| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Ohio (State or Other Jurisdiction of Incorporation or Organization) |
31-1364046 (I.R.S. Employer Identification No.) |
2
3
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
NET SALES
|
$ | 65,519,637 | $ | 27,433,987 | $ | 127,017,721 | $ | 49,316,076 | ||||||||
|
|
||||||||||||||||
|
COST OF GOODS SOLD
|
39,796,398 | 19,657,778 | 77,086,610 | 35,921,263 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
GROSS MARGIN
|
25,723,239 | 7,776,209 | 49,931,111 | 13,394,813 | ||||||||||||
|
|
||||||||||||||||
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
19,484,789 | 5,396,376 | 40,146,472 | 10,724,067 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
INCOME FROM OPERATIONS
|
6,238,450 | 2,379,833 | 9,784,639 | 2,670,746 | ||||||||||||
|
|
||||||||||||||||
|
OTHER INCOME AND
(EXPENSES):
|
||||||||||||||||
|
Interest expense
|
(2,115,578 | ) | (274,868 | ) | (3,994,170 | ) | (533,441 | ) | ||||||||
|
Other — net
|
126,887 | 24,182 | 117,639 | 98,388 | ||||||||||||
|
|
||||||||||||||||
|
Total other —
net
|
(1,988,691 | ) | (250,686 | ) | (3,876,531 | ) | (435,053 | ) | ||||||||
|
|
||||||||||||||||
|
INCOME BEFORE INCOME
TAXES
|
4,249,759 | 2,129,147 | 5,908,108 | 2,235,693 | ||||||||||||
|
|
||||||||||||||||
|
INCOME TAX EXPENSE
|
1,444,864 | 681,325 | 2,008,759 | 715,420 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
NET INCOME
|
$ | 2,804,895 | $ | 1,447,822 | $ | 3,899,349 | $ | 1,520,273 | ||||||||
|
|
||||||||||||||||
|
NET INCOME PER SHARE
|
||||||||||||||||
|
Basic
|
$ | 0.53 | $ | 0.32 | $ | 0.75 | $ | 0.34 | ||||||||
|
Diluted
|
$ | 0.50 | $ | 0.29 | $ | 0.70 | $ | 0.31 | ||||||||
|
|
||||||||||||||||
|
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING
|
||||||||||||||||
|
Basic
|
5,244,395 | 4,557,954 | 5,204,107 | 4,492,989 | ||||||||||||
|
|
||||||||||||||||
|
Diluted
|
5,625,169 | 5,003,956 | 5,589,643 | 4,949,805 | ||||||||||||
|
|
||||||||||||||||
4
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2005 | 2004 | |||||||
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$ | 3,899,349 | $ | 1,520,273 | ||||
|
Adjustments to reconcile
net income to net cash used in operating activities:
|
||||||||
|
Depreciation and
amortization
|
2,523,105 | 1,558,687 | ||||||
|
Deferred compensation
and pension
|
553,158 | |||||||
|
Deferred income
taxes
|
(16,118 | ) | 334,567 | |||||
|
Loss on disposal
of fixed assets
|
37,431 | |||||||
|
Stock issued as
directors’ compensation
|
60,000 | 50,000 | ||||||
|
Change in assets
and liabilities, (net of effect of acquisition):
|
||||||||
|
Receivables
|
(290,197 | ) | (7,923,661 | ) | ||||
|
Inventories
|
(17,778,307 | ) | (573,681 | ) | ||||
|
Other current assets
|
2,048,502 | (59,832 | ) | |||||
|
Other assets
|
166,897 | (214,951 | ) | |||||
|
Accounts payable
|
7,721,322 | 3,837,559 | ||||||
|
Accrued and other
liabilities
|
42,425 | (2,845,538 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Net cash used in
operating activities
|
(1,032,433 | ) | (4,316,577 | ) | ||||
|
|
||||||||
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
||||||||
|
Purchase of fixed
assets
|
(2,660,940 | ) | (2,782,106 | ) | ||||
|
Acquisition of business
|
(92,916,237 | ) | ||||||
|
|
||||||||
|
|
||||||||
|
Net cash used in
investing activities
|
(95,577,177 | ) | (2,782,106 | ) | ||||
|
|
||||||||
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from revolving
credit facility (net)
|
47,988,443 | 4,241,638 | ||||||
|
Proceeds from long-term
debt
|
48,000,000 | |||||||
|
Repayments of long-term
debt
|
(1,803,860 | ) | (275,468 | ) | ||||
|
Debt financing costs
|
(2,310,550 | ) | ||||||
|
Proceeds from exercise
of stock options
|
690,363 | 1,465,871 | ||||||
|
|
||||||||
|
|
||||||||
|
Net cash provided
by financing activities
|
92,564,396 | 5,432,041 | ||||||
|
|
||||||||
|
|
||||||||
|
DECREASE IN CASH
AND CASH EQUIVALENTS
|
(4,045,214 | ) | (1,666,642 | ) | ||||
|
|
||||||||
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
5,060,859 | 2,159,050 | ||||||
|
|
||||||||
|
|
||||||||
|
CASH AND CASH EQUIVALENTS,
END OF PERIOD
|
$ | 1,015,645 | $ | 492,408 | ||||
|
|
||||||||
5
| 1. | INTERIM FINANCIAL REPORTING | |
| In the opinion of management, the accompanying interim 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 unaudited interim consolidated financial statements are considered to be of a normal and recurring nature. The results of the operations for the three-month periods and six-month periods ended June 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the whole year. Accordingly, these consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. | ||
| The Company accounts for its stock option plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for all stock option plans been determined consistent with the SFAS No. 123, “Accounting for Stock Based Compensation,” the Company’s net income and earnings per share would have resulted in the pro forma amounts as reported below. |
| The pro forma amounts are not representative of the effects on reported net income for future years. |
6
| June 30, 2005 | December 31, 2004 | June 30, 2004 | ||||||||||
|
Raw materials
|
$ | 10,865,761 | $ | 4,711,014 | $ | 6,949,144 | ||||||
|
Work-in-process
|
1,191,299 | 564,717 | 1,469,094 | |||||||||
|
Finished goods
|
72,955,072 | 26,565,240 | 28,878,360 | |||||||||
|
Factory outlet finished
goods
|
1,383,191 | 1,268,153 | 1,570,270 | |||||||||
|
Reserve for obsolescence
or lower of cost or market
|
(984,348 | ) | (150,000 | ) | (225,000 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 85,410,975 | $ | 32,959,124 | $ | 38,641,868 | ||||||
|
|
||||||||||||
| 3. | SUPPLEMENTAL CASH FLOW INFORMATION | |
| Cash paid for interest and federal, state and local income taxes was as follows: |
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2005 | 2004 | |||||||
|
Interest
|
$ | 3,701,000 | $ | 503,000 | ||||
|
|
||||||||
|
|
||||||||
|
Federal, state and
local income taxes
|
$ | 952,000 | $ | 2,580,000 | ||||
|
|
||||||||
| The Company issued 484,261 common shares valued at $11,473,838, as part of the purchase of the EJ Footwear LLC, Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC (the “EJ Footwear Group”) from SILLC Holdings LLC. | ||
| 4. | PER SHARE INFORMATION | |
| Basic earnings per share (EPS) is computed by dividing net income applicable 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, 2005 and 2004 is as follows: |
7
| 5. | RECENT FINANCIAL ACCOUNTING STANDARDS | |
| In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” The statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” The statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. SFAS 123(R) applies to all awards granted after the required effective date (the beginning of the first annual reporting period that begins after June 15, 2005 in accordance with the Securities and Exchange Commission’s delay of the original effective date of SFAS 123(R)) and to awards modified, repurchased or canceled after that date. As a result, beginning January 1, 2006, the Company will adopt SFAS 123(R) and begin reflecting the stock option expense determined under fair value based methods in our income statement rather than as pro forma disclosure in the notes to the financial statements. | ||
| In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin Number 107 (“SAB 107”) that provided additional guidance to public companies relating to share-based payment transactions and the implementation of SFAS 123(R), including guidance regarding valuation methods and related assumptions, classification of compensation expense and income tax effects of share-based payment arrangements. | ||
| The Company has not completed its assessment of the impact or method of adoption of SFAS 123(R) and SAB 107. | ||
| 6. | ACQUISITION | |
| On January 6, 2005, the Company completed the purchase of 100% of the issued and outstanding voting limited interests of the EJ Footwear Group from SILLC Holdings LLC. |
8
| The EJ Footwear Group was acquired to expand the Company’s branded product lines, principally occupational products, and provide new channels for the Company’s existing product lines. The aggregate purchase price for the interests of EJ Footwear Group, including closing date working capital adjustments, was $91.3 million in cash plus 484,261 shares of the Company’s common stock valued at $11,473,838. Common stock value was based on the average closing share price during the three days preceding and three days subsequent to the date of the acquisition agreement. | ||
| On January 6, 2005, to fund the acquisition of EJ Footwear Group, the Company entered into a loan and security agreement with GMAC Commercial Finance LLC, refinancing its former $45,000,000 revolving line of credit, for certain extensions of credit (the “Credit Facility”). The Credit Facility is comprised of (i) a five-year revolving credit facility up to a principal amount of $100,000,000 with an interest rate of LIBOR plus two and a half percent (2.5%) or prime plus one percent (1.0%) and (ii) a three-year term loan in the principal amount of $18,000,000 with an interest rate of LIBOR plus three and a quarter percent (3.25%) or prime plus one and three quarters percent (1.75%). The Credit Facility is secured by a first priority perfected security interest in all presently owned and hereafter acquired domestic personal property, subject to specified exceptions. Also, on January 6, 2005, the Company entered into a note agreement (the “Note Purchase Agreement”) with American Capital Financial Services, Inc., as agent, and American Capital Strategies, Ltd., as lender (collectively, “ACAS”), regarding $30,000,000 in six-year Senior Secured Term B Notes with an interest rate of LIBOR plus eight percent (8.0%). The Note Purchase Agreement provides, among other terms, that (i) the ACAS Senior Secured Term B Notes will be senior indebtedness of the Company, secured by essentially the same collateral as the Credit Facility, (ii) such note facility will be “last out” in the event of liquidation of the Company and its subsidiaries, and (iii) principal payments on such note facility will begin in the fourth year of such note facility. | ||
| The purchase price has been allocated to the Company’s tangible and intangible assets and liabilities acquired based upon the fair values and income tax basis as determined by independent appraisals. Goodwill resulting from the transaction can not practicably be allocated between business segments and will not be tax deductible. The purchase price has been allocated as follows: |
9
| Estimated amounts of identified intangibles and goodwill and the related allocation by segment are subject to final allocation based on independent appraisals of fair value of assets acquired and final determination of income tax basis of assets and liabilities. During the second quarter, the Company paid the final adjustment of purchase price of $1,795,435. |
| Gross | Accumulated | Carrying | ||||||||||
| December 31, 2004 | Amount | Amortization | Amount | |||||||||
|
Trademarks (Wholesale)
|
$ | 2,225,887 | $ | 2,225,887 | ||||||||
|
Patents
|
467,336 | $ | 131,796 | 335,540 | ||||||||
|
Goodwill
|
1,649,732 | 91,871 | 1,557,861 | |||||||||
|
|
||||||||||||
|
Total Intangibles
|
$ | 4,342,955 | $ | 223,667 | $ | 4,119,288 | ||||||
|
|
||||||||||||
| Gross | Accumulated | Carrying | ||||||||||
| June 30, 2005 (Unaudited) | Amount | Amortization | Amount | |||||||||
|
Trademarks:
|
||||||||||||
|
Wholesale
|
$ | 28,702,080 | $ | 28,702,080 | ||||||||
|
Retail
|
15,100,000 | 15,100,000 | ||||||||||
|
Patents
|
2,905,660 | $ | 375,664 | 2,529,996 | ||||||||
|
Customer Relationships
|
1,000,000 | 100,000 | 900,000 | |||||||||
|
Goodwill
|
20,524,421 | 91,871 | 20,432,550 | |||||||||
|
|
||||||||||||
|
Total Intangibles
|
$ | 68,232,161 | $ | 567,535 | $ | 67,664,626 | ||||||
|
|
||||||||||||
| Amortization expense for intangible assets was $170,267 and $6,517 for the three months ended June 30, 2005 and 2004, respectively, and $343,868 and $12,639 for the six months ended June 30, 2005 and 2004, respectively. The weighted average amortization period for patents is six years and for customer relationships is five years. |
| The results of operations of EJ Footwear Group are included in the results of operations of the Company effective January 1, 2005, as management determined that results of operations were not significant and no material transactions occurred during the period from January 1, 2005 to January 6, 2005. |
10
| The following table reflects the unaudited consolidated results of operations on a pro forma basis had EJ Footwear been included in operating results from January 1, 2004. There are no material non-recurring items in the pro forma results of operations. |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Service cost
|
$ | 130,966 | $ | 128,080 | $ | 261,932 | $ | 256,159 | ||||||||
|
Interest
|
132,265 | 90,758 | 264,530 | 252,271 | ||||||||||||
|
Expected return
on assets
|
(170,931 | ) | (86,391 | ) | (341,862 | ) | (257,465 | ) | ||||||||
|
Amortization of
unrecognized net loss
|
21,404 | 32,141 | 42,808 | 67,552 | ||||||||||||
|
Amortization of
unrecognized transition obligation
|
4,077 | 4,076 | 8,154 | 8,153 | ||||||||||||
|
Amortization of
unrecognized prior service cost
|
33,848 | 33,849 | 67,696 | 67,697 | ||||||||||||
|
|
||||||||||||||||
|
Net pension cost
|
$ | 151,629 | $ | 202,513 | $ | 303,258 | $ | 394,367 | ||||||||
|
|
||||||||||||||||
11
| The Company’s unrecognized benefit obligations existing at the date of transition for the non-union plan is being amortized over 21 years. Actuarial assumptions used in the accounting for the plans were as follows: |
| June 30, | ||||||||
| 2005 | 2004 | |||||||
|
Discount rate
|
5.75 | % | 5.75 | % | ||||
|
|
||||||||
|
Average rate of
increase in compensation levels
|
3.0 | % | 3.0 | % | ||||
|
|
||||||||
|
Expected long-term
rate of return on plan assets
|
8.0 | % | 8.0 | % | ||||
| The Company’s desired investment result is a long-term rate of return on assets that is at least 8%. The target rate of return for the plans have been based upon the assumption that returns will approximate the long-term rates of return experienced for each asset class in the Company’s investment policy. The Company’s investment guidelines are based upon an investment horizon of greater than five years, so that interim fluctuations should be viewed with appropriate perspective. Similarly, the Plan’s strategic asset allocation is based on this long-term perspective. |
| The Company expects to make contributions to the plan in 2005 of approximately $1.0 million. At June 30, 2005, no Company contribution had been made. |
| The Company also sponsors 401(k) savings plans for substantially all of its employees. The Company provides contributions to the plans on a discretionary basis for workers covered under the defined benefits pension plan, and matches eligible employee contributions up to 4% of applicable salary for qualified employees not covered by the defined benefits pension plan. Total Company contributions to 401(k) plans were $0.2 million in 2005 and none in 2004. |
12
| 9. | SEGMENT INFORMATION |
| The Company has identified three reportable segments: Wholesale, Retail and Military. Wholesale includes sales of footwear and accessories to several classifications of retailers including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Retail includes all sales from the Company’s stores and all sales in the Company’s Lehigh division, which includes sales via shoemobiles to individual customers. Military includes sales to the U.S. Military. The following is a summary of segment results for the Wholesale, Retail, and Military segments. |
| For reporting purposes, the Wholesale segment aggregates our footwear manufacturing, sourcing, and Wildwolf operating segments with our apparel, glove, and other operating segments. Segment asset information is not prepared or used to assess segment performance. |
13
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
NET SALES:
|
||||||||||||||||
|
Wholesale
|
$ | 45,520,269 | $ | 23,981,465 | $ | 87,383,197 | $ | 40,089,142 | ||||||||
|
Retail
|
14,216,418 | 691,143 | 30,111,095 | 1,499,331 | ||||||||||||
|
Military
|
5,782,950 | 2,761,379 | 9,523,429 | 7,727,603 | ||||||||||||
|
|
||||||||||||||||
|
Total Net Sales
|
$ | 65,519,637 | $ | 27,433,987 | $ | 127,017,721 | $ | 49,316,076 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
GROSS MARGIN:
|
||||||||||||||||
|
Wholesale
|
$ | 17,322,197 | $ | 7,194,641 | $ | 32,679,481 | $ | 12,155,897 | ||||||||
|
Retail
|
7,668,139 | 210,631 | 16,026,272 | 416,713 | ||||||||||||
|
Military
|
732,903 | 370,937 | 1,225,358 | 822,203 | ||||||||||||
|
|
||||||||||||||||
|
Total Gross Margin
|
$ | 25,723,239 | $ | 7,776,209 | $ | 49,931,111 | $ | 13,394,813 | ||||||||
|
|
||||||||||||||||
PERCENTAGE OF NET SALES
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
|
Net Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost Of Goods Sold
|
60.7 | % | 71.7 | % | 60.7 | % | 72.8 | % | ||||||||
|
|
||||||||||||||||
|
Gross Margin
|
39.3 | % | 28.3 | % | 39.3 | % | 27.2 | % | ||||||||
|
|
||||||||||||||||
|
Selling, General
and Administrative Expenses
|
29.7 | % | 19.7 | % | 31.6 | % | 21.7 | % | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Income From Operations
|
9.6 | % | 8.6 | % | 7.7 | % | 5.5 | % | ||||||||
|
|
||||||||||||||||
14
15
16
17
18
19
20
21
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
| None |
| The Company recently became aware that the continuous offering of certain units in the Company’s Stock Fund (the “Stock Fund”) of the Company’s 401(k) Plan (the “Retirement Plan”) representing approximately 16,514 shares of the Company’s common stock purchased by the trustee of the Retirement Plan on the open market from time to time had not been registered under the Securities Act of 1933, as amended (the “Act”). Participants in the Retirement Plan had the option to invest defined contributions into the Stock Fund. The Company received no consideration for units purchased by participants in the Stock Fund of the Retirement Plan. While the Company cannot predict the possible effect of federal or state regulatory action, the Company does not believe that the failure to register the offering and sale of these units and the shares will have a material adverse effect on the Company’s financial position or results of operation. |
| None |
| The 2005 Annual Meeting of Shareholders was held on May 17, 2005, and the following proposal was acted upon: |
| Proposal: To elect four Class I Directors of the Company, each to serve for a two-year term expiring at the 2007 Annual Meeting of Shareholders |
22
| None |
| * | Filed with this report. | |
| + | Furnished with this report. |
23
|
|
ROCKY SHOES & BOOTS, INC. | |||
|
|
||||
|
Date: August 9,
2005
|
/s/ James E. McDonald | |||
|
|
||||
|
|
James E. McDonald, Executive Vice President and | |||
|
|
Chief Financial Officer* |
| * | In his capacity as Executive Vice President and Chief Financial Officer, Mr. McDonald is duly authorized to sign this report on behalf of the Registrant. |
24
Exhibit 10(a)
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT is made this 1st day of December, 2004, (the "Agreement") between Georgia Boot LLC, a Delaware limited liability company (the "Company"), and Thomas R. Morrison (the "Executive").
Recitals
WHEREAS, Executive is employee "at-will" of the Company, which is now a wholly-owned subsidiary of SILLC Holdings LLC, a Delaware limited liability company ("SILLC").
WHEREAS, the Company is proposed to be sold to and acquired by Rocky Shoes & Boots, Inc., an Ohio corporation ("Rocky"), as a result of the consummation of the sale of the Company and other subsidiaries of SILLC to Rocky (the "Transaction"), as described in the Purchase and Sale of Equity Interests Agreement, made and entered into as of December 6, 2004, by and among Rocky, SILLC, and for limited purposes thereof, Strategic Industries LLC (the "Purchase Agreement").
WHEREAS, as a material consideration and inducement for Rocky to enter into and perform the Purchase Agreement, Executive has agreed to simultaneously enter into a Confidentiality, Assignment and Non-Competition Agreement for Key Personnel (the "Key Personnel Agreement") and this Agreement with the Company. The Company desires to retain the services of Executive as an "at-will" employee pursuant to the terms and conditions of this Agreement.
WHEREAS, the effectiveness of this Agreement is conditioned upon the consummation of the Transaction, and this Agreement shall have no legally binding effect upon the Company or the Executive if the Transaction is not consummated pursuant to the Purchase Agreement.
NOW, THEREFORE, in consideration of these premises and the mutual and dependent promises hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. Upon the consummation of the Transaction, the Company, as a wholly-owned subsidiary of Rocky, shall employ Executive and Executive shall accept such employment upon the terms and conditions hereinafter set forth.
2. DUTIES.
(a) Executive shall be employed to serve as President of the Company, subject to the authority and direction of the President and the Board of Directors of the Company. Executive shall also serve as an officer of Rocky if and as elected by the Board of Directors of Rocky.
(b) Executive shall also perform such other duties and responsibilities and exercise such other authority, perform such other or additional duties and responsibilities and have such other or different title (or have no title) as the Board of Directors of the Company or Rocky, as the case may be, may prescribe from time to time.
(c) So long as Executive is employed under this Agreement, Executive shall devote his full time and efforts exclusively on behalf of the Company and Rocky and to competently, diligently and effectively discharge his duties hereunder. Executive shall not be prohibited from engaging in such personal, charitable, or other non-employment activities as do not interfere with his full time employment hereunder and which do not violate the other provisions of this Agreement. Executive further agrees to comply fully with all reasonable policies of the Company as are from time to time in effect.
3. COMPENSATION.
(a) Base Salary. As compensation for all services rendered to the Company pursuant to this Agreement, in whatever capacity rendered, the Company shall pay to Executive a base salary at the rate of $193,000 per year for services performed from the consummation of the Transaction through December 31, 2005 (the "Basic Salary"), payable monthly or in other more frequent installments consistent with the regular payroll practices for payment of similar executives as determined from time to time by the Company. Thereafter, the Basic Salary may be increased, but not decreased, from time to time, by the Board of Directors of the Company.
(b) Annual Cash Bonus Plan. The Executive shall also be included in an annual cash bonus program in 2005 in a manner consistent with the plan to be adopted by the Board of Directors of Rocky for 2005 for other similarly situated officers of Rocky and its subsidiaries. For 2005, Executive will be eligible for a bonus in the range of 16-35% (50% Georgia Boots/Durango/John Deere and 50% Corporate) of Executive's Basic Salary; provided, if, during 2005, Executive is terminated without cause by the Company, Executive shall be eligible for a pro rata bonus based on the number of months Executive is employed by the Company during 2005, such pro rata payment payable simultaneous with the payment of the annual bonus payments, if any, payable to similarly situated officers of Rocky and its subsidiaries under the cash bonus program for 2005. Subject to the immediately preceding sentence, Executive must remain employed by the Company through December 31, 2005 to earn the bonus, as the bonus plan will be based on annual results. The cash bonus program is determined annually by the Compensation Committee of the Board of Directors of Rocky and may change in 2006 and future years.
(c) Stock Options. At the consummation of the Transaction and the effectiveness of this Agreement, Executive shall receive stock options under Rocky's 2004 Stock Option Plan to purchase 20,000 shares of common stock exercisable at fair market value per share at the date of grant, which options shall vest based on the Executive continuing to be employed by the Company or by Rocky or one of its subsidiaries at the rate of 25% of such option shares per year of employment on each of the first, second, third and fourth anniversaries of the date of grant. The options shall terminate on the earlier of the eighth anniversary of the date of grant or until exercised in full or otherwise has terminated in accordance with the terms of the 2004 Stock Option Plan.
4. BUSINESS EXPENSES; MOVING EXPENSES.
(a) The Company shall promptly pay directly, or reimburse Executive for, all business expenses to the extent such expenses are paid or incurred by Executive during the term of employment in accordance with Company policy in effect from time to time
and to the extent such expenses are reasonable and necessary to the conduct by Executive of the Company's business and properly substantiated.
(b) The Company shall pay directly to, or reimburse, Executive for reasonable moving expenses associated with the Executive's relocation, if any, to Rocky's Nelsonville, Ohio office, including the payment of any realtors' commissions in an amount not to exceed 6% associated with the sale of Executive's primary residence, the expense of Executive's temporary housing for a period of time not to exceed 3 months, and the expenses associated with no more than 2 visits by the Executive's spouse and/or family to the Nelsonville, Ohio area to examine housing and schools.
5. BENEFITS. During the term of this Agreement and Executive's employment hereunder, the Company shall provide to Executive such insurance, vacation, sick leave and other like benefits as are provided from time to time to its other executives holding equivalent executive positions with the Company or Rocky in accordance with the policy of the Company or Rocky and as may be established from time to time.
6. TERM; TERMINATION. Executive is employed by the Company "at will" and Executive's employment may be terminated at any time as provided below. For purposes of this paragraph, "Termination Date" shall mean the date on which any notice period required under this paragraph expires or, if no notice period is specified in this paragraph, the effective date of the termination referenced in the notice.
(a) Executive may terminate his employment upon giving at least 14 days' advance written notice to the Company and the Company will pay Executive the earned but unpaid portion of Executive's Basic Salary through the Termination Date. If Executive gives notice of termination hereunder, the Company shall have the right to relieve Executive, in whole or in part, of his duties under this Agreement and to advance the Termination Date from the date set by Executive's notice to any earlier date within the notice period.
(b) The Company may terminate Executive's employment without cause upon giving 14 days' advance written notice to Executive. If the Company gives notice of termination under this paragraph, the Company shall have the right to relieve Executive, in whole or in part, of his duties under this Agreement at any time during the notice period. If Executive's employment is terminated without cause under this paragraph, the Company will pay Executive the earned but unpaid portion of Executive's Basic Salary through the Termination Date and will continue to pay Executive his Basic Salary for six months following the Termination Date (the "Severance Period"); provided, however, that the Company may terminate payment of the Basic Salary during the Severance Period if Executive accepts other employment or if Executive breaches any provision of the Key Personnel Agreement.
(c) If the Company gives notice of termination under paragraph (b) above during 2005, the Company shall be deemed to have waived the covenant set forth in Section 2(a)(i) of the Confidentiality, Assignment and Non-Competition Agreement for Key Personnel with respect to the Executive. In addition, if during the term of this Agreement, the Company gives Executive notice of termination relating to or arising from the Executive's refusal to relocate to Rocky's Nelsonville, Ohio office, the Company will pay Executive the earned and unpaid portion of Executive's Basic Salary
through the Termination Date and will continue to pay Executive his Basic Salary during the Severance Period and the Company shall be deemed to have waived the covenant set forth in Section 2(a)(i) of the Confidentiality, Assignment and Non-Competition Agreement for Key Personnel with respect to the Executive.
(d) The Company may terminate Executive's employment upon a determination by the Company that "good cause" exists for Executive's termination and the Company serves written notice of such termination upon the Executive. As used in this Agreement, the term "good cause" shall refer only to any one or more of the following grounds:
(i) commission of an act of dishonesty, including, but not limited to, misappropriation of funds or any property of the Company;
(ii) engagement in activities or conduct clearly injurious to the reputation of the Company or Rocky;
(iii) refusal to perform his assigned duties and responsibilities;
(iv) gross insubordination by the Executive;
(v) the violation of any of the material terms and conditions of this Agreement or any written agreement or agreements the Executive may from time to time have with the Company (following 30-days' written notice from the Company specifying the violation and Executive's failure to cure such violation within such 30-day period); or
(vi) commission of any misdemeanor involving an act of moral turpitude or any felony.
In the event of a termination under this subparagraph (d), the Company will pay Executive the earned but unpaid portion of Executive's Basic Salary through the Termination Date.
A refusal by the Executive to relocate to Rocky's Nelsonville, Ohio office will not constitute "good cause" for termination under this subparagraph (d).
(e) Executive's employment shall terminate upon the death or permanent disability of Executive. For purposes hereof, "permanent disability," shall mean the inability of the Executive, as determined by the Board of Directors of the Company, by reason of physical or mental illness to perform the duties required of him under this Agreement for more than 180 days in any one year period. Successive periods of disability, illness or incapacity will be considered separate periods unless the later period of disability, illness or incapacity is due to the same or related cause and commences less than six months from the ending of the previous period of disability. Upon a determination by the Board of Directors of the Company that the Executive's employment shall be terminated under this subparagraph (e), the Board of Directors shall give the Executive 30 days' prior written notice of the termination. If a determination of the Board of Directors under this subparagraph (e) is disputed by the Executive, the parties agree to abide by the decision of a panel of three physicians. The Company will select a physician, the Executive will select a physician and the physicians selected by the Company and the Executive will select a third physician. The Executive agrees to make
himself available for and submit to examinations by such physicians as may be directed by the Company. Failure to submit to any examination shall constitute a breach of a material part of this Agreement.
7. NO CONFLICTS. Executive represents that the performance by Executive of all the terms of this Agreement, as a continuing Executive of the Company, does not and will not breach any agreement as to which Executive is or was a party and which requires Executive to keep any information in confidence or in trust. Executive has not entered into, and will not enter into, any agreement either written or oral in conflict herewith.
8. JURISDICTION AND VENUE. The parties designate the Court of Common Pleas of Athens County, Ohio, as the court of competent jurisdiction and venue of any actions or proceedings relating to this Agreement and hereby irrevocably consent to such designation, jurisdiction and venue. Such jurisdiction and venue is exclusive. The parties further agree that the mailing by certified or registered mail, return receipt requested, of any process required by any such court shall constitute valid and lawful service of process against them, without the necessity for service by any other means provided by statute or rule of court.
9. WITHHOLDING. The Company may withhold from any payments to be made hereunder such amounts as it may be required to withhold under applicable federal, state or other law, and transmit such withheld amounts to the appropriate taxing authority.
10. ASSIGNMENT. This Agreement is personal to the Executive, and Executive may not assign or delegate any of his rights or obligations hereunder. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the respective parties hereto, their heirs, executors, administrators, successors and assigns.
11. WAIVER. The waiver by either party hereto of any breach or violation of any provision of this Agreement by the other party shall not operate as or be construed to be a waiver of any subsequent breach by such waiving party.
12. NOTICES. Any and all notices required or permitted to be given under this Agreement will be sufficient and deemed effective three (3) days following deposit in the United States mail if furnished in writing and sent by certified mail to Executive at the address for Executive appearing in the Company's personnel records and to the Company at:
Georgia Boot LLC c/o Rocky Shoes & Boots, Inc. 39 East Canal Street Nelsonville, OH 45764 Attention: President of Rocky Shoes & Boots, Inc.
with a copy to:
Curtis A. Loveland, Esq.
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
13. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Ohio without regard to its conflict of laws rules.
14. AMENDMENT. This Agreement may be amended in any and every respect by agreement in writing executed by both parties hereto.
15. SECTION HEADINGS. Section headings contained in this Agreement are for convenience only and shall not be considered in construing any provision hereof.
16. BINDING EFFECT; ENTIRE AGREEMENT.
(a) This Agreement is conditioned upon, and is effective only upon, the consummation of the transactions contemplated by the Purchase Agreement, including but not limited to, the sale by SILLC and the purchase by Rocky, of the Company. In the event the transactions contemplated by the Purchase Agreement are not consummated pursuant to the terms thereof, this Agreement is null and void and without effect with respect to either the Company or Executive.
(b) This Agreement when effective terminates, cancels and supersedes all previous employment agreements or other agreements, including but not limited to the EJ Footwear Management Incentive Plan Corporate Plan for Year Ending September 30, 2005, relating to the employment of Executive and made by the Executive with the Company or SILLC or their affiliates, written or oral, except for the Key Personnel Agreement, and this Agreement contains the entire understanding of the parties hereto with respect to the subject matter of this Agreement.
(c) This Agreement was fully reviewed and negotiated on behalf of each party and shall not be construed against the interest of either party as the drafter of this Agreement. EXECUTIVE ACKNOWLEDGES THAT, BEFORE PLACING HIS SIGNATURE HEREUNDER, HE HAS READ ALL OF THE PROVISIONS OF THIS EMPLOYMENT AGREEMENT AND HAS THIS DAY RECEIVED A COPY HEREOF.
17. SEVERABILITY. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement or parts thereof.
18. SURVIVAL. Section 8 of this Agreement and this Section 18 shall survive any termination or expiration of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
EXECUTIVE: GEORGIA BOOT LLC
/s/ Thomas R. Morrison /s/ Gerald M. Cohn
-------------------------- ----------------------------
Name: Thomas R. Morrison Name: Gerald M. Cohn
Title: President and CEO
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Exhibit 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
OF THE CHIEF EXECUTIVE OFFICER
I, Mike Brooks, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Rocky Shoes & Boots, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: August 9, 2005
/s/ Mike Brooks
------------------------------------
Mike Brooks
Chairman and Chief Executive Officer
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Exhibit 31.2
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
OF THE CHIEF FINANCIAL OFFICER
I, James E. McDonald, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Rocky Shoes & Boots, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: August 9, 2005
/s/ James E. McDonald
----------------------------------------------------
James E. McDonald
Executive Vice President and Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, OF THE CHIEF
EXECUTIVE OFFICER
In connection with the Quarterly Report of Rocky Shoes & Boots, Inc. (the "Company") on Form 10-Q for the fiscal quarter ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mike Brooks, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Mike Brooks
-------------------------------------------------
Mike Brooks, Chairman and Chief Executive Officer
August 9, 2005
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This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, OF THE CHIEF
FINANCIAL OFFICER
In connection with the Quarterly Report of Rocky Shoes & Boots, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended June 30, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, James E. McDonald, Executive Vice President and Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James E. McDonald
-----------------------------------------------------------------------
James E. McDonald, Executive Vice President and Chief Financial Officer
August 9, 2005
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This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.