ROCKY SHOES & BOOTS INC

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934


For Quarter Ended                                    Commission File Number:

  JUNE 30, 2000                                               0-21026

  -------------                                               -------

ROCKY SHOES & BOOTS, INC.
(Exact name of registrant as specified in its charter)


          OHIO                                           31-1364046

          ----                                           ----------

(State of Incorporation)                    (IRS Employer Identification Number)

39 E. CANAL STREET NELSONVILLE, OHIO 45764
(Address of principal executive offices)

(740) 753-1951
(Registrant's telephone number, including area code)

(Former name, former address, and former Fiscal year if changed since last report.)

Indicate by check mark 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 twelve (12) months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

Yes X No

4,489,215 common shares, no par value, outstanding at August 1, 2000

ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

FORM 10-Q


                                              INDEX

                                              -----



                                                                                            PAGE

PART I.     FINANCIAL INFORMATION                                                          NUMBER

            Item 1.   Financial Statements



                      Condensed Consolidated Balance Sheets

                      June 30, 2000 (unaudited) and December 31, 1999                         3



                      Unaudited Condensed Consolidated Statements of Operations

                      For the Three Months and Six Months Ended June 30, 2000 and 1999        4



                      Unaudited Condensed Consolidated Statements of Cash Flows

                      For the Six Months Ended June 30, 2000 and 1999                         5



                      Notes to Interim Unaudited Condensed Consolidated Financial

                      Statements                                                            6 - 7



            Item 2.   Management's Discussion and Analysis of Financial Condition and

                      Results of Operations                                                8 - 13



PART II.    OTHER INFORMATION



            Item 1.   Legal Proceedings                                                      14



            Item 2.   Changes in Securities and Use of Proceeds                              14



            Item 3.   Defaults Upon Senior Securities                                        14



            Item 4.   Submission of Matters to a Vote of Security Holders                    14



            Item 5.   Other Information                                                      14



            Item 6.   Exhibits and Reports on Form 8-K                                       15



SIGNATURES                                                                                   16



EXHIBIT INDEX                                                                                17

PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS


                             ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

                                CONDENSED CONSOLIDATED BALANCE SHEETS



                                                                     June 30, 2000    December 31, 1999

                                                                      (unaudited)

                                                                     -------------    -----------------

ASSETS:



CURRENT ASSETS:

     Cash and cash equivalents                                       $  1,351,350        $ 2,330,324

     Trade receivables - net                                           22,850,112         18,712,588

     Other receivables                                                  4,983,912          5,227,394

     Inventories                                                       46,284,130         32,573,067

     Deferred income taxes                                              1,017,331          1,017,331

     Prepaid expenses                                                   1,991,155          1,222,914

                                                                     ------------        -----------

         Total current assets                                          78,477,990         61,083,618



FIXED ASSETS - net                                                     26,213,787         26,132,222

OTHER ASSETS                                                            2,515,139          2,117,514

                                                                     ------------        -----------



TOTAL ASSETS                                                         $107,206,916        $89,333,354

                                                                     ============        ===========



LIABILITIES AND

SHAREHOLDERS' EQUITY:



CURRENT LIABILITIES:

     Accounts payable                                                $ 10,556,046        $ 2,128,112

     Current maturities - long term debt                               37,774,865          8,599,897

     Accrued taxes - other                                                896,153            412,721

     Accrued salaries and wages                                           863,749            569,203

     Accrued other                                                        838,620            905,783

                                                                     ------------        -----------

         Total current liabilities                                     50,929,433         12,615,716



LONG TERM DEBT-less current maturities                                  6,030,372         25,176,918



DEFERRED LIABILITIES                                                    1,290,261          1,311,590

                                                                     ------------        -----------



TOTAL LIABILITIES                                                      58,250,066         39,104,224



SHAREHOLDERS' EQUITY:



Common stock, no par value;

     10,000,000 shares authorized;

     issued and outstanding June 30, 2000 - 4,489,215 shares;

     December 31, 1999 - 4,489,215 shares                              35,284,159         35,284,159

     Retained earnings                                                 13,672,691         14,944,971

                                                                     ------------        -----------



         Total shareholders' equity                                    48,956,850         50,229,130

                                                                     ------------        -----------



TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $107,206,916        $89,333,354

                                                                     ============        ===========

See notes to the unaudited condensed consolidated financial statements.


                                     ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

                                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                     (UNAUDITED)



                                                         Three Months Ended                   Six Months Ended

                                                              June 30,                            June 30,

                                                       2000              1999              2000              1999

                                                       ----              ----              ----              ----

NET SALES                                          $22,918,457       $23,200,428       $37,760,568       $36,823,158

COST OF GOODS SOLD                                  17,642,373        17,237,006        29,240,724        27,681,066

                                                   -----------       -----------       -----------       -----------

GROSS MARGIN                                         5,276,084         5,963,422         8,519,844         9,142,092



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES         4,392,552         4,605,435         9,379,462         7,949,946

                                                   -----------       -----------       -----------       -----------

INCOME (LOSS) FROM OPERATIONS                          883,532         1,357,987          (859,618)        1,192,146



OTHER INCOME AND (EXPENSES):

        Interest expense                              (473,661)         (543,875)       (1,131,721)       (1,050,680)

        Other - net                                     71,556           108,426           180,059           241,359

                                                   -----------       -----------       -----------       -----------

                  Total other - net                   (402,105)         (435,449)         (951,662)         (809,321)

                                                   -----------       -----------       -----------       -----------



INCOME (LOSS) BEFORE INCOME TAXES                      481,427           922,538        (1,811,280)          382,825

INCOME TAX (BENEFIT) EXPENSE                           138,139           334,888          (539,000)          117,148

                                                   -----------       -----------       -----------       -----------

NET INCOME (LOSS)                                  $   343,288       $   587,650       $(1,272,280)      $   265,677

                                                   ===========       ===========       ===========       ===========

NET INCOME (LOSS) PER SHARE

        Basic                                      $      0.08       $      0.12       $     (0.28)      $      0.05

                                                   ===========       ===========       ===========       ===========

        Diluted                                    $      0.08       $      0.12       $     (0.28)      $      0.05

                                                   ===========       ===========       ===========       ===========



WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

        Basic                                        4,489,215         4,747,558         4,489,215         4,872,855

                                                   ===========       ===========       ===========       ===========

        Diluted                                      4,489,714         4,763,049         4,489,215         4,882,817

                                                   ===========       ===========       ===========       ===========

See notes to the unaudited condensed consolidated financial statements.


                           ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

                        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                          (UNAUDITED)



                                                                          Six Months Ended

                                                                              June 30,

                                                                       2000             1999

                                                                       ----             ----

CASH FLOWS FROM OPERATING ACTIVITIES:

       Net income (loss)                                          $ (1,272,280)     $   265,677

       Adjustments to reconcile net income (loss) to net cash

       provided by (used in) operating activities:

          Depreciation and amortization                              2,286,699        1,770,658

          Deferred taxes and other                                                      (50,000)

          Deferred compensation and pension - net                      (21,328)        (170,369)

          Loss on sale of fixed assets                                   1,226



       Change in assets and liabilities:

          Receivables                                               (3,894,042)      (6,864,297)

          Inventories                                              (13,711,063)      (8,300,069)

          Other current assets                                        (768,241)        (209,382)

          Other assets                                                (413,304)           5,314

          Accounts payable                                           8,315,069        5,284,346

          Accrued and other liabilities                                710,814          158,155

                                                                  ------------      -----------



             Net cash used in operating activities                  (8,766,450)      (8,109,967)



CASH FLOWS FROM INVESTING ACTIVITIES:

       Purchase of fixed assets                                     (2,426,429)      (5,827,090)

       Proceeds from sale of fixed assets                              185,483

                                                                  ------------      -----------



          Net cash used in investing activities                     (2,240,946)      (5,827,090)



CASH FLOWS FROM FINANCING ACTIVITIES:

       Proceeds from debt                                           26,845,000       18,252,000

       Payments on long term debt                                  (16,816,578)      (6,809,943)

       Purchase treasury stock                                                       (3,807,300)

                                                                  ------------      -----------



          Net cash used in financing activities                     10,028,422        7,634,757

                                                                  ------------      -----------





DECREASE IN CASH AND CASH EQUIVALENTS                                 (978,974)      (6,302,300)



CASH AND CASH EQUIVALENTS,

BEGINNING OF PERIOD                                                  2,330,324        7,232,876

                                                                  ------------      -----------



CASH AND CASH EQUIVALENTS,

END OF PERIOD                                                     $  1,351,350      $   930,576

                                                                  ============      ===========

See notes to the unaudited condensed consolidated financial statements.

ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. INTERIM FINANCIAL REPORTING

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the financial results. All such adjustments reflected in the interim consolidated financial statements are considered to be of a normal and recurring nature. The results of the operations for the six month periods ended June 30, 2000 and 1999 are not necessarily indicative of the results to be expected for the whole year. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for year ended December 31, 1999.

2. INVENTORIES

Inventories are comprised of the following:


                                             June 30, 2000  December 31, 1999

                                             -------------  -----------------

Raw materials                                 $ 9,755,977      $ 4,133,520

Work-in Process                                 4,918,058        2,128,738

Manufactured finished good                     28,771,644       24,110,469

Factory outlet finished goods                   3,048,561        2,645,340

Reserve for obsolescence or lower of cost

   or market                                     (210,110)        (445,000)

                                              -----------      -----------



Total                                         $46,284,130      $32,573,067

                                              ===========      ===========

3. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and Federal, state and local income taxes was as follows:


                                 Six Months Ended

                                      June 30,

                                2000           1999

                                ----           ----

Interest                     $1,188,114     $1,001,663

                             ==========     ==========



Federal, state and local

    income taxes             $   86,725     $   91,000

                             ==========     ==========

Accounts payable at June 30, 2000 and December 31, 1999 included a total of $302,524 and $189,659, respectively, relating to the purchase of fixed assets.

4. PER SHARE INFORMATION

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the basic weighted average number of common shares outstanding during each period. The diluted earnings per share computation includes common share equivalents, when dilutive. There are no adjustments to net income necessary in the calculation of basic and diluted earnings per share.

A reconciliation of the shares used in the basic and diluted income per common share computation for the three months and six months ended June 30, 2000 and 1999 is as follows:


                                  Three Months Ended           Six Months Ended

                                       June 30,                    June 30,

                                  2000          1999          2000          1999

                                  ----          ----          ----          ----

Basic-Weighted average

    shares outstanding         4,489,215     4,747,558     4,489,215     4,872,855



Diluted securities:

    Stock options                    499        15,491                       9,962

                               ---------     ---------     ---------     ---------



Diluted-weighted

average shares outstanding     4,489,714     4,763,049     4,489,215     4,882,817

                               =========     =========     =========     =========

5. ACCOUNTING STANDARDS

The Securities and Exchange Commission published Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," SAB 101A and SAB 101B in December 1999, March 2000, and June 2000, respectively. These bulletins summarize certain aspects of the Commissions views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The bulletins are effective no later than the fourth fiscal quarter of the fiscal year beginning after December 15, 1999. Management has not yet completed its analysis of these bulletins and their impact on the Company's financial statements and disclosures.

6. DEBT AGREEMENT

At June 30, 2000, the Company was not in compliance with certain financial ratio covenants under its bank revolving credit line (up to $42,000,000) and term loan ($1,250,000) credit facilities but has obtained a waiver from the bank through August 31, 2000, which may be extended to September 20, 2000 provided that the Company has obtained a commitment on or prior to August 18, 2000 to refinance the credit facilities and there has been no material adverse change in financial condition. The Company has classified all debt under these credit facilities as current on the June 30, 2000 balance sheet. During the second quarter, the Company began negotiations with another lender to refinance the bank credit facilities, and the Company anticipates that it will have a commitment to refinance on or before August 18, 2000, and that the refinancing will be completed by September 20, 2000.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, information derived from the Company's unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales. The discussion that follows the table should be read in conjunction with the unaudited Condensed Consolidated Financial Statements of the Company.


                        PERCENTAGE OF NET SALES



                                    Three Months Ended           Six Months Ended

                                         June 30,                    June 30,

                                    2000          1999          2000           1999

                                    ----          ----          ----           ----

Net Sales                          100.0%        100.0%        100.0%         100.0%

Cost of Goods Sold                  77.0%         74.3%         77.4%          75.2%

                                   -----         -----         -----          -----

Gross Margin                        23.0%         25.7%         22.6%          24.8%

Selling, General and

    Administrative Expenses         19.1%         19.8%         24.9%          21.6%

                                   -----         -----         -----          -----

Income from Operations               3.9%          5.9%         (2.3%)          3.2%

                                   =====         =====         =====          =====

THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999

Net Sales

Net sales for the quarter ended June 30, 2000, decreased $281,971, or 1.2% to $22,918,457 from $23,200,428 for the same period a year ago. Net sales declined primarily as a result of decreased shipments of military footwear. This decrease was essentially offset by increased shipments of outdoor and rubber footwear. Prices were approximately 2% higher for the first half of 2000 than the prior year.

At June 30, 2000 the Company's backlog was $35 million, which remained unchanged from the first quarter 2000. It includes solid orders for key styles of ROCKY(R) branded footwear and particularly strong acceptance of new footwear, especially styles in recently introduced, Scent Control SystemTM and Wild WolfTM by Rocky lines. Order backlogs are subject to timing differences, cancellations and changes, and are not necessarily reflective of future sales or sales trends.

Gross Margin

Gross margin for the quarter ended June 30, 2000 decreased $687,338 to $5,276,084 from $5,963,422 for the same period a year ago. As a percent of net sales, gross margin was 23.0% in the second quarter of 2000 versus 25.7% for the same period in 1999.

During the first half of 2000, the Company consolidated its Puerto Rican manufacturing operations into a single plant with greater capacity than its two former facilities. The related moving and start up expenses resulted in lower absorption of manufacturing overhead which was a substantial factor in the decrease in gross margin.

The Company continued to shift manufacturing to its plants in Puerto Rico and the Dominican Republic during second quarter 2000. Although this shift resulted in temporary production inefficiencies, it is anticipated that gross margin will improve during the second half of 2000 as production increases in response to orders and benefits from lower cost production in the Company's Carribbean factories are realized.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses (SG&A) were $4,392,552 for the three months ended June 30, 2000, or $212,883 below the same period last year. Expressed as a percent of net sales, SG&A declined to 19.1% for the second quarter 2000 from 19.8% in 1999. Specific plans have been implemented during 2000 to reduce SG&A in total dollars and as a percentage of net sales versus a year ago. The most significant impact to date has been in administrative expenses, which were down 28% for the second quarter 2000 versus the prior year. Factors contributing to this reduction include, improving efficiencies in the operation of the new distribution center and a realignment of the sales force with a renewed emphasis on the Company's core product lines.

Interest Expense

Interest expense for the quarter ended June 30, 2000 decreased $70,214 or 12.9%, to $473,661 versus $543,875 for the same period a year ago. The decrease in interest expense is a result of a gain on the sale of an interest rate swap agreement which was partially offset by increased levels of borrowing and higher rates of interest.

Income Taxes

Income taxes decreased $196,749, or 58.8%, to $138,139 for the three months ended June 30, 2000, versus $334,888 for the same period a year ago. The Company's effective tax rate decreased to 28.7% for second quarter 2000 from 36.3% in 1999. The decrease in the Company's effective tax rate is due to more income being earned in taxing locations with lower effective tax rates than in prior periods.

SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999

Net Sales

Net sales for the six months ended June 30, 2000 increased $934,410 or 2.5% to $37,760,568 versus $36,823,158 for the same period a year ago. The increase in net sales is due in part to higher shipments of outdoor and work/occupational footwear during the first half of 2000. Prices were approximately 2% higher for the first half of 2000 than the prior year.

Gross Margin

Gross margin for the six months ended June 30, 2000 decreased $622,248, to $8,519,844 versus $9,142,092 for the same period a year ago. As a percent of net sales, gross margin was 22.6% in the first half of 2000 versus 24.9% for the same period a year ago. During the first half of 2000, the Company consolidated its Puerto Rican manufacturing operations into a single plant with greater capacity than the two previous facilities. The related moving and start up expenses resulted in lower absorption of manufacturing overhead which was a substantial factor in the decrease in gross margin. It is anticipated that gross margin will improve during the second half of 2000 as production increases in response to orders and benefits from lower cost production in the Company's Carribbean factories are realized.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses (SG&A) for the six months ended June 30, 2000 were $9,379,462 compared with $7,949,946 for the same period a year ago. As a percent of net sales, SG&A was 24.8% in the first half of 2000 versus 21.6% for the same period in 1999. The increase was primarily the result of increased sales salaries and related expenses for sales persons added following first quarter 1999, tradeshow expenses, and costs associated with developing the Company's key footwear categories. There were also additional depreciation expenses for the Company's new finished goods distribution center, which was completed in December 1999. The Company has been implementing plans during the first half of this year to control and reduce SG&A expenses. Most of the benefits thus far were realized in lower administrative expenses for the second quarter 2000 compared to the same period last year.

Interest Expense

Interest expense for the first six months ended June 30, 2000 increased $81,041 or 7.7% to $1,131,721 versus $1,050,680 for the same period a year ago. The increase is a result of rising interest rates and the completion of mortgage financing for the Company's new distribution center, warehouse, and corporate office building.

Income Taxes

Income tax benefit increased for the six months ended June 30, 2000 to $539,000 compared to an income tax expense of $117,148 for 1999. The Company's effective tax benefit rate of 29.8% for the first half of 2000 compares with 30.6% for the same period last year. The income tax benefit for first half of 2000 and 1999 is primarily generated from the Company's domestic operations.

Liquidity and Capital Resources

The Company has principally funded its working capital requirements and capital expenditures through borrowings under its line of credit and other indebtedness. Working capital is primarily used to support changes in accounts receivable and inventory as a result of the Company's seasonal business cycle and business expansion. These requirements are generally lowest in the months of January through March of each year and highest during the months of May through October of each year. In addition, the Company requires financing to support additions to machinery, equipment and facilities as well as the introduction of new footwear styles.

At June 30, 2000, the Company had working capital of $27,548,557 versus $48,467,902, at December 31, 1999. The Company has a revolving line of credit with maximum borrowing limits of $25,000,000 during the period of January 28th through May 15th of each year, after which the line increases to $42,000,000 for the remainder of the year. The line of credit expires May 31, 2003. Changes in the line of credit during the year match the Company's seasonal requirements for working capital. As of June 30, 2000, the Company had borrowed $36,060,000 against its available line of credit of $42,000,000.

The Company reacquired and retired 619,900 common shares for $3,807,300 under its share repurchase program during the six-month period ended June 30, 1999.

During the first half of 2000 the Company completed mortgage financing with GE Capital for three of its facilities totaling $6,300,000, with monthly payments of $63,100 to 2014. The proceeds were used to reduce borrowings under the revolving line of credit facility.

The Company's cash flow used in operations increased to $8,766,450 in first half of 2000 from $8,109,967 for the same period in the prior year. The primary cause of the cash used in operations for the first half of 2000 and 1999 was due to an increase in accounts receivable and inventories, which was partially offset by increased accounts payable. All of the responsible balance sheet fluctuations are normal and reflect the seasonal nature of the Company's business.

Inventory was 16% lower at $46,284,130 on June 30, 2000 versus $55,410,080 as of the same date last year. Controlled production schedules during the past year combined with improved inventory management contributed to the favorable comparison. The Company's centralized finished goods distribution center, which became fully operational in January 2000, is an integral part of the improved inventory management compared to second quarter 1999. The current level of inventory reflects production activities consistent with the significant backlog at June 30, 2000 for the fall and winter seasons.

The principal use of cash flows in investing activities for the first quarters of both 2000 and 1999 has been for investment in property, plant, and equipment. In the first quarter of 2000, property, plant, and equipment expenditures were $2,426,000 or $3,401,000 below expenditures for the same period in 1999. The reduction resulted from the completion of the Company's new distribution center at year-end 1999.

The Company's cash flows from financing activities reflect the net increase or decrease in borrowings under its revolving credit facility and new long-term mortgage facility to finance working capital requirements and other operating capital expenditures. In addition, in the first half of 1999, the Company acquired treasury stock in the amount of $3,807,300.

Capital expenditures for 2000 are expected to be approximately $3,250,000 for machinery and equipment to support increased production and for lasts, dies, and patterns for new footwear styles. This amount, although higher than originally anticipated, is in response to the initial customer response to Wild Wolf(TM) by Rocky, a new line of footwear the Company introduced this year. The Company believes it will be able to finance such additions and meet operating expenditure requirements in 2000 through available cash on hand, additional long-term borrowings and operating cash flows.

Inflation

The Company cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and employee benefits. The Company attempts to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding the intent, belief and expectations of the Company and its management, and include statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the Company's orders (paragraph 3), future gross margins (paragraphs 5 and 10), reduction in SG&A (paragraphs 6 and 11), ability to finance its operations (paragraph 16), and inventory management (paragraph 20). Investors are cautioned that such statements involve risks and uncertainties, including, but not limited to, changes in consumer demand, seasonality, impact of weather, competition, reliance on suppliers, changing retailing trends, reliance on foreign manufacturing, changes in tax rates, limited protection of proprietary technology, and other risks, uncertainties and factors described in the Company's most recent Annual Report on Form 10-K and other filings from time to time with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes since December 31, 1999.

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Changes in Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

Proposal 1: The election of Class II Directors of the Company, to serve until the 2002 Annual Meeting of Shareholders or until their successors are elected and qualified:


                                  Number of Shares Voted

                          ----------------------------------------

                                         WITHHOLD

                             FOR         AUTHORITY         TOTAL

                          ---------      ---------       ---------

Leonard L. Brown          3,783,892        92,430        3,876,322

                          ---------        ------        ---------

David Fraedrich           3,783,892        92,430        3,876,322

                          ---------        ------        ---------

Curtis A. Loveland        3,783,892        92,430        3,876,322

                          ---------        ------        ---------

Robert D. Rockey          3,783,892        92,430        3,876,322

Proposal 2: To ratify the appointment of Deloitte & Touche LLP to serve as the Company's independent public accountants for the fiscal year ending December 31, 2000.


             Number of Shares Voted

----------------------------------------------------

   FOR          AGAINST     ABSTAINED        TOTAL

---------       -------     ---------      ---------

3,869,012        6,060        1,250        3,786,322

----------------------------------------------------

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

The exhibits to this report begin at page 18.

(b) Reports on Form 8-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROCKY SHOES & BOOTS, INC.




Date:  August 14, 2000            By: /s/ David Fraedrich

                                      ------------------------------------------

                                      David Fraedrich, Executive Vice President,

                                      Treasurer and Chief Financial Officer

                                      (Duly Authorized Officer and Principal

                                        Financial and Accounting Officer)


                                    ROCKY SHOES & BOOTS, INC.

                                        AND SUBSIDIARIES

                                            FORM 10-Q

                                          EXHIBIT INDEX



------------------------------------------------------------------------------------------------



    EXHIBIT                                 EXHIBIT

     NUMBER                                DESCRIPTION                               PAGE NUMBER

------------------------------------------------------------------------------------------------

     10.1         Promissory Note, dated December 30, 1999, in favor of General

                  Electric Capital Business Asset Funding Corporation in the

                  amount of $1,050,000.



     10.2         Promissory Note, dated December 30, 1999, in favor of General

                  Electric Capital 10.3 Business Asset Funding Corporation in

                  the amount of $1,500,000.



     10.3         Promissory Note, dated December 30, 1999, in favor of General

                  Electric Capital Business Asset Funding Corporation in the

                  amount of $3,750,000.



     10.4         Limited Waiver and Modification Agreement, dated May 14, 2000,

                  by and among the Registrant, Five Star Enterprises Ltd.,

                  Lifestyle Footwear, Inc., Bank One, NA, The Huntington

                  National Bank, and Bank One, NA, as agent.



     10.5         Extension of Limited Waiver and Modification Agreement, dated

                  June 30, 2000, by and among the Registrant, Five Star

                  Enterprises Ltd., Lifestyle Footwear, Inc., Bank One, NA, The

                  Huntington National Bank, and Bank One, NA, as agent.



     27           Financial Data Schedule

Exhibit 10.1

LOAN NO. 001-5056-003

PROMISSORY NOTE

$1,050,000.00 DECEMBER 30, 1999

FOR VALUE RECEIVED, ROCKY SHOES & BOOTS, INC., an Ohio corporation ("BORROWER"), promises to pay to the order of GENERAL ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION ("GE CAPITAL") at GE CAPITAL's office at 10900 N.E. 4th St., Suite 500, Bellevue, Washington 98004, Attention: Real Estate Department, or at such other address as the holder hereof may from time to time designate in writing, the principal sum of ONE MILLION FIFTY THOUSAND AND NO/100 DOLLARS ($1,050,000.00) together with interest from the date the proceeds of the loan (the "Loan") evidenced by this Promissory Note (this "Note") are initially disbursed until maturity on the principal balance from time to time remaining unpaid hereon at the rate of 8.275% per annum (computed on the basis of a 360-day year of twelve (12) consecutive thirty (30)-day months) in installments as follows: (i) interest only in advance at the rate of $241.35 per day shall be due and payable on the date the proceeds of the Loan are initially disbursed to or for the benefit of BORROWER (including, without limitation, disbursement into an escrow for the benefit of BORROWER) for the period beginning on the date of such disbursement and ending on December 31, 1999; (ii) one hundred seventy-nine (179) installments of principal and interest in the amount of $10,201.75 each shall be payable commencing on February 1, 2000, and continuing on the first day of each and every succeeding month until and including December 1, 2014, and (iii) on January 1, 2015, all then unpaid principal and interest hereon shall be due and payable.

If any payment shall not be paid when due and shall remain unpaid for ten (10) days, BORROWER shall pay an additional charge equal to five percent (5.00%) of the delinquent payment or the highest additional charge permitted by law, whichever is less.

Upon not less than thirty (30) days advance written notice to GE CAPITAL at any time after February 1, 2005, and upon payment of the Prepayment Premium, BORROWER shall have the right to prepay all, but not less than all, of the outstanding balance of this Note on any regularly scheduled principal and interest payment date. The Prepayment Premium shall be determined by (i) calculating the decrease (expressed in basis points) in the current weekly average yield of ten (10)-year U.S. Treasury Constant Maturities (as published in Federal Reserve Statistical Release H.15 [519]) (the "Index") from Friday, June 4, 1999, to the Friday immediately preceding the week in which the prepayment is made, (ii) dividing the decrease by 100, (iii) multiplying the result by the following described applicable premium factor (the "Premium Factor"), and (iv) multiplying the product by the principal balance to be prepaid. If the Index is unchanged or has increased from Friday, June 4, 1999, to the Friday immediately preceding the prepayment date, no Prepayment Premium shall be due. The Premium Factor shall be the amount shown on the following chart for the month in which prepayment occurs:

Number of

 Months

Remaining           (Years)           Premium Factor

---------           -------           --------------



144 - 133             (12)                 .059

132 - 121             (11)                 .054

120 - 109             (10)                 .049

108 -  97              (9)                 .044

 96 -  85              (8)                 .039

 84 -  73              (7)                 .035

 72 -  61              (6)                 .030

 60 -  49              (5)                 .025

 48 -  37              (4)                 .020

 36 -  25              (3)                 .015

 24 -  13              (2)                 .010
 12 -   1              (1)                 .005

If the Federal Reserve Board ceases to publish the Index, then the decrease in the weekly average yield of ten (10)-year U.S. Treasury Constant Maturities will be determined from another comparable source designated by GE CAPITAL. Prepayment prior to February 1, 2005 will not be permitted.

If GE CAPITAL at any time accelerates this Note after an Event of Default (defined below), then BORROWER shall be obligated to pay the Prepayment Premium in accordance with the foregoing schedule. The Prepayment Premium shall not be payable with respect to condemnation awards or insurance proceeds from fire or other casualty which GE CAPITAL applies to prepayment, nor with respect to BORROWER's prepayment of the Note in full during the last three (3) months of the term of this Note unless an Event of Default has occurred. BORROWER expressly acknowledges that the Prepayment Premium is not a penalty but is intended solely to compensate GE CAPITAL for the loss of its bargain and the reimbursement of internal expenses and administrative fees and expenses incurred by GE CAPITAL.

The Loan is secured, in part, by a certain Open-End Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing (the "Mortgage") covering the real property and other assets (the "Property") described therein, and by certain other documents executed and delivered in connection herewith (the "Loan Documents").

Each of the following shall constitute an Event of Default ("Event of Default") hereunder and under the Mortgage:

a. Failure of or refusal by BORROWER to make any payment of principal, interest, or any Prepayment Premium due under this Note when due, and such failure or refusal shall continue for a period of ten (10) days after written notice is given to BORROWER by GE CAPITAL specifying such failure; or

b. Failure of BORROWER within the time required by the Mortgage to make any payment for taxes, insurance or for reserves for such payments, or any other payment necessary to prevent the filing of any lien, and such failure shall continue for a period of ten (10) days after written notice is given to BORROWER by GE CAPITAL specifying such failure; or

c. Failure by BORROWER to observe or perform any obligations of BORROWER to GE CAPITAL on or with respect to any transaction, debt, undertaking or agreement other than the transaction evidenced by this Note and the continuation of such failure beyond the expiration of the applicable cure period, if any, set forth in the documents evidencing or securing such other transaction, debt, undertaking or agreement; or

d. Failure of BORROWER to make any payment or perform any obligation under any superior liens or encumbrances on the Property, within the time required thereunder, or commencement of any suit or other action to foreclose any superior liens or encumbrances; or

e. Failure by BORROWER to observe or perform any of its obligations under any of the lease agreements covering the Property; or

f. The Property is transferred or any agreement to transfer any part or interest in the Property in any manner whatsoever is made or entered into without the prior written consent of GE CAPITAL; or

g. Filing by BORROWER of a voluntary petition in bankruptcy or filing by BORROWER of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, or similar relief for itself under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, or the seeking, consenting to, or acquiescing by BORROWER in the appointment of any trustee, receiver, custodian, conservator or liquidator for BORROWER, any part of the Property, or any of the income or rents of the Property, or the making by BORROWER of any general assignment for the benefit of creditors, or the inability of or failure by BORROWER to pay its debts generally as they become due, or the insolvency on a balance sheet basis or business failure of BORROWER, or the making or suffering of a preference within the meaning of federal bankruptcy law or the making of a fraudulent transfer under applicable federal or state law, or concealment by BORROWER of any of its property in fraud of creditors, or the imposition of a lien upon any of the property of BORROWER which is not discharged in the manner permitted by the Mortgage, or the giving of notice by BORROWER to any governmental body of insolvency or suspension of operations; or

h. Filing of a petition against BORROWER seeking any reorganization, arrangement, composition, readjustment, liquidation, or similar relief under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debts, or the appointment of any trustee, receiver, custodian, conservator or liquidator of BORROWER, of any part of the Property or of any of the income or rents of the Property, unless such petition shall be dismissed within ninety (90) days after such filing, but in any event prior to the entry of an order, judgment or decree approving such petition; or

i. The institution of any proceeding for the dissolution or termination of BORROWER voluntarily, involuntarily, or by operation of law, or the death of BORROWER; or

j. A material adverse change occurs in the assets, liabilities or net worth of BORROWER or any of the guarantors of the indebtedness evidenced by this Note from the assets, liabilities or net worth of BORROWER or any of the guarantors of the indebtedness evidenced by this Note previously disclosed to GE CAPITAL; or

k. Any warranty, representation or statement furnished to GE CAPITAL by or on behalf of BORROWER under this Note, the Mortgage, or any of the Loan Documents shall prove to have been false or misleading in any material respect; or

l. Failure of BORROWER to observe or perform any other covenant or condition contained in this Note and such failure shall continue for thirty (30) days after notice is given to BORROWER specifying the nature of the failure. No notice of default and no opportunity to cure shall be required if during the prior twelve (12) months GE CAPITAL has already sent a notice to BORROWER concerning default in performance of the same obligation; or

m. Failure of BORROWER to observe or perform any other obligation under the Mortgage or any of the Loan Documents when such observance or performance is due, and such failure shall continue beyond the applicable cure period set forth in the Loan Documents, or if the default cannot be cured within such applicable cure period, if BORROWER fails within such time to commence and pursue curative action with reasonable diligence or fails at any time after expiration of such applicable cure period to continue with reasonable diligence all necessary curative actions. No notice of default and no opportunity to cure shall be required if during the prior twelve (12) months GE CAPITAL has already sent a notice to BORROWER concerning default in performance of the same obligation; or

n. Any of the foregoing events occur with respect to any tenant of the Property, with respect to any guarantor of any of BORROWER's obligations in connection with the indebtedness evidenced by this Note or with respect to any guarantor of any tenant's obligations relating to the Property, or such guarantor dies or becomes incompetent; or

o. The occurrence of any event of default under the documents evidencing or securing (i) GE CAPITAL Loan No. 001-5056-002 in the original principal amount of $1,500,000.00 or (ii) any other amounts owed to GE CAPITAL by Borrower or any entity related to Borrower or any of the guarantors of the indebtedness evidenced by this Note.

Upon the occurrence of any Event of Default, GE CAPITAL shall have the option to declare the entire amount of principal and interest due under this Note immediately due and payable without notice or demand, and GE CAPITAL may exercise any of its rights under this Note, under the Mortgage and under the Loan Documents. After acceleration or maturity, BORROWER shall pay interest on the outstanding principal balance of this Note at the rate of five percent (5.00%) per annum above Chase Manhattan Bank's prime interest rate in effect from time to time, or fifteen percent (15.00%) per annum, whichever is higher, provided that such interest rate shall not exceed the maximum interest rate permitted by law.

All payments of the principal and interest on this Note shall be made in coin or currency of the United States of America which at the time shall be the legal tender for the payment of public and private debts.

If this Note is placed in the hands of an attorney for collection, BORROWER agrees to pay reasonable attorneys' fees and costs incurred by GE CAPITAL in connection therewith, and in the event suit or action is instituted to enforce or interpret this Note (including without limitation efforts to modify or vacate any automatic stay or injunction), the prevailing party shall be entitled to recover all expenses reasonably incurred at, before or after trial and on appeal, whether or not taxable as costs, or in any bankruptcy proceeding, or in connection with post-judgment collection efforts, including, without limitation, attorneys' fees, witness fees (expert and otherwise), deposition costs, copying charges and other expenses.

This Note shall be governed and construed in accordance with the laws of the State of Ohio applicable to contracts made and to be performed therein (excluding choice-of-law principles).

This Note is given in a commercial transaction for business purposes.

This Note may be declared due prior to its expressed maturity date, all in the events, on the terms, and in the manner provided for in the Mortgage.

BORROWER and all sureties, endorsers, guarantors and other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally (i) waive demand, notice of demand, presentment for payment, notice of nonpayment, notice of default, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices, and further waive diligence in collecting this Note or in enforcing any of the security for this Note; (ii) agree to any substitution, subordination, exchange or release of any security for this Note or the release of any party primarily or secondarily liable for the payment of this Note; (iii) agree that GE CAPITAL shall not be required to first institute suit or exhaust its remedies hereon against BORROWER or others liable or to become liable for the payment of this Note or to enforce its rights against any security for the payment of this Note; and (iv) consent to any extension of time for the payment of this Note, or any installment hereof, made by agreement by GE CAPITAL with any person now or hereafter liable for the payment of this Note, even if BORROWER is not a party to such agreement.

All agreements between BORROWER and GE CAPITAL, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand or acceleration of the final maturity of this Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to GE CAPITAL exceed the maximum amount permissible under the applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to GE CAPITAL in excess of the maximum amount permissible under applicable law, the interest payable to GE CAPITAL shall be reduced to the maximum amount permissible under applicable law; and if from any circumstance GE CAPITAL shall ever receive anything of value deemed interest by applicable law in excess of the maximum amount permissible under applicable law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid balance of principal hereof, such excess shall be refunded to BORROWER. All interest paid or agreed to be paid to GE CAPITAL shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under applicable law. GE CAPITAL expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under applicable law. BORROWER expressly acknowledges and represents that the Loan is a "business loan" within the meaning of Chapter 1343 of the Ohio Revised Code.

BORROWER authorizes any attorney-at-law to appear in any Court of Record in the State of Ohio or in any other state or territory of the United States after the above indebtedness becomes due, whether by acceleration or otherwise, after not less than ten (10) days' written notice to BORROWER to waive the issuing and service of process, and to confess judgment against BORROWER in favor of the holder of this Note for the amount then appearing due together with costs of suit, and thereupon to waive all error and all rights of appeal and stays of execution.

[SIGNATURE PAGE FOLLOWS]

IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT WILL BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.




Signed in the presence of:             BORROWER:

                                       --------



                                       ROCKY SHOES & BOOTS, INC.,

                                       an Ohio corporation

/s/ Brenda Hammond

------------------------------

Print Name:  Brenda Hammond

                                       By: /s/ David Fraedrich

                                          -----------------------------

/s/ Susan Harmony                      Print: David Fraedrich

------------------------------                -------------------------

Print Name: Susan Harmony              Its: Exec VP & CFO

            -------------                   ---------------------------

Exhibit 10.2

LOAN NO. 001-5056-002

PROMISSORY NOTE

$1,500,000.00 DECEMBER 30, 1999

FOR VALUE RECEIVED, ROCKY SHOES & BOOTS, INC., an Ohio corporation ("BORROWER"), promises to pay to the order of GENERAL ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION ("GE CAPITAL") at GE CAPITAL's office at 10900 N.E. 4th St., Suite 500, Bellevue, Washington 98004, Attention: Real Estate Department, or at such other address as the holder hereof may from time to time designate in writing, the principal sum of ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($1,500,000.00) together with interest from the date the proceeds of the loan (the "Loan") evidenced by this Promissory Note (this "Note") are initially disbursed until maturity on the principal balance from time to time remaining unpaid hereon at the rate of 8.275% per annum (computed on the basis of a 360-day year of twelve (12) consecutive thirty (30)-day months) in installments as follows: (i) interest only in advance at the rate of $344.79 per day shall be due and payable on the date the proceeds of the Loan are initially disbursed to or for the benefit of BORROWER (including, without limitation, disbursement into an escrow for the benefit of BORROWER) for the period beginning on the date of such disbursement and ending on December 31, 1999; (ii) one hundred forty-three (43) installments of principal and interest in the amount of $16,463.82 each shall be payable commencing on February 1, 2000, and continuing on the first day of each and every succeeding month until and including December 1, 2011, and (iii) on January 1, 2012, all then unpaid principal and interest hereon shall be due and payable.

Number of

 Months

Remaining          (Years)       Premium Factor

---------          -------       --------------

144 - 133            (12)             .059

132 - 121            (11)             .054

120 - 109            (10)             .049

108 -  97             (9)             .044

 96 -  85             (8)             .039

 84 -  73             (7)             .035

 72 -  61             (6)             .030

 60 -  49             (5)             .025

 48 -  37             (4)             .020

 36 -  25             (3)             .015

 24 -  13             (2)             .010
 12 -   1             (1)             .005

Each of the following shall constitute an Event of Default ("Event of Default") hereunder and under the Mortgage:

e. Failure by BORROWER to observe or perform any of its obligations under any of the lease agreements covering the Property; or

f. The Property is transferred or any agreement to transfer any part or interest in the Property in any manner whatsoever is made or entered into without the prior written consent of GE CAPITAL; or

i. The institution of any proceeding for the dissolution or termination of BORROWER voluntarily, involuntarily, or by operation of law, or the death of BORROWER; or

o. The occurrence of any event of default under the documents evidencing or securing (i) GE CAPITAL Loan No. 001-5056-003 in the original principal amount of $1,050,000.00 or (ii) any other amounts owed to GE CAPITAL by Borrower or any entity related to Borrower or any of the guarantors of the indebtedness evidenced by this Note.

This Note shall be governed and construed in accordance with the laws of the State of Ohio applicable to contracts made and to be performed therein (excluding choice-of-law principles).

This Note is given in a commercial transaction for business purposes.

This Note may be declared due prior to its expressed maturity date, all in the events, on the terms, and in the manner provided for in the Mortgage.

[SIGNATURE PAGE FOLLOWS]




Signed in the presence of:             BORROWER:

                                       ---------





                                      ROCKY SHOES & BOOTS, INC.,

/s/ Christine Lehman                  an Ohio corporation

--------------------------------

Print Name:  Christine Lehman

             ----------------

                                      By: /s/ David Fraedrich

                                          ------------------------------

/s/ Brenda Hammond                    Print: David Fraedrich

--------------------------------             ---------------------------

Print Name: Brenda Hammond            Its: Exec VP & CFO

            --------------                 -----------------------------

Exhibit 10.3

LOAN NO. 001-5056-001

PROMISSORY NOTE

$3,750,000.00 JANUARY 31, 2000

FOR VALUE RECEIVED, ROCKY SHOES & BOOTS, INC., an Ohio corporation ("BORROWER"), promises to pay to the order of GENERAL ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION ("GE CAPITAL") at GE CAPITAL's office at 10900 N.E. 4th St., Suite 500, Bellevue, Washington 98004, Attention: Real Estate Department, or at such other address as the holder hereof may from time to time designate in writing, the principal sum of THREE MILLION SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($3,750,000.00) together with interest from the date the proceeds of the loan (the "Loan") evidenced by this Promissory Note (this "Note") are initially disbursed until maturity on the principal balance from time to time remaining unpaid hereon at the rate of 8.275% per annum (computed on the basis of a 360-day year of twelve (12) consecutive thirty (30)-day months) in installments as follows: (i) interest only in advance at the rate of $861.98 per day shall be due and payable on the date the proceeds of the Loan are initially disbursed to or for the benefit of BORROWER (including, without limitation, disbursement into an escrow for the benefit of BORROWER) for the period beginning on the date of such disbursement and ending on January 31, 2000; (ii) one hundred seventy-nine (179) installments of principal and interest in the amount of $36,434.82 each shall be payable commencing on March 1, 2000, and continuing on the first day of each and every succeeding month until and including January 1, 2015, and (iii) on February 1, 2015, all then unpaid principal and interest hereon shall be due and payable.

Upon not less than thirty (30) days advance written notice to GE CAPITAL at any time after March 1, 2005, and upon payment of the Prepayment Premium, BORROWER shall have the right to prepay all, but not less than all, of the outstanding balance of this Note on any regularly scheduled principal and interest payment date. The Prepayment Premium shall be determined by (i) calculating the decrease (expressed in basis points) in the current weekly average yield of ten (10)-year U.S. Treasury Constant Maturities (as published in Federal Reserve Statistical Release H.15 [519]) (the "Index") from Friday, June 4, 1999, to the Friday immediately preceding the week in which the prepayment is made, (ii) dividing the decrease by 100, (iii) multiplying the result by the following described applicable premium factor (the "Premium Factor"), and (iv) multiplying the product by the principal balance to be prepaid. If the Index is unchanged or has increased from Friday, June 4, 1999, to the Friday immediately preceding the prepayment date, no Prepayment Premium shall be due. The Premium Factor shall be the amount shown on the following chart for the month in which prepayment occurs:

Number of

 Months

Remaining        (Years)      Premium Factor

----------       -------      --------------



180 -  169        (15)            .073

168 -  157        (14)            .069

157 -  145        (13)            .064

 144 - 133        (12)            .059

 132 - 121        (11)            .054

 120 - 109        (10)            .049

 108 -  97         (9)            .044

  96 -  85         (8)            .039

  84 -  73         (7)            .035

  72 -  61         (6)            .030

  60 -  49         (5)            .025

  48 -  37         (4)            .020

  36 -  25         (3)            .015
  24 -  13         (2)            .010
  12 -   1         (1)            .005

Each of the following shall constitute an Event of Default ("Event of Default") hereunder and under the Mortgage:

e. Failure by BORROWER to observe or perform any of its obligations under any of the lease agreements covering the Property; or

f. The Property is transferred or any agreement to transfer any part or interest in the Property in any manner whatsoever is made or entered into without the prior written consent of GE CAPITAL; or

i. The institution of any proceeding for the dissolution or termination of BORROWER voluntarily, involuntarily, or by operation of law, or the death of BORROWER; or

o. The occurrence of any event of default under the documents evidencing or securing (i) GE CAPITAL Loan No. 001-5056-002 in the original principal amount of $1,500,000.00, (ii) GE CAPITAL Loan No. 001-5056-003 in the original principal amount of $1,050,000.00, or (ii) any other amounts owed to GE CAPITAL by Borrower or any entity related to Borrower or any of the guarantors of the indebtedness evidenced by this Note.

This Note shall be governed and construed in accordance with the laws of the State of Ohio applicable to contracts made and to be performed therein (excluding choice-of-law principles).

This Note is given in a commercial transaction for business purposes.

This Note may be declared due prior to its expressed maturity date, all in the events, on the terms, and in the manner provided for in the Mortgage.

[SIGNATURE PAGE FOLLOWS]




Signed in the presence of:                  BORROWER:

                                            ---------



                                            ROCKY SHOES & BOOTS, INC.,

/s/ Brenda Hammond                          an Ohio corporation

-----------------------------

Print Name: Brenda Hammond

            --------------

                                            By: /s/ David Fraedrich

                                                ---------------------------

/s/ Susan Harmony                           Print: David Fraedrich

-----------------------------                      ------------------------

Print Name: Susan Harmony                   Its: Exec VP & CFO

            -------------                        --------------------------

Exhibit 10.4

LIMITED WAIVER AND LOAN MODIFICATION AGREEMENT

THIS LIMITED WAIVER AND LOAN MODIFICATION AGREEMENT (the "Waiver Agreement") is made effective as of May 15, 2000 by and among Rocky Shoes & Boots, Inc., an Ohio corporation ("Rocky Inc."), Five Star Enterprises Ltd., a Cayman Islands corporation ("Five Star"), Lifestyle Footwear, Inc., a Delaware corporation ("Lifestyle") (the foregoing parties being referred to herein individually as a "Borrower" and collectively as the "Borrowers"), Bank One, NA, a national banking association ("Bank One"), The Huntington National Bank, a national banking association ("HNB")(Bank One and HNB shall be referred to herein individually as a "Bank" and collectively as the "Banks"), and Bank One, NA, as Agent, acting in the manner and to the extent described in Article IX of the Agreement referred to herein (in such capacity, the "Agent").

BACKGROUND INFORMATION

A. The Borrowers, Bank One, HNB and the Agent entered into a certain Revolving Credit Loan Agreement, dated as of January 28, 1997, as amended by (i) a Term Loan Agreement and First Amendment to Revolving Credit Loan Agreement, dated effective as of April 18, 1997, (ii) a Second Amendment to Revolving Credit Loan Agreement, dated effective as of May 29, 1998, (iii) a Third Amendment to Revolving Credit Loan Agreement, dated effective as of April 1, 1999, and (iv) a Fourth Amendment to Revolving Credit Loan Agreement, dated effective as of July 23, 1999 (such agreement, as so amended, the "Agreement"), pursuant to which Bank One and HNB agreed to provide revolving credit loans to the Borrowers, upon and subject to the terms and conditions as set forth in the Agreement.

B. Events of Default have occurred under the terms of the Facility Documents, and the Borrowers have requested that the Banks waive certain provisions of the Agreement, and the Banks are willing do to so, but only in accordance with the terms as set forth in this Waiver Agreement.

PROVISIONS

NOW, THEREFORE, in consideration of the waiver of the Banks as set forth herein, the mutual agreements hereunder and under the Facility Documents, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Banks and the Agent hereby agree as follows:

SECTION 1. CAPITALIZED TERMS. Except as provided for herein, the capitalized terms used herein shall have the same meanings as set forth in the Agreement.

SECTION 2. CURRENT AMOUNT OF REVOLVING CREDIT LOANS. The Borrowers certify, acknowledge, agree and state that (i) as of May 3, 2000, the total principal amount of Revolving Credit Loans owed to the Banks under the Agreement and the Notes is $25,925,000 (with $15,555,000 being owed to Bank One and $10,370,000 being owed to HNB), and that such amounts are payable to the Banks without any offsets, counterclaim, defense or reductions, and

(ii) the aggregate undrawn amount of outstanding Commercial L/Cs and Standby L/Cs is $2,657,303.82 (with Bank One's participation therein being $1,594,382.29 and HNB's participation therein being $1,062,921.53).

SECTION 3. DEFAULT; WAIVER BY THE BANKS; WAIVER FEE; INCREASE IN INTEREST RATE; DISCUSSIONS AMONG BANKS AND BORROWERS.

(a) The Borrowers acknowledge and agree that the Borrowers are currently in default with respect to the following sections of the Agreement (such sections being referred to collectively as the "Subject Sections"):

(i) Section 7.2(l) (i) (relating to the Consolidated Net Worth financial covenant);

(ii) Section 7.2(l) (ii) (relating to the Consolidated Fixed Charge Coverage Ratio financial covenant); and

(iii) Section 7.2(l)(iii) (relating to the Consolidated Funded Debt to Consolidated EBITDA Ratio financial covenant).

(b) Subject to the terms of this Waiver Agreement, the Banks hereby waive compliance (the "Waiver") by the Borrowers with the Subject Sections for the period (the "Waiver Period") commencing on March 30, 2000 (the "Effective Date") and continuing through and including June 29, 2000 (the "Termination Date"). EACH BORROWER ACKNOWLEDGES AND AGREES THAT THE BANKS DO NOT INTEND TO EXTEND, AND NEITHER BANK IS MAKING ANY COMMITMENT TO EXTEND, THE WAIVER PROVIDED FOR HEREIN BEYOND THE TERMINATION DATE.

(c) The Borrowers, jointly and severally, shall pay to the Agent for the ratable benefit the Banks a waiver fee in the amount of $20,000.00.

(d) During the Waiver Period, in determining the interest rate applicable to each LIBOR Rate Loan (whether outstanding on the Effective Date or originating thereafter), the Applicable Margin shall be 225 basis points, rather than the Applicable Margin that would otherwise be in effect pursuant to the Agreement.

(e) Although the Banks are agreeing to the Waiver as set forth herein, the Banks (i) are not waiving, abandoning, discharging, releasing, modifying, extending, canceling or relinquishing any right, claims, or causes of action, and (ii) are not accepting any security or promise granted herein as payment of any right, claims, or causes of action. The Waiver by the Banks as set forth herein shall not affect or impair any right that the Banks may have against any Borrower or any other party.

(f) The Banks and the Borrowers have had discussions with respect to the possible modification and adjustment of certain terms of the Agreement, including with respect to the Subject Sections, and it is anticipated that such discussions will continue in the near future. HOWEVER, THE BANKS HAVE NOT MADE ANY COMMITMENT, AND THIS WAIVER AGREEMENT SHALL NOT BE A CONSIDERED TO BE A COMMITMENT BY THE BANKS, TO (i) CONTINUE ANY SUCH DISCUSSIONS OR (ii) MODIFY, AMEND OR OTHERWISE CHANGE ANY TERMS OF THE AGREEMENT OR ANY OTHER FACILITY DOCUMENTS AND THE CREDIT FACILITIES PROVIDED THEREBY.

SECTION 4. ABSENCE OF WAIVER. The Borrowers and the Banks agree that the agreements set forth in Section 3 hereof shall not be deemed to:

(a) except as expressly set forth in Section 3 of this Waiver Agreement, modify or limit any other term the Facility Documents;

(b) impose upon the Banks any obligation, express or implied, to consent to any amendment or modification of the Facility Documents; or

(c) prejudice any right or remedy that the Banks may now have or may in the future have under the Facility Documents or any instrument or agreement referred to therein including, without limitation, any right or remedy resulting from any Default or Event of Default not covered by the Waiver with respect to the Subject Sections.

SECTION 5. CONTINUING OBLIGATIONS; MODIFICATIONS; ADDITIONAL OBLIGATIONS; PROVISION OF ADDITIONAL ITEMS.

(a) Except with respect to the Subject Sections, the Borrowers shall continue to comply, observe and perform all of their obligations under the Agreement and the other Facility Documents.

(b) Effective as the date hereof and continuing hereafter:

(i) Exhibit D of the Agreement, containing the form of the Borrowing Base Certificate, is hereby amended by deleting said Exhibit D in its entirety and substituting in place thereof a new Exhibit D in the form of Annex A attached hereto, and whenever the Borrowers are required to provide a Borrowing Base Certificate to the Agent and/or the Banks under the Agreement or this Waiver Agreement, the form of such Borrowing Base Certificate shall be in the form attached hereto as Annex A, appropriately completed and signed by the Borrowers; and

(ii) Notwithstanding anything in the Agreement and the other Facility Documents to the contrary, the Borrowers hereby consent and agree that the Banks and the Agent shall have, and the Banks and the Agent hereby reserve, the right and ability to reduce, modify and otherwise change in any manner the Borrowing Base, which right may be exercised in the Banks' and the Agent's sole and absolute discretion and at anytime and from time to time; without limiting the generality of the foregoing, the Banks and the Agent shall have the right to (x) reduce the percentage of Eligible Accounts Receivable (currently 80%) and Inventory (currently 50%) which may be included in calculating the Borrowing Base, (y) which Accounts Receivable shall constitute Eligible Accounts Receivable, (z) which Inventory may be included in calculating the Borrowing Base.

(i) provide to the Agent, not later than 2:00 p.m. on each Monday during the Waiver Period, a Borrowing Base Certificate, certified by an officer of the Borrowers as true and correct, setting forth the amount of Eligible Accounts Receivable and Inventory, in each case as of the close of business of the preceding Friday; as currently provided in the Agreement, notwithstanding any provision in the Facility Documents or herein to the contrary, the total amount of outstanding Revolving Credit Loans under the Aggregate Commitment, when taken together with the total aggregate Dollar amount available to be drawn under outstanding Commercial L/Cs and Standby L/Cs, shall at no time exceed the lesser of (i) the Aggregate Commitment or (ii) the Borrowing Base as set forth on the most recent weekly Borrowing Base Certificate provided to the Agent, plus 50% of the Dollar amount available to be drawn under outstanding Commercial L/Cs;

(ii) provide to the Agent as soon as available, but in any event not later than 25 days after the end of each month (beginning with April, 2000 and continuing during the Waiver Period), the unaudited internally prepared consolidated balance sheet of the Borrowers as at the end of such month and the related unaudited unconsolidated statements of income and shareholders equity of the Borrowers for such month and the portion of the Fiscal Year through such date, setting forth in each case in comparative form the figures for the previous year, certified by an appropriate officer as being fairly stated in all material respects;

(iii) concurrently with the delivery of the monthly financial statements referred to in subsection (ii) above, a certificate of an appropriate officer of the Borrowers (in such form as shall be reasonably acceptable to the Banks) stated to have been made after due examination by such officer (x) stating that, to the best of such officer's knowledge, except with respect to the Subject Sections, the Borrowers during such period have observed or performed in all material respects all of its covenants and other agreements, and satisfied every condition, contained in the Facility Documents to be observed, performed or satisfied by the Borrowers and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, (y) showing in detail the calculations used in determining the financial covenants set forth in the Subject Sections, and (z) stating that, to the best of such officer's knowledge, the representations and warranties expressed in Article V are true, correct and complete in all material respects on and as of the date of such financial statements delivered concurrently therewith, except in each case of (x), (y) or (z) as may otherwise be specifically set forth in such certificate; and

(iv) execute such additional documents reasonably requested by the Banks and/or the Agent, including without limitation to protect, perfect or continue perfection of liens.

SECTION 6. TRUTH OF REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant that the following are true and correct as of the date of this Waiver Agreement:

(a) the representations and warranties of the Borrowers contained in the Facility Documents are true and correct on and as of the date of this Waiver Agreement as if made on and as of such date unless stated to relate to a specific earlier date;

(b) all financial statements of the Borrowers provided to the Banks are true, accurate and complete in all material respects as of the date of, and for the periods covered by, such financial statements;

(c) neither this Waiver Agreement nor any other document, certificate or written statement furnished to the Banks or the Agent by or on behalf of any Borrower in connection herewith or with the Revolving Credit Loans and the transactions contemplated hereby and by the Facility Documents contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading;

(d) each Borrower has full power and authority (i) to make the borrowings contemplated by the Facility Documents, (ii) to execute, deliver and perform this Waiver Agreement, and (iii) to incur the obligations provided for herein, all of which have been duly authorized by all necessary and proper corporate action;

(e) no consent, waiver or authorization of, or filing with, any person or any governmental authority is required to be made or obtained by the Borrowers in connection with the borrowings under the Facility Documents, or the execution, delivery, performance, validity or enforceability of this Waiver Agreement;

(f) this Waiver Agreement constitutes the legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its terms; and

(g) the execution and delivery by the Borrowers of this Waiver Agreement and the performance by the Borrowers of this Waiver Agreement:
(i) do not and will not violate any law or regulation; (ii) do not and will not violate any order, decree or judgment by which any Borrower is bound; (iii) do not and will not violate or conflict with, result in a breach of or constitute (with notice, lapse of time, or otherwise) a default under any material agreement, mortgage, indenture or other contractual obligation to which any Borrower is a party, or by which any Borrower's properties are bound; or (iv) do not and will not result in the creation or imposition of any lien upon any property or assets of any Borrower.

SECTION 7. CONDITIONS TO THE BANKS 'S OBLIGATIONS. The obligations of the Banks to enter into this Waiver Agreement and be bound by the terms hereof are subject to the satisfaction of the following conditions precedent:

(a) DELIVERY OF DOCUMENTS AND ITEMS. Contemporaneously with or before the execution of this Waiver Agreement by the Banks, the Agent shall have received the following, each in form and substance satisfactory to the Agent, the Banks and their counsel:

(i) WAIVER AGREEMENT. This Waiver Agreement, duly executed by the Borrowers;

(ii) WAIVER FEE. The waiver fee required to be paid by the Borrowers pursuant to
Section 3(c) of this Waiver Agreement; and

(iii) OTHER REQUIREMENTS. Such other certificates, documents and other items as the Banks and/ or the Agent deem necessary or desirable.

(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Borrowers in this Waiver Agreement shall be true and correct in all material respects as of the date hereof.

SECTION 8. ADDITIONAL EVENTS OF DEFAULT; REVOCATION OF WAIVER. Upon (i) the failure of the Borrowers, or any of them, to observe, comply or perform any of their obligations under this Waiver Agreement, or (ii) the occurrence of an Event of Default, other than with respect to the Subject Sections, during the Waiver Period, the Waiver provided herein may, in the sole and absolute discretion of the Banks, be revoked by giving notice thereof by the Agent to the Borrowers, and upon such revocation, the Waiver shall be null and void and the Banks and the Agent shall be entitled to exercise all rights and remedies that the Banks and the Agent now have at law or under the Facility Documents or any instrument or agreement referred to therein with respect to such failure or Event of Default, including an Event of Default with respect to any of the Subject Sections.

SECTION 9. REAFFIRMATION OF LIABILITY; RELEASE OF CLAIMS. Each Borrower hereby reaffirms its liability to the Banks and the Agent under the Facility Documents and all other agreements and instruments executed by the Borrower for the benefit of the Banks and the Agent in connection therewith. Each Borrower acknowledges and agrees that the Banks and the Agent have performed all of their respective obligations under the Facility Documents and that the Banks and the Agent, or any of them, are not in default under any obligation it has or ever did have to any Borrower under the Facility Documents or any other agreement or otherwise. As a specific inducement and consideration to the Banks to enter into this Waiver Agreement and agree to the transactions contemplated hereby, each Borrower hereby waives and releases the Banks and the Agent, their respective officers, directors, employees and representatives, from any and all claims or causes of actions, if any, accruing on or before the date hereof and arising out of the past and/or present business relationship between any Borrower and the Banks and/or the Agent which any Borrower now has or may have or in the future may have against the Banks and/or the Agent or any of their respective officers, directors, employees or representatives.

SECTION 10. EFFECTIVENESS OF FACILITY DOCUMENTS. The Borrowers have read and understand all terms and provisions of the Facility Documents and this Waiver Agreement and, subject to the Waiver provided hereby, all of the terms, covenants and conditions of, and the obligations of the Borrowers under, all Facility Documents shall remain valid, binding and in full force and effect. No delay on the part of the Banks or the Agent in the exercise of any right or remedy under the Facility Documents shall operate as a waiver. No single or partial exercise by the Banks or the Agent of any such right or remedy shall preclude any other future exercise of such right or remedy or the exercise of any other right or remedy. No waiver or indulgence by the Banks of any Default or Event of Default shall be effective unless in writing and signed by the Banks, nor shall a waiver on one occasion be construed as a bar to or waiver of that right on any future occasion.

SECTION 11. PRESERVATION OF EXISTING SECURITY INTERESTS. Each mortgage, security interest, pledge, assignment, lien or other conveyance or encumbrance, including without limitation pursuant to the Security Agreement, of any right, title, or interest in any property of any kind delivered to the Banks at any time by any person or entity in connection with the Facility Documents or to secure the performance of the obligations of the Borrowers under the Facility Documents, , shall remain in full force and effect following the execution of this Waiver Agreement.

SECTION 12. APPLICABLE LAW. This Waiver Agreement shall be deemed to be a contract made under the laws of the State of Ohio and for all purposes shall be construed in accordance with the laws of such state.

SECTION 13. SEVERABILITY. Any provision of this Waiver Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

SECTION 14. INTERPRETATION. This Waiver Agreement is to be deemed to have been prepared jointly by the parties hereto, and any uncertainty or ambiguity existing herein shall not be interpreted against any party but shall be interpreted according to the rules for the interpretation of arm's length agreements. The various headings in this Waiver Agreement are inserted for convenience of reference only