHIGH(R), NORTHLAKE(R),
PROMISE PLUS(R), and ROCKY(R) in certain of these 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. As part of the acquisition
of EJ Footwear Group, the Company acquired a license to use various trademarks
owned by Deere & Company, including JOHN DEERE(R) and NOTHING RUNS LIKE
A DEERE(R). Also as part of the acquisition of EJ Footwear Group, the Company
acquired a license to use various trademarks owned by Williamson-Dickie Manufacturing
Company, including DICKIES(R) and DICKIES THE BRAND THAT WORKS!(R). 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 products. The Company believes that, based
on these factors, it competes favorably in the rugged outdoor and occupational
footwear and apparel market niches. The Company competes in markets against
competitors with greater financial, distribution and marketing resources.
These competitors have strong brand name recognition in the markets they serve.
The footwear and apparel industry is subject to rapid changes in consumer
preferences. The Company's casual product line and certain styles within its
rugged outdoor and occupational product lines are susceptible to fashion trends.
Therefore, the success of these products and styles are more dependent on
the Company's ability to anticipate and respond to changing fashion trends
and consumer demands within its niche market in a timely manner. The Company's
inability or failure to do so could adversely affect consumer acceptance of
these product lines and styles and could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
At December 31, 2004, the Company had approximately 1,079 full-time employees
and 12 part-time employees. Approximately 913 of these full-time employees
are in the Dominican Republic and Puerto Rico. The Company has approximately
825 employees engaged in production and the balance in managerial and administrative
positions. EJ Footwear Group, acquired in January 2005, added 438 full-time
and 54 part-time employees. The Company considers its relations with all of
its employees to be good.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). In addition to the other information in this report, readers should
carefully consider that the following important factors, among others, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
for Fiscal 2005 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Dependence on Sales Forecasts. The Company's investments in infrastructure and
product inventory are based on sales forecasts and are necessarily made in advance
of actual sales. The markets in which the Company does business are highly competitive,
and the Company's business is affected by a variety of factors, including brand
awareness, changing consumer preferences, product innovations, susceptibility
to fashion trends, retail market conditions, weather conditions and economic
and other factors. One of management's principal challenges is to improve its
ability to predict these factors, in order to enable the Company to better match
production with demand. In addition, the Company's growth over the years has
created the need to increase the investment in infrastructure and product inventory
and to enhance the Company's systems. To the extent sales forecasts are not
achieved, costs associated with the infrastructure and carrying costs of product
inventory would represent a higher percentage of revenue, which would adversely
affect the Company's financial performance.
Changes in Consumer Demand. Demand for the Company's products, particularly
the Company's casual product line and certain styles within its rugged outdoor
and occupational product lines, may be adversely affected by changing fashion
trends. The future success of the Company will depend upon its ability to
anticipate and respond to changing consumer preferences and fashion trends
in a timely manner. The Company's failure to adequately anticipate or respond
to such changes could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, sales of the Company's
products may be negatively affected by weak consumer spending as a result
of adverse economic trends or uncertainties regarding the economy. See "Business
-- Competition."
Seasonality. The Company has historically experienced significant seasonal
fluctuations in the sale of its products. The Company's operating results
have varied significantly in the past, partly due to such seasonal fluctuations.
A majority of the orders for the Company's rugged outdoor footwear have historically
been 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. EJ Footwear Group was acquired in January 2005. This
acquisition is expected to reduce the Company's exposure to seasonality beginning
in 2005 since most of the EJ Footwear Group's brands are occupational products
that are sold throughout the year. Additionally, the Company does not have
long-term contracts with its customers. 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 possible 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 and apparel lines, have historically been used primarily
in cold or wet weather. Mild or dry weather has in the past and may in the
future have a material adverse effect on sales of the Company's products,
particularly if mild or dry weather conditions occur in broad geographical
areas during late fall or early winter. Also, due to variations in weather
conditions from year to year, results for any single quarter or year may not
be indicative of results for any future period. EJ Footwear Group was acquired
in January 2005. This acquisition is expected to reduce the Company's exposure
to seasonality beginning in 2005 since most of the EJ Footwear Group's brands
are occupational products that are sold throughout the year. See "Business
-- Seasonality and Weather."
Competition. The footwear and apparel industries are intensely competitive,
and the Company expects competition to increase in the future. Many of the
Company's competitors have greater financial, distribution and marketing resources
than the Company. The Company's ability to succeed depends on its ability
to remain competitive with respect to the quality, design, price and timely
delivery of products. Competition could materially adversely affect the Company's
business, financial condition and results of operations. See "Business
-- Competition."
Reliance on Suppliers. The Company purchases raw materials from a number
of domestic and foreign sources. The Company does not have any long-term supply
contracts for the purchase of its raw materials, except for limited blanket
orders on leather. The principal raw materials used in the production of the
Company's footwear, in terms of dollar value, are leather, GORE-TEX waterproof
breathable fabric, CORDURA nylon fabric and soling materials. The Company
currently believes there are acceptable alternatives to these suppliers and
materials, with the exception of the GORE-TEX waterproof breathable fabric.
The Company is currently one of the largest customers of GORE-TEX waterproof
fabric for use in footwear. The Company's licensing agreement with W.L. Gore
& Associates, Inc. may be terminated by either party upon advance written
notice to the other party by October 1 of the current year of the agreement
that the agreement will terminate, effective December 31 of that same year.
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 and GEORGIA BOOT footwear has a reputation
for quality and proven performance. Even though the Company does not believe
that its supply of GORE-TEX waterproof breathable fabric will be interrupted
in the future, no assurance can be given in this regard. The Company's loss
of its license to use GORE-TEX waterproof breathable fabric could have a material
adverse effect on the Company's competitive position, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Suppliers."
Changing Retailing Trends. A continued shift in the marketplace from traditional
independent retailers to large discount mass merchandisers has increased the
pressure on many footwear manufacturers to sell products to large discount
mass merchandisers at less favorable margins. Because of competition from
large discount mass merchandisers, a number of small retailing customers of
the Company have gone out of business, and in the future more of these customers
may go out of business, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
progressive independent retailers have attempted to improve their competitive
position by joining buying groups, stressing personal service and stocking
more products that address specific local needs, a continued shift to discount
mass merchandisers could have a material adverse effect on the Company's business,
financial condition and results of operations. 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
and Chief Executive Officer, David Sharp, President and Chief Operating Officer,
and James McDonald, Executive Vice President, Chief Financial Officer and
Treasurer. Mr. Brooks has an at-will employment agreement with the Company.
The employment agreement provides that in the event of termination of employment
with the Company, he will receive a severance benefit and may not compete
with the Company for a period of one year. 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. A majority of the Company's products
are produced in the Dominican Republic and Far East, primarily the People's
Republic of China. 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 and Far East; foreign governmental regulation and taxation; fluctuations
in foreign exchange rates; changes in economic conditions; changes in the
political stability of the these countries; and changes in relationships between
the United States and these countries. If any such factors were to render
the conduct of business in these countries undesirable or impracticable, the
Company would have to source its products elsewhere. There can be no assurance
that additional sources or products would be available to the Company or,
if available, that such sources could be relied on to provide product at 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 are capped beginning in 2002 and terminate in 2006. In addition,
the Company's local tax abatements in Puerto Rico are scheduled to expire
in 2009. In 2004, the Company elected to repatriate $3,000,000 of earnings
and accrued $157,000 of related taxes under the provisions of the American
Jobs Creation Act of 2004. No income taxes are provided on the approximately
$6,839,000 of remaining undistributed earnings. During 2005, the Company will
complete its evaluation of foreign earnings and may repatriate up to an additional
$5,000,000 of accumulated undistributed earnings, which could result in up
to $260,000 of additional tax. As a result of the January 2005 acquisition
of EJ Footwear Group, the Company's effective tax rate for Fiscal 2005 is
expected to increase compared to Fiscal 2004 as a higher percentage of profits
will be taxed at U. S. tax rates.
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. The
Company cannot anticipate future changes in such laws. Increases in effective
tax rates or changes in tax laws may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Manufacturing. The Company currently plans to retain its internal manufacturing
capability in order to continue benefiting from expertise the Company has
gained with respect to footwear manufacturing methods conducted at its manufacturing
facilities. The Company continues to evaluate its manufacturing facilities
and independent manufacturing alternatives in order to determine the appropriate
size and scope of its manufacturing facilities. There can be no assurance
that the costs of products that continue to be manufactured by the Company
can remain competitive with sourced products.
Certain Corporate Governance Measures. The Company has adopted certain corporate
governance measures which, individually or collectively, could delay or frustrate
the removal of incumbent directors and could make a merger, tender offer or
proxy contest involving the Company, more difficult, even if such events might
be deemed by certain shareholders to be beneficial to the interest of the
shareholders.
Volatility of Market Price. From time to time, there may be significant
volatility in the market price of the Common Stock. The Company believes that
the current market price of its Common Stock reflects expectations that the
Company will be able to continue to market its products profitably and develop
new products with market appeal. If the Company is unable to market its products
profitably and develop new products at a pace that reflects the expectations
of the market, investors could sell shares of the Common Stock at or after
the time that it becomes apparent that such expectations may not be realized,
resulting in a decrease in the market price of the Common Stock.
In addition to the operating results of the Company, changes in earnings
estimates by analysts, changes in general conditions in the economy or the
financial markets or other developments affecting the Company or its industry
could cause the market price of the Common Stock to fluctuate substantially.
In recent years, the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies, including the Company, for reasons
unrelated to their operating performance. See "Market for the Registrant's
Common Equity and Related Matters."
Accounting Standards. Changes in the accounting standards promulgated by
the Financial Accounting Standards Board or other authoritative bodies could
have an adverse effect on the Company's future reported operating results.
Environmental and Other Regulation. The Company is subject to various environmental
and other laws and regulations, which may change periodically. Compliance
with such laws or changes therein could have a negative impact on the Company's
future reported operating results.
Limited Protection of Intellectual Property. The Company regards certain
of its footwear designs as proprietary and relies on patents to protect those
designs. The Company believes that the ownership of the patents is a significant
factor in its business. Existing intellectual property laws afford only limited
protection of the Company's proprietary rights, and it may be possible for
unauthorized third parties to copy certain of the Company's footwear designs
or to reverse engineer or otherwise obtain and use information that the Company
regards as proprietary. The 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. See "Business
-- Patents, Trademarks and Trade Names."
Integration of EJ Footwear Group. In light of the Company's recent acquisition
of EJ Footwear Group, the Company's success will depend in part on its ability
to integrate the operations and personnel of EJ Footwear Group along with
the Company into a single organizational structure. There can be no assurance
that the Company will be able to effectively integrate the existing operations
of the Company with the newly-acquired EJ Footwear Group. Integration of these
operations could also place additional pressures on the Company's management
as well as on its key resources. The failure to successfully manage this integration
could have a material adverse effect on the Company.
Risks Associated with Forward Looking Statements. This Annual Report on
Form 10-K contains certain forward-looking statements within the meaning of
The Company owns, subject to a mortgage, executive offices which are located
in Nelsonville, Ohio in a two-story 25,000 square foot building. The second
floor of this building houses the Company's executive offices. The first floor
will house additional executive offices in the future.
The Company owns a 5,000 square foot office building in Nelsonville, Ohio,
subject to a mortgage, which is currently under lease to an unrelated entity.
The Company owns, subject to a mortgage, a 98,000 square foot distribution
warehouse in Nelsonville, Ohio. This facility is currently under lease to
an unrelated entity.
In 2004 the Company leased a 41,000 square foot facility in Nelsonville,
Ohio. Until January 2005, the facility was leased from the William Brooks
Real Estate Company, which is 25% owned by Mike Brooks, Chairman and CEO of
the Company. In January 2005, the Company purchased the facility for $505,000.
This building was previously used for manufacturing and presently houses the
Company's factory outlet store.
Lifestyle leases two manufacturing facilities, one of which contains 44,978
square feet and the other which contains 39,581 square feet in Moca, Puerto
Rico. These buildings are leased from the Puerto Rico Industrial Development
Company under a net operating lease which expires in 2009.
Five Star's manufacturing facility, consisting of three connected buildings
and a stand-alone building, is located in a tax-free trade zone in the Dominican
Republic. Five Star leases 82,000 square feet of this facility from the Dominican
Republic Corporation for Industrial Development (the "DRCID") under
a Consolidation of Lease Contract, dated as of February 1997, the term of
which expires on June 1, 2009. Five Star leases an additional stand-alone
37,000 square foot building from the DRCID under a lease that expires March
1, 2008.
The Company owns, subject to a mortgage, a finished goods distribution facility
near Logan, Ohio. The building contains 192,000 square feet and is situated
on 17.9 acres of land. The finished goods distribution facility became fully
operational in the first quarter of 2000.
Rocky Canada leases an approximately 5,000 square foot facility in Waterloo,
Ontario, from Marshland Centre Limited. The facility is used for distribution
of certain of the Company's products in Canada. The lease expires on July
31, 2006 with an option for a five-year extension.
EJ Footwear Group leases two offices in Franklin, TN and one office in Vestal,
NY. The Franklin, TN offices are approximately 13,400 and 22,500 square foot
facilities and the leases expire on August 30, 2005 and April 10, 2007, respectively.
The Vestal, NY office is an approximately 24,000 square foot facility and the
lease expires on June 30, 2005.
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.
Not applicable.
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:
On March 1, 2005, the last reported sales price of the Common Stock on the
NASDAQ National Market was $31.56 per share. As of March 1, 2005, there were
114 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 Company's credit facility restricts the payment of
dividends on the Common Stock. At December 31, 2004, the Company had no retained
earnings available for distribution.
This Management's Discussion and Analysis of Financial Condition and Result
of Operations ("MD&A") describes the matters that we consider
to be important to understanding the results of our operations for each of
the three years in the period ended December 31, 2004, and our capital resources
and liquidity as of December 31, 2004 and 2003. Use of the terms "Rocky",
the "Company", "we", "us" and "our"
in this discussion refer to Rocky Shoes & Boots, Inc. and subsidiaries.
Our fiscal year begins on January 1 and ends on December 31. We analyze the
results of our operations for the last three years, including the trends in
the overall business followed by a discussion of our cash flows and liquidity,
our credit facility, and contractual commitments. We then provide a review
of the critical accounting judgments and estimates that we have made which
we believe are most important to an understanding of our MD&A and our
consolidated financial statements. We conclude our MD&A with information
on recent accounting pronouncements which we adopted during the year, as well
as those not yet adopted that are expected to have an impact on our financial
accounting practices.
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and our consolidated financial statements
and the notes thereto, all included elsewhere herein. The forward-looking
statements in this section and other parts of this document involve risks
and uncertainties including statements regarding our plans, objectives, goals,
strategies, and financial performance. Our actual results could differ materially
from the results anticipated in these forward-looking statements as a result
of factors set forth under the caption "Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995" below. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements made by or on behalf of the Company.
We have one reportable segment: the design, manufacture and distribution
of high quality men's and women's footwear and related apparel and accessories.
We sell our products primarily to large and small retailers throughout the
United States of America and Canada.
2004 OVERVIEW
The Company continued to implement its growth strategy in 2004 through key
line extensions in footwear and outdoor apparel. This strategy was initially
focused on leveraging the ROCKY brand in the rugged outdoor segment, and has
been expanded to include footwear and apparel in the occupational segment
as well as accessories.
- Net sales, led by increases of approximately $18.1 million of boots produced
for delivery to the U.S. military and $7.9 million of higher branded sales,
rose to $132.2 million from $106.2 million in 2003.
- The Company's gross profit increased to $38.6 million from $32.8 million
the prior year. Gross profit margin was 29.2% versus 30.9% in 2003, primarily
due to substantially higher shipments of boots to the U.S. military during
2004.
- Net income rose to $8.6 million compared to $6.0 million the prior year.
Diluted earnings per common share rose 32% to $1.74 in 2004 versus $1.32 per
diluted share in 2003.
- Capital expenditures were $6.0 million in 2004 compared to $2.2 million
in 2003. For 2004, capital expenditures included the purchase and renovation
of a factory outlet store for $2.2 million and purchase of in-store displays
for $1.2 million.
- Net debt (total debt minus cash, cash equivalents, marketable securities
and interest-bearing deposits) was $11.5 million or 13.1% of total capitalization
at December 31, 2004 compared to $15.9 million or 20.8% of total capitalization
at year-end 2003. Total debt was $16.5 million or 18.8% of total capitalization
at December 31, 2004 compared to $18.0 million or 23.6% of total capitalization
at year-end 2003.
The Company anticipates further benefits from its growth strategy in 2005
due to increased net sales resulting from broader product lines and increased
demand for its portfolio of branded products. Improvement in net sales and
profitability is anticipated from the acquisition of EJ Footwear Group, full-year
sales of recently introduced line extensions, and a higher level of footwear
produced for delivery to the U.S. military than in 2004.
Market conditions were mixed during Fiscal 2004 compared to Fiscal 2003.
Sales of the Company's rugged outdoor products were solid during the first
half of 2004, but were impacted by warmer seasonal weather during the fall
and winter months of the year. These conditions also contributed to a slight
reduction in net sales of rugged outdoor footwear compared to the prior year.
Sales in the Company's occupational category, which are sold year-round,
achieved substantial growth in Fiscal 2004 compared to 2003 due to new product
introductions, especially in work western footwear and work apparel. The Company
continues to pursue key line extensions in its work and duty markets.
Sales of boots for delivery to the U.S. military occur from time to time
based on competitively bid contracts. The Company entered into a $6.1 million
contract with Belleville Shoe Manufacturing Company ("Belleville")
in September 2003 for Intermediate Cold Wet Boots ("ICWs"). Initial
shipments, $0.4 million, of these ICWs began in the fourth quarter 2003 and
the remaining amount of these ICWs, $5.7 million, were shipped by May 2004.
On March 9, 2004, the Company announced a $16.4 million contract with Belleville
to produce 200,000 pairs of Infantry Combat Boots ("ICBs"). Shipments
began in June 2004 and are expected to continue at the rate of 20,000 pairs
per 30-day period through April 2005. All of the ICBs are manufactured in
the Company's factory in Puerto Rico.
On February 14, 2005, the Company announced a $21.0 million order from the
U.S. military to produce ICBs beginning in the second quarter of 2005 with
an estimated completion date of December 2005.
References to 2004, 2003 and 2002 are to years ended December 31 of the
respective year.
NET SALES
Net sales rose 24.6% to $132.2 million for Fiscal 2004 from $106.2 million
the prior year. This was due to an $18.1 million increase in boots produced
for delivery to the U.S. military and a $7.9 million increase in the Company's
branded sales. Sales of boots to the U.S. military fluctuate based on competitively
bid contracts.
Branded footwear sales increases were led by the occupational product line.
Sales of rugged outdoor footwear declined 3.1% to $46.6 million for 2004 primarily
due to warmer, drier weather during the fall and winter months. These conditions
impacted re-orders during the second half of 2004. Sales in the occupational
product line, led by solid gains in work, especially work western footwear,
increased 18.2% to $40.8 million, benefiting from product line extensions
and expanded distribution.
ROCKY branded apparel was initially introduced in the outdoor market in
2002 and the line was extended to the occupational market in February 2004.
Customer acceptance of these items remains strong. Net sales in this category
increased 96.6% to $8.9 million for 2004 from $4.5 million the prior year.
GATES branded product sales were $9.6 million for 2004 compared to $10.2
million for the nine-month period following the acquisition of certain assets
of Gates-Mills, Inc. in April 2003. The decrease in sales was due to the Company's
decision to exit the dress glove segment of this business.
Military sales, which occur from time to time, were $18.5 million in 2004
versus $0.4 million in 2003. This represented final shipments of $5.7 million
under a contract awarded in September 2003 and $12.8 million of shipments
under a contract awarded in March 2004 to produce boots for delivery to the
U.S. military. The remaining $3.6 million of military boots under the March
2004 contract award are expected to be shipped by the second quarter of 2005.
Net sales for the Company's factory outlet stores declined 12.3% to $4.0
million in 2004 compared to $4.6 million the prior year. The decline in retail
sales resulted from less traditional seasonal cold and wet weather during
the fall and winter months of 2004.
Average list prices for the Company's footwear, apparel and accessories
were similar in 2004 compared to 2003.
GROSS MARGIN
Gross profit rose to $38.6 million for 2004 from $32.8 million the prior
year. Expressed as a percentage of net sales, gross margin declined 170 basis
points to 29.2% of net sales in 2004 compared to 30.9% in 2003. The lower
gross margin was primarily attributable to higher sales of boots for delivery
to the U.S. military, which totaled $18.5 million in 2004 compared to $0.4
million in 2003. These boots traditionally have substantially lower gross
margins than the Company's branded products.
The Company has been sourcing footwear from outside the United States since
1993. In 2004, sourced footwear, apparel and accessories declined to 63% of
net sales versus 66% in 2003 because of the effect of the military sales.
Sales of sourced products are generally higher than for footwear produced
in the Company's factories. Sourced product sales are expected to remain a
significant percentage of the Company's total net sales.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses rose
$2.3 million to $25.6 million for Fiscal 2004. The increase in SG&A expenses
for the year ended December 31, 2004 was due to higher commissions paid of
$.4 million, $.6 million of additional distribution costs, higher advertising
expenses of $.6 million, as well as testing and documentation of internal
controls required by the Sarbanes-Oxley Act of 2002 of $.4 million. Most of
the Company's SG&A expenses are relatively fixed and changes between periods
are generally in response to increased sales and profitability. As a percent
of net sales, SG&A expenses declined to 19.4% for Fiscal 2004 from 21.9%
the prior year, due to nominal SG&A expenses associated with military
boot sales.
Income from operations improved 37.1% to $13.0 million, or 9.8% of net sales,
for Fiscal 2004 from $9.5 million, or 9.0% of net sales, in Fiscal 2003.
INTEREST EXPENSE
Interest expense declined slightly to $1.3 million for Fiscal 2004 from
$1.4 million in 2003 because of lower average borrowings in 2004 versus 2003.
The Company's funded debt declined to $16.5 million at December 31, 2004
versus $18.0 million a year ago. This was principally due to inventory reductions
during 2004.
INCOME TAXES
Income tax expense was $3.5 million for Fiscal 2004 compared to $2.4 million
in 2003. The Company's effective tax rate remained stable between the two
years at 28.8% and 28.7%, respectively. This effective rate is lower than
the statutory rate of 35.0% due to a portion of income being earned in offshore
jurisdictions where effective tax rates are lower than the U.S. effective
tax rate. Sourced products are taxed at U.S. effective tax rates. In addition,
the provision includes $157,000 related to the Company's decision to repatriate
foreign earnings totaling $3,000,000.
2003 COMPARED TO 2002
NET SALES
Net sales rose 19.3% to $106.2 million for the year ended December 31, 2003
from $89.0 million the prior year. This was attributable to a 28% increase
in branded product sales, which include ROCKY footwear, apparel and accessories
and GATES products. Shipments of boots to the U.S. military for the year ended
December 31, 2003 were $6.0 million below the prior year. These sales fluctuate
in response to specific competitively bid contracts to produce boots for the
U.S. military.
Footwear sales increases were led by the rugged outdoor category, which
sales increased 15.7% to $48.1 million for 2003. These sales benefited from
increased demand and more seasonal weather conditions in most regions of the
U.S. where the Company's rugged outdoor footwear is sold. Initial sell-through
and re-orders were particularly strong during the fall and winter season due
to the weather conditions which also benefited from increased demand for the
ROCKY brand. Occupational footwear increased 16.7% to $34.6 million reflecting
product line extensions, particularly a line of western influenced footwear.
Casual footwear sales increased $0.2 million to $2.5 million in 2003, consistent
with the Company's emphasis on controlled growth within this category through
its existing dealer network.
ROCKY branded apparel, particularly for the outdoor market, was introduced
in 2002. Net sales in this category increased 67% to $4.5 million for 2003
compared to $2.7 the prior year.
GATES branded product sales were $10.2 million for 2003 due to the acquisition
of the Gates brand in April 2003.
Military sales, which occur from time to time, were $0.4 million in 2003
versus $6.4 million in 2002. This represented initial shipments under a $6.1
million contract to produce boots for delivery to the U.S. military. The remaining
amount of this contract was completed in the second quarter 2004.
Net sales for the Company's factory outlet stores increased 13% to $4.6
million in 2003 compared with $4.1 million the prior year. The retail sales
increase was the result of more traditional seasonal weather, expansion of
the Company's Nelsonville store, and refocused merchandising of the retail
stores.
Average list prices for the Company's footwear, apparel and accessories
were similar in 2003 compared to 2002.
Gross margin rose to $32.8 million for 2003 from $23.4 million the prior
year. Expressed as a percentage of net sales, gross margin increased 460 basis
points to 30.9% of net sales in 2003 compared with 26.3% in 2002. This increase
in gross margin was attributable to sales mix and a 17 percentage point increase
in sourced product sales. The 2003 gross margin benefited from lower shipments
of boots to the U.S. military in 2003. Historically, these boots are produced
at gross margins below the Company's overall average.
The Company has been sourcing footwear from outside the United States since
1993. In 2003, sourced footwear, apparel and accessories increased to 66%
of net sales from 49% in 2002. The increase in sourced products sales as a
percentage of total sales is expected to continue in the future; however,
such increase is not expected to be at the same year-over-year growth rate
as the Company experienced in 2003.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were
$23.3 million, or 21.9% of net sales, for 2003 versus $18.7 million, or 21.0%
of net sales, the prior year. The increase in SG&A expenses for the year
ended December 31, 2003 was due to higher commissions paid, additional distribution
costs, and higher incentive compensation. All of these factors are attributable
to the increase in net sales and profitability compared to the prior year.
Most of the Company's SG&A expenses are relatively fixed and changes between
periods are generally in response to increased sales and profitability.
INTEREST EXPENSE
Interest expense was $1.4 million for both of the years 2003 and 2002. The
Company benefited from generally lower interest rates, which was partially
offset by higher average outstanding borrowings.
The Company's funded debt increased to $18.0 million at December 31, 2003
versus $11.0 million a year ago. The increase in funded debt in 2003 was due
to the purchase of certain assets of Gates-Mills, Inc., the repurchase of
483,500 shares of common stock, and increased inventory to support sales growth.
The Company's investment in capital assets was substantially below depreciation
expense for 2003 and 2002.
INCOME TAXES
Income tax expense increased $1.4 million to $2.4 million in 2003 compared
to $1.0 million in 2002. The Company's effective tax rate was 28.7% for 2003
compared to 25.1% the previous year. This effective rate is lower than the
statutory rate of 35.0% due to a portion of income being earned in offshore
jurisdictions where effective tax rates are lower than the U.S. effective
tax rate and the Company's decision not to repatriate foreign earnings to
the U.S. The increase in the effective tax rate in 2003 over 2002 is due primarily
to the increase in sales of sourced products which are taxed at U.S. effective
tax rates.
OVERVIEW
The Company principally funds its working capital requirements and capital
expenditures through income from operations, borrowings under its credit facility
and other indebtedness. During 2004, the Company primarily relied upon cash
provided from operating activities. Working capital is used to support changes
in accounts receivable and inventory as a result of the Company's seasonal
business cycle and business expansion. These requirements are generally lowest
in the months of January through March of each year and highest during the
months of May through October of each year. The Company's working capital
increased to $55.6 million and $54.2 million at December 31, 2004 and 2003,
respectively.
Inventory was $33.0 million at December 31, 2004 compared to $38.1 million
at year-end 2003. This decline was due to efforts initiated during Fiscal
2004 to reduce the Company's overall inventory. The funds provided by the
inventory reduction were used for increased receivables from higher sales
in the second half of 2004.
Total debt outstanding declined to $16.5 million or 18.8% of total capitalization
at December 31, 2004 compared to $18.0 million or 23.6% of total capitalization
at year-end 2003. This improvement was attributable to improved cash flow
and strong inventory management.
In conjunction with completion of the acquisition of EJ Footwear Group,
the Company entered into agreements with GMAC Commercial Finance LLC and American
Capital Strategies, Ltd. for credit facilities totaling $148 million. The
agreements include a $100 million revolving credit facility and term loans
totaling $48 million with maturities between 3-6 years to fund the acquisition
of EJ Footwear Group and replace the Company's $45 million revolving credit
facility. Under the terms of the agreement, the interest rates and repayment
terms are: (1) a revolving credit facility with an interest rate of LIBOR
plus two and a half percent (2.5%) or prime plus one percent (1.0%); (2) a
$18 million term loan with an interest rate of LIBOR plus three and a quarter
percent (3.25%) or prime plus one and three quarters percent (1.75%) and payable
equally over three years; and (3) a $30 million term loan with an interest
rate of LIBOR plus eight percent (8.0%) and payable equally over years four
through six. We believe that our existing credit facilities coupled with our
available cash generated from operations will provide sufficient liquidity
to fund our operations in 2005. Our continued liquidity, however, is contingent
upon future operating performance, cash flows, and our ability to meet financial
covenants in the credit facilities.
Operating Activities. Net cash provided by operating activities totaled
$7.6 million for Fiscal 2004 compared to net cash used by operating activities
of $1.6 million in 2003, and net cash provided by operations of $10.1 million
in 2002. Principal uses of net cash compared to the prior year included a
$7.6 million increase in accounts receivable-trade during 2004, which was
partially offset by a $5.1 million reduction in inventory. The principal uses
of net cash in 2003 included $14.9 million in increased inventory to support
the Company's growth and a $4.2 million increase in accounts receivable-trade
related to the Company's sales growth. For 2002, the Company had $10.1 million
of net cash provided by operating activities, which benefited from a $4.5
million reduction in inventories, as well as reductions in deferred compensation
and pension and accrued expenses of $1.6 million and $1.5 million, respectively.
Investing Activities. Net cash used in investing activities was $5.5 million
in Fiscal 2004 versus $7.0 million of net cash used in investing activities
in 2003. The principal uses of cash in 2004 were for the purchase of fixed
assets. The principal uses of cash in 2003 were for the purchase of fixed
assets ($2.2 million), and the acquisition of certain assets of Gates-Mills,
Inc. ($4.9 million). For 2002, the Company purchased $2.3 million of fixed
assets.
Financing Activities. The Company's financing activity during 2004 was $.8
million. This included proceeds from the exercise of stock options ($2.2 million),
which was offset by a reduction in borrowings ($1.5 million). The Company's
financing activity during 2003 totaled $6.5 million, which included the repurchase
of common stock ($3.1 million) which was partially offset by proceeds from
the exercise of stock options ($2.5 million), and increased borrowings ($7.0
million) to support sales growth as well as inventory acquired in conjunction
with the acquisition of Gates-Mills, Inc. For the year 2002, cash provided
in financing activities was $6.5 million due to a reduction in total debt
outstanding.
The Company's borrowings and external sources of funds were as follows at
December 31, 2004 and 2003:
Our real estate obligations were $4.9 million at December 31, 2004. The
mortgage financing, completed in the year 2000, includes three of the Company's
facilities, with monthly payments of approximately $0.1 million through 2014.
We lease certain machinery and manufacturing facilities under operating
leases that generally provide for renewal options. Future minimum lease payments
under non-cancelable operating leases are $0.7 million, $0.6 million, $0.3
million and $0.3 million for years 2005 through 2008, respectively, and $0.3
million for all years after 2008, or approximately $2.2 million in total.
We continually evaluate our external credit arrangements in light of our growth
strategy and new opportunities. We anticipate no further changes in our credit
arrangements in 2005 beyond the $148 credit facilities announced on January
6, 2005, to fund the acquisition of EJ Footwear Group and to replace our $45
million revolving credit facility.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our contractual obligations at December 31,
2004 resulting from financial contracts and commitments. We have not included
information on our recurring purchases of materials for use in our manufacturing
operations. These amounts are generally consistent from year to year, closely
reflect our levels of production, and are not long-term in nature (less than
three months).
(1) Assumes no plan termination and includes estimated pension plan contributions.
(2) Assumes the following interest rates: (1) 6.0% on the $58.4 million
revolving credit facility; (2) 5.65% on the $18 million three year term loan;
(3) 10.4% on the $30 million six year term loan; and (4) 8.275% on the $4.9
million mortgage loans.
From time to time we enter into purchase commitments with our suppliers
under customary purchase order terms. Any significant losses implicit in these
contracts would be recognized in accordance with generally accepted accounting
principles. At December 31, 2004, no such losses existed.
The Company is contingently liable with respect to lawsuits, taxes and various
other matters that routinely arise in the normal course of business. The Company
does not have off-balance sheet arrangements, financings, or other relationships
with unconsolidated entities or other persons, also known as "Variable
Interest Entities." Additionally, the Company does not have any related
party transactions that materially affect the result of operations, cash flow
or financial condition.
INFLATION
The Company's financial performance is influenced by factors such as higher
raw material costs as well as higher salaries and employee benefits. Management
attempts to minimize or offset the effects of inflation through increased
selling prices, productivity improvements, and cost reductions. The Company
was able to mitigate the effects of inflation during 2004 due to these factors.
It is anticipated that inflationary pressures during 2005 will be offset through
increases in sales and profitability, due to improved operating leverage in
the Company's business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discuss the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. A summary
of our significant accounting policies is included in the Notes to Consolidated
Financial Statements included in this Annual Report.
Management regularly reviews its accounting policies to make certain they
are current and also provide readers of the consolidated financial statements
with useful and reliable information about our operating results and financial
condition. These include, but are not limited to, matters related to accounts
receivable, inventories, pension benefits, and income taxes. Implementation
of these accounting policies includes estimates and judgments by management
based on historical experience and other factors believed to be reasonable.
This may include judgments about the carrying value of assets and liabilities
based on considerations that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or conditions.
Management believes the following critical accounting policies are most
important to the portrayal of the Company's financial condition and results
of operations, and require more significant judgments and estimates in the
preparation of its consolidated financial statements.
Revenue recognition:
Customer sales are recognized when revenue is realized and earned. The Company
recognizes revenue when the risk and title passes to the customer, generally
at the time of shipment. Customer sales are recorded net of allowances for
estimated returns, trade promotions and other discounts, which are recognized
as a deduction from sales at the time of sale.
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the financial condition of the Company's customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances
may be required. Management also records estimates for customer returns and
discounts offered to customers. Should a greater proportion of customers return
goods and take advantage of discounts than estimated by the Company, additional
allowances may be required.
Revenue principally consists of sales to customers. Revenue is recognized
upon shipment of product to customers, while license fees are recognized when
earned. The Company records a reduction to gross sales based on estimated
customer returns and allowances. These reductions are influenced by historical
experience, based on customer returns and allowances. The actual amount of
sales returns and allowances realized may differ from the Company's estimates.
If the Company determines that sales returns or allowances should be either
increased or decreased, then the adjustment would be made to net sales in
the period in which such a determination is made.
Inventories:
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
slow moving or obsolete inventories through the Company's factory outlet stores
or through various discounts to customers. Should management encounter difficulties
liquidating slow moving or obsolete inventories, additional provisions may
be necessary. Management regularly reviews the adequacy of its inventory reserves
and makes adjustments to them as required.
Intangible assets:
The Company had $4.1 million of intangible assets at December 31, 2004.
Goodwill, trademarks and patents are tested for impairment at least annually
by comparing the fair value of the reporting units to their carrying values.
Fair values are estimated using discounted cash flow methodologies that are
based on projections of the amounts and timing of future revenues and cash
flows. Based on this testing, none of our goodwill, trademarks or patents
were impaired as of December 31, 2004.
Pension benefits:
Accounting for pensions involves estimating the cost of benefits to be provided
well into the future and attributing that cost over the time period each employee
works. To accomplish this, extensive use is made of assumptions about inflation,
investment returns, mortality, turnover, medical costs and discount rates.
These assumptions are reviewed annually. See Note 9, "Retirement Plans,"
of this Form 10-K for information on these plans and the assumptions used.
Pension expenses are determined by actuaries using assumptions concerning
the discount rate, expected return on plan assets and rate of compensation
increase. An actuarial analysis of benefit obligations and plan assets is
determined as of September 30 each year. The funded status of the Company's
plans and reconciliation of accrued pension cost is determined annually as
of December 31. Further discussion of the Company's pension and post-retirement
benefit plans and related assumptions is included in Note 9 "Retirement
Plans", to the consolidated financial statements included in the Annual
Report on Form 10-K. Actual results would be different using other assumptions.
Management records an accrual for pension costs associated with the Company
sponsored noncontributory defined benefit pension plans covering non-union
workers of the Company. A union plan, which was frozen in 2001, was settled
in April 2004. Future adverse changes in market conditions or poor operating
results of underlying plan assets could result in losses or a higher accrual.
Income taxes:
Currently, management has not recorded a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not
to be realized. The Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a valuation
allowance, however in the event the Company were to determine that it would
not be able to realize all or part of its net deferred tax assets in the future,
an adjustment to the deferred tax assets would be charged to income in the
period such determination was made. Finally, at December 31, 2004, a provision
of $157,000 has been made for U.S. taxes on the repatriation of $3,000,000
of accumulated undistributed earnings of Five Star through December 31, 2004.
At December 31, 2004, after the planned repatriation above, approximately
$6,839,000 is remaining that would become taxable upon repatriation to the
United States. During 2005, the Company will complete its evaluation of foreign
earnings and may repatriate up to an additional $5,000,000 of accumulated
undistributed earnings, which could result in up to $260,000 of additional
tax.
RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued a revision to Interpretation 46 (FIN 46R)
to clarify certain provisions of FASB Interpretation No. 46. Variable interests
in a variable interest entity are contractual, ownership, or other pecuniary
interests in an entity that change with changes in the entity's net asset
value. Variable interests are investments or other interests that will absorb
a portion of an entity's expected losses if they occur or receive portions
of the entity's expected residual returns if they occur. FIN 46R defers the
effective date of FIN 46 for certain entities and makes several other changes
to FIN 46. The Company's adoption of FIN 46 or FIN 46R did not have a material
impact on the Company's consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4," which clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and also requires that the allocation of fixed
production overhead be based on the normal capacity of the production facilities.
SFAS No. 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is currently evaluating the impact
of adopting this statement.
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based
Payment" which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." This statement, which requires the cost of
all share-based payment transactions be recognized in the financial statements,
establishes fair value as the measurement objective and requires entities
to apply a fair-value-based measurement method in accounting for share-based
payment transactions. The statement applies to all awards granted, modified,
repurchased or cancelled after July 1, 2005, and unvested portions of previously
issued and outstanding awards. The Company is currently evaluating the impact
of adopting this statement.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." The statement addresses
the measurement of exchanges of nonmonetary assets and eliminates the exception
from fair value measurement for nonmonetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company is currently
evaluating the impact of adopting this statement.
In December 2004, the FASB issued FSP No. FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004," which provides a practical exception
to the SFAS No. 109 requirement to reflect the effect of a new tax law in
the period of enactment by allowing additional time beyond the financial reporting
period to evaluate the effects on plans for reinvestment or repatriation of
unremitted foreign earnings. At December 31, 2004 the Company determined it
would repatriate a portion of its foreign earnings and accrued the related
taxes. (See Note 8)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
This Management's Discussion and Analysis of Financial Conditions and Results
of Operations contains forward-looking statements within the meaning of The Company's primary market risk results from fluctuations in interest
rates. The Company is also exposed to changes in the price of commodities
used in its manufacturing operations. However, commodity price risk related
to the Company's current commodities is not material as price changes in commodities
can generally be passed along to the customer. The Company does not hold any
material market risk sensitive instruments for trading purposes.
On January 6, 2005, we announced the Company had entered into credit facilities
with GMAC Commercial Finance LLC and American Capital Strategies, Ltd. totaling
$148 million to fund the acquisition of EJ Footwear Group and to replace our
$45 million revolving credit facility. The agreements include a $100 million
revolving credit facility and term loans totaling $48 million with maturities
between 3-6 years. Under the terms of the agreement, the interest rates and
repayment terms are: (1) a revolving credit facility with an interest rate
of LIBOR plus two and a half percent (2.5%) or prime plus one percent (1.0%);
(2) a $18 million term loan with an interest rate of LIBOR plus three and
a quarter percent (3.25%) or prime plus one and three quarters percent (1.75%)
and payable equally over three years; and (3) a $30 million term loan with
an interest rate of LIBOR plus eight percent (8.0%) and payable equally over
years four through six.
The Company does not have any interest rate management agreements as of
December 31, 2004.
The Company's consolidated balance sheets as of December 31, 2004 and 2003
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years ended December 31, 2004, 2003, and 2002, together
with the independent auditors' report thereon appear on pages F-1 through
F-27 hereof and are incorporated herein by reference.
None.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's management
carried out an evaluation, with the participation of the Company's principal
executive officer and principal financial officer, of the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Securities Exchange Act). Based upon that
evaluation, the Company's principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures were
effective as of the end of the period covered by this report. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As part of the Company's evaluation of the effectiveness of internal controls
over financial reporting described below, the Company made certain improvements
to its internal controls. However, there were no changes in the Company's
internal controls over financial reporting that occurred during the Company's
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined
in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are
subject to risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures
may deteriorate. Under the supervision and with the participation of the Company's
principal executive officer and principal financial officer, the Company's
management conducted an evaluation of the effectiveness of the Company's internal
control over financial reporting based on the framework in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based upon that evaluation under the framework
in Internal Control - Integrated Framework, the Company's management concluded
that our internal control over financial reporting was effective as of December
31, 2004.
Board of Directors and Stockholders We have audited management's assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that Rocky Shoes &
Boots, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the company's Board of Directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting
as of December 31, 2004, based on the criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of the Company
as of December 31, 2004 and 2003, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 2004. Our report dated March 15, 2005 expressed
an unqualified opinion on those financial statements and financial statement
schedule.
None.
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 &
SUGGESTED
RETAIL
PRODUCT LINE TARGET MARKET PRICE DISTRIBUTION CHANNELS
-------------- ------------------------------------ ---------- --------------------------------------------------
RUGGED OUTDOOR Hunters and outdoorsmen $59 - $259 Sporting goods stores, outdoor specialty stores,
mail order catalogs, independent retail stores and
mass merchandisers
OCCUPATIONAL Law enforcement and military $69 - $179 Retail uniform stores, mail order catalogs,
personnel, security guards, work specialty safety stores, shoemobiles and farm
western, postal workers, paramedics, stores.
industrial workers and construction
workers
MILITARY U. S. Government NA U.S. government supply chain
CASUAL Retail customers of premium casual $69 - $189 Independent retail stores, sporting goods stores,
wear mail order catalogs and sporting goods stores
APPAREL Hunters, outdoorsmen and $7 - $200 Sporting goods stores, outdoor specialty stores,
occupational workers mail order catalogs, independent retail stores and
mass merchandisers
GATES Skiers, hunters and outdoorsmen and $7 - $70 Sporting goods stores, outdoor specialty stores,
retail customers of premium casual mail order catalogs, independent retail stores and
wear mass merchandisers
FISCAL FISCAL FISCAL
2004 2003 2002
------ ------ ------
Rugged outdoor ............... 35.3% 45.3% 46.7%
Occupational ................. 30.9 32.6 33.3
Military ..................... 14.0 0.4 7.2
Casual ....................... 1.8 2.4 2.6
Apparel ...................... 6.7 4.2 3.1
Gates gloves ................. 7.3 9.6 --
Factory outlet stores ........ 3.0 4.3 4.6
Other ........................ 1.0 1.2 2.5
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
RESOURCING(R), BEAR CLAW(R), BOOTS UNLIMITED(R), CAMO-TEK(R), CHIEFTAN(R),
COMFORT CORE(R), COOL NOTES(R), CORNSTALKERS(R), D-TECH(R), DURANGO(R), DURANGO
and Design(R) (which claims the fanciful head of a cowboy), DURANGO and Design(R)
(which claims a footprint), EJ and Design (which claims the stylized letters
"EJ" inside of a square)(R), FARM & RANCH(R), FARM MASTERS(R),
FIRSTMED(R), FIT FOR SAFETY(R), FIT FOR WORK(R), FLX-POINT(R), GATES(R), GATES
GLOVES(R), GATES LIGHT (Stylized)(R), GATES ULTRA LITE(R), GEORGIA BOOT(R),
GEORGIA BOOT and Design(R) (which claims a large male character with the mark
in the body), INDUSTRY WORKS IN LEHIGH SAFETY SHOES(R), L and Design(R) (which
claims the letter "L" inside a diamond), LEHIGH(R), LEHIGH FOOTSHIELDS(R)
(in stylized letters), LOCKRIM(R). LONGBEARD(R), LSR(R) (in stylized letters),
MIRA-LUG(R), MUD DOG(R) (in stylized letters), NORTHLAKE(R), NUGUARD 75(R),
PARACORD(R), PARACREPE(R), PONDEROSA(R), PROHUNTER(R), PROMISE PLUS(R), ROCKY
and Design(R) for cigars, ROCKY ELIMINATOR(R), ROCKY 911 SERIES and Design(R),
SAWBLADE(R), SHADES OF THE OLD WEST(R), SHIELD TOE(R), SIGNATURE TOUR QUALITY
FOOTWEAR(R), SILENTHUNTER(R), SNAKE RIVER(R), SNOW STALKER(R), SPORTSET(R),
STALKERS(R), SWAMPERS(R), TAC-TEAM(R), TORQUE SUSPENSION SYSTEM(R), TRAIL
KING(R), TRIAD(R), US*1 and Design(R) (which claims "US*1" in the
upper left corner of a flag), X-10 ULTRASOLE(R) and WILD WOLF(R).
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. The Company does not assume any obligation to publicly update
or revise its forward-looking statements even if experience or future changes
make it clear that any projected results expressed or implied therein will
not be realized.
QUARTER ENDED HIGH LOW
------------------------ -------- --------
March 31, 2003.......... $ 7.30 $ 4.77
June 30, 2003........... $ 9.54 $ 6.50
September 30, 2003...... $ 11.72 $ 9.10
December 31, 2003....... $ 26.01 $ 11.12
March 31, 2004.......... $ 31.95 $ 17.75
June 30, 2004........... $ 29.25 $ 17.96
September 30, 2004...... $ 23.70 $ 15.79
December 31, 2004....... $ 29.93 $ 17.00
FIVE YEAR FINANCIAL SUMMARY
-------------------------------------------------------------------------
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
------------ ------------- ------------ ----------- -----------
INCOME STATEMENT DATA
Net sales $ 132,249 $ 106,165 $ 88,959 $ 103,320 $ 103,229
Gross margin (% of sales) 29.2% 30.9% 26.3% 22.5% 23.8%
Net income $ 8,594 6,039 $ 2,843 $ 1,531 $ 96
PER SHARE
Net income
Basic $ 1.89 1.44 $ 0.63 $ 0.34 $ 0.02
Diluted $ 1.74 1.32 $ 0.62 $ 0.34 $ 0.02
Weighted average number of common
shares outstanding
Basic 4,557 4,190 4,500 4,489 4,489
Diluted 4,954 4,561 4,590 4,549 4,493
BALANCE SHEET DATA
Inventories $ 32,959 38,068 $ 23,182 $ 27,714 $ 32,035
Total assets $ 96,706 86,175 $ 68,417 $ 74,660 $ 86,051
Working capital $ 55,612 54,210 $ 41,751 $ 44,267 $ 50,201
Long-term debt, less current
maturities $ 10,045 17,515 $ 10,488 $ 16,976 $ 26,445
Shareholders' equity $ 71,371 58,385 $ 52,393 $ 51,043 $ 50,326
2004 2003 2002
----- ----- -----
Net Sales 100.0% 100.0% 100.0%
Costs of goods sold 70.8 69.1 73.7
----- ----- -----
Gross margin 29.2 30.9 26.3
SG&A expenses 19.4 21.9 20.9
----- ----- -----
Income from operations 9.8% 9.0% 5.4%
===== ===== =====
2004 2003 2002
Cash Flow Summary $ in million
Cash provided by (used in):
Operating activities $ 7.6 $ (1.6) $ 10.1
Investing activities (5.5) (7.0) (2.3)
Financing activities .8 6.5 (6.5)
-------- -------- --------
Net change in cash and cash equivalents $ 2.9 $ (2.1) $ 1.3
======== ======== ========
December 31,
------------------
2004 2003
$ in millions
Bank - revolving credit facility $ 11.5 $ 12.5
Equipment and other obligations 0.1 0.3
Real estate obligations 4.9 5.2
-------- --------
Total debt 16.5 18.0
Less current maturities 6.5 0.5
-------- --------
Net long-term debt $ 10.0 $ 17.5
======== ========
PAYMENTS DUE BY YEAR
$ MILLIONS
LESS THAN OVER 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
Long-term debt, adjusted for the January
2005 refinancing $ 111.3 $ 6.5 $ 12.8 $ 21.0 $ 71.0
Pension benefits (1) 4.1 0.3 0.6 0.7 2.5
Minimum operating lease commitments 2.2 0.7 0.9 0.6 -
Expected cash requirements for interest(2) 36.3 7.8 14.7 12.8 1.0
Building purchase obligation 0.5 0.5 - - -
-------- ----------- ----------- ----------- -------
Total contractual obligations $ 154.4 $ 15.8 $ 29.0 $ 35.1 $ 74.5
======== =========== =========== =========== =======
Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended, which are intended to be covered
by the safe harbors created thereby. Those statements include, but may not
be limited to, all statements regarding the intent, belief and expectations
of the Company and its management. Investors are cautioned that all forward-looking
statements involve risk and uncertainties including, without limitations,
dependence on sales forecasts, changes in consumer demand, seasonality, impact
of weather, competition, reliance on suppliers, changing retail trends, economic
changes, as well as other factors set forth under the caption "Business
Risks" in this Annual Report on Form 10-K and other factors detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the objectives
and plans of the Company will be achieved. The Company assumes no obligation
to update any forward-looking statements.
Rocky Shoes & Boots, Inc.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
March 15, 2005