1
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
References to Fiscal 1997 and Fiscal 1996 are to fiscal years of the Company
ended December 31 of the respective year
PERCENTAGE OF NET SALES
TWELVE MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1995
---- ---- ----
(UNAUDITED)
Net Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 72.9 75.3 81.7
----- ----- -----
Gross Margin 27.1 24.7 18.3
Selling, General and
Administrative Expenses 17.3 16.9 17.5
----- ----- -----
Income from Operations 9.8% 7.8% 0.8%
===== ===== =====
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net sales increased $21,878,965, or 29.9%, to $95,026,786 for Fiscal 1997,
versus $73,147,821 in Fiscal 1996. The increase in net sales was principally due
to increased sales of rugged outdoor footwear, which grew $7.5 million,
increased sales of occupational footwear, which grew $6.1 million, and to a
lesser extent, sales of the Company's handsewn casual footwear which grew $3.6
million. During Fiscal 1997, the Company opened 440 new accounts and continues
to benefit from diversification of its customer base with sales to new accounts
in each of its product categories. The Company principally sells its products
through mail order catalogs, outdoor specialty stores, sporting goods stores,
specialty safety stores, department store chains and independent retail stores.
Average selling prices were approximately 3% higher across the Company's product
categories in Fiscal 1997.
GROSS MARGIN
The Company's gross margin improved $7,682,472, or 42.6%, to $25,726,715 for
Fiscal 1997, compared with $18,044,243 for Fiscal 1996. As a percentage of net
sales, gross margin rose to 27.1% in Fiscal 1997, versus 24.7% in Fiscal 1996.
The increase in gross margin as a percentage of net sales is primarily the
result of higher production levels in all of the Company's manufacturing plants
and increased sales of newer products with higher gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $4,083,822, or
33.1%, to $16,416,341 for Fiscal 1997,, versus $12,332,519 in Fiscal 1996. As a
percentage of net sales, SG&A expenses rose to 17.3% in Fiscal 1997, from 16.9%
in Fiscal 1996. The increase in SG&A expense for Fiscal 1997 resulted from
higher sales commissions due to the growth in net sales, additional selling and
administrative salaries, and consulting expenses associated with the
implementation of new financial and production software systems.
4
2
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense rose $449,176, or 21.4%, to $2,552,732 for Fiscal 1997, versus
$2,103,556 in Fiscal 1996. The increase in interest expense is attributable
primarily to higher outstanding balances during Fiscal 1997 on the Company's
line of credit. The line of credit is used to support increased inventory and
accounts receivable balances related to higher net sales. The Company benefited
from lower interest expense during the fourth quarter of Fiscal 1997 due to net
proceeds of $26.9 million from a follow-on stock offering which were used in
part to reduce outstanding debt.
INCOME TAXES
Income taxes were $2,105,000 for Fiscal 1997, versus $918,154 for Fiscal 1996.
The Company's effective tax rate was 30.7% in Fiscal 1997 versus 24.7% in Fiscal
1996. The relatively low effective tax rates result from favorable income tax
treatment afforded income earned by the Company's subsidiary in Puerto Rico. The
income of this subsidiary is exempt from taxation under Section 936 of the
Internal Revenue Code. However, Section 936 of the Internal Revenue Code has
been repealed such that future tax credits available to the Company will be
capped beginning in 2002 and terminate in 2006. Additionally, the Company
receives abatements on its commonwealth and municipal taxes on its subsidiary in
Puerto Rico. The increase in the effective tax rate in Fiscal 1997 is due to a
smaller portion of the Company's income being earned in Puerto Rico and the
Dominican Republic in Fiscal 1997 versus Fiscal 1996.
FISCAL 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1995
NET SALES
Net sales for Fiscal 1996 rose $12,764,160, or 21.1%, to $73,147,821 from
$60,383,661 for 1995. The Company's sales of rugged outdoor footwear increased
$5.8 million, sales of occupational footwear increased $2.2 million, sales of
handsewn casual footwear increased $1.4 million and sales in the factory outlet
store increased $.07 million. Net sales increased in Fiscal 1996 from further
diversification of the customer base, which included increased penetration in
certain geographic markets, the addition of many smaller customers and
substantial re-orders. The Company also began selling through new retail sales
channels which included regional and national department stores. Average selling
prices were approximately 3.0% higher in Fiscal 1996 than 1995 across the
Company's product categories.
GROSS MARGIN
The Company's gross margin increased $6,995,405, or 63.3%, to $18,044,243 for
Fiscal 1996, from $11,048,838 for the same period in 1995. As a percentage of
net sales, gross margin rose to 24.7% for Fiscal 1996, versus 18.3% for the same
period in 1995. The increase in gross margin was due to improved factory
utilization in all of the Company's manufacturing facilities as a result of
increased new orders and re-orders by a growing number of customers. In
addition, increased sales of the Company's brand handsewn casual footwear
contributed to the improved gross margin for Fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased $1,762,695, or 16.7%, to $12,332,519 for Fiscal 1996,
from $10,569,824 in 1995. As a percentage of net sales, SG&A expenses declined
to 16.9% in Fiscal 1996, from 17.5% in 1995. The decrease as a percentage of net
sales was due to increased sales volume with no increase in the fixed cost
component of SG&A expenses combined with a decrease in advertising expenses. In
1995, the Company implemented specific marketing initiatives, including
increased advertising and
5
3
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
additional sales personnel. The impact of such initiatives resulted in greater
sales volumes in Fiscal 1996 with minimal additional costs.
INTEREST EXPENSE
Interest expense increased $3,187, or 0.2%, to $2,103,556 for Fiscal 1996, from
$2,100,369 in 1995. Interest expense remained relatively constant due to
improved cash flow in Fiscal 1996, similar average balances outstanding on the
Company's line of credit, and generally stable interest rates during Fiscal 1996
and 1995.
INCOME TAXES
Income taxes for Fiscal 1996 were $918,154, versus a benefit of $988,395 in
1995. The Company's relatively low effective tax rate of 24.7% for Fiscal 1996
resulted from favorable income tax treatment afforded under the Internal Revenue
Code for income earned by the Company's subsidiary in Puerto Rico and local tax
abatements available to such subsidiary. In addition, during the first three
quarters of 1996, the Company provided no income taxes on the earnings of its
Dominican Republic subsidiary as the Company intended to reinvest such earnings
in that subsidiary on a long-term basis. In the fourth quarter of 1996, the
Company determined that it would repatriate future earnings from its subsidiary
in the Dominican Republic and, accordingly, began to provide appropriate income
taxes on such earnings.
The high effective tax benefit rate in 1995 of 64.8% was due to the reasons
cited for Fiscal 1996 and to losses incurred domestically for which a full tax
benefit was obtained compared to earnings in the Puerto Rico and Dominican
Republic subsidiaries for which the related tax effect was minimal.
LIQUIDITY AND CAPITAL RESOURCES
The Company has principally funded its working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness,
and in Fiscal 1997, through issuance of additional shares of common stock.
Working capital is primarily used to support changes in accounts receivable and
inventory as a result of the Company's seasonal business cycle and business
expansion. These requirements are generally lowest in the months of January
through March of each year and highest during the months of May through October
of each year. In addition, the Company requires financing to support additions
to machinery, equipment and facilities as well as the introduction of footwear
styles.
At December 31, 1997, the Company had working capital of $55,987,571 versus
$30,608,581 on the same date in 1996. During the fourth quarter of 1997, the
Company received $26.9 million of net proceeds from a follow-on common stock
offering and the exercise of the underwriters' over-allotment option in
connection therewith. The proceeds were used to reduce outstanding debt and for
working capital.
The Company has a revolving line of credit which provides for advances based on
a percentage of eligible accounts receivable and inventory with maximum
borrowing limits of $42,000,000 until January 1, 1998, when the line decreased
to $25,000,000. The maximum available under the line of credit increases to
$42,000,000 on May 16, 1998 through January 1, 1999, when it decreases to
$25,000,000. The line of credit expires April 30, 1999. Changes in the line of
credit during the year match the Company's seasonal requirements for working
capital. As of December 31, 1997, the Company had borrowed $10,600,000 against
its available line of credit of $29,687,481. In early 1998, the Company
initiated discussions with its primary lender to re-negotiate more favorable
terms on the existing line of credit agreement.
Cash paid for capital expenditures during Fiscal 1997 was $4,462,236, which was
funded through operating cash flows, long-term debt and equity financing.
Capital expenditures for 1998 are expected to be
6
4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
approximately $3,000,000 for machinery and equipment to support increased
production and for lasts, dies and patterns for new footwear styles. The Company
believes it will be able to finance such additions and meet operating
expenditure requirements in 1998 through available cash on hand, additional
long-term borrowings and operating cash flows.
INFLATION
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of raw materials, salaries
and employee benefits. The Company attempts to minimize or offset the effects of
inflation through increased selling prices, productivity improvements and cost
reductions.
INFORMATION SYSTEMS AND THE YEAR 2000
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the Year 2000 problem. The Company
is currently engaged in a comprehensive project to upgrade its information,
technology, manufacturing and facilities computer software to programs that will
consistently and properly recognize the Year 2000. Most of the Company's systems
include new packaged software recently purchased from large vendors who have
represented that these systems are already Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram or
replace and test all of its software for Year 2000 compliance, and the Company
expects to complete the project in early 1999. The estimated cost for this
project could range as high as $300,000, including the cost of new systems which
will be capitalized. This cost is being funded through operating cash flows.
Failure by the Company and/or vendors and customers to complete Year 2000
compliance work in a timely manner could have a material adverse effect on
certain of the Company's operations.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
will require adoption in 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating segments.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company has not yet
determined what, if any, impact the adoption of this Statement will have on its
financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
include statements regarding growth opportunities, fashion trends, product
acceptance, expanded use of sourced products, distribution channels, marketing
plans, sales, profitability, income taxes, working capital, and anticipated
capital expenditures and financing thereof. Investors are cautioned that such
statements involve risks and uncertainties that to many factors, including, but
not limited to, the changes in consumer demand, seasonality, impact of weather,
competition, reliance on suppliers, changing retailing trends, reliance on
foreign manufacturing, changes in tax rates, limited protection of proprietary
technology, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements.
7
5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996 2-3
Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996,
the Six Months Ended December 31, 1995, the Twelve Months
Ended December 31, 1995 (unaudited), and the Year Ended June 30, 1995 4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1997 and 1996, the Six Months Ended December 31, 1995,
and the Year Ended June 30, 1995 5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996, the Six Months Ended December 31, 1995,
the Twelve Months Ended December 31, 1995 (unaudited), and the Year Ended June 30, 1995 6
Notes to Consolidated Financial Statements 7-19
6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Rocky Shoes & Boots, Inc.:
We have audited the accompanying consolidated balance sheets of Rocky Shoes &
Boots, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1997 and 1996, the six months ended December 31,
1995, and the year ended June 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rocky Shoes & Boots, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years ended December 31, 1997 and 1996, the six
months ended December 31, 1995, and the year ended June 30, 1995 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Columbus, Ohio
March 6, 1998
7
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
------------------------------
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 8,556,883 $ 349,637
Accounts receivable - trade, net 17,789,329 12,409,920
Other receivables 475,593 678,293
Inventories 32,894,236 25,389,902
Deferred income taxes 1,474,799 926,297
Other current assets 850,018 706,097
------------ ------------
Total current assets 62,040,858 40,460,146
FIXED ASSETS, AT COST:
Property, plant and equipment 30,557,770 25,544,360
Less - accumulated depreciation (12,949,316) (10,035,763)
------------ ------------
Total fixed assets - net 17,608,454 15,508,597
DEFERRED PENSION ASSET 216,260 953,211
OTHER ASSETS 1,089,266 1,168,217
------------ ------------
TOTAL ASSETS $ 80,954,838 $ 58,090,171
============ ============
See notes to consolidated financial statements.
-2-
8
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------
1997 1996
CURRENT LIABILITIES:
Accounts payable $ 2,414,936 $ 3,036,705
Current maturities - long-term debt 1,173,840 3,609,645
Accrued taxes - other 355,134 447,203
Accrued income taxes 304,808 802,658
Accrued salaries and wages 1,118,331 921,034
Accrued other 686,238 1,034,320
----------- -----------
Total current liabilities 6,053,287 9,851,565
LONG-TERM DEBT - Less current maturities 13,406,962 19,520,029
DEFERRED LIABILITIES:
Deferred compensation 241,673 246,500
Deferred income taxes 2,049,256 1,344,507
Deferred pension liability 7,130 752,481
----------- -----------
Total deferred liabilities 2,298,059 2,343,488
----------- -----------
Total liabilities 21,758,308 31,715,082
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, Series A, no par value, $.06 stated
value; issued 1997 - 90,000 shares; 1996 - 100,000 shares 5,400 6,000
Common stock, no par value; 10,000,000 shares
authorized; issued 1997 - 5,476,620 shares; 1996 - 3,782,500 shares 42,604,658 14,543,947
Stock held in treasury, at cost - 116,952 common
shares and 7,143 preferred shares (1,226,059) (1,226,059)
Retained earnings 17,812,531 13,051,201
----------- -----------
Total shareholders' equity 59,196,530 26,375,089
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,954,838 $58,090,171
=========== ===========
See notes to consolidated financial statements.
-3-
9
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS
ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, JUNE 30,
1997 1996 (UNAUDITED) 1995 1995
NET SALES $95,026,786 $73,147,821 $60,383,661 $36,123,862 $60,226,827
COST OF GOODS SOLD 69,300,071 55,103,578 49,334,823 28,886,555 48,366,376
----------- ----------- ----------- ----------- -----------
GROSS MARGIN 25,726,715 18,044,243 11,048,838 7,237,307 11,860,451
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 16,416,341 12,332,519 10,569,824 6,863,623 8,629,172
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 9,310,374 5,711,724 479,014 373,684 3,231,279
----------- ----------- ----------- ----------- -----------
OTHER INCOME AND (EXPENSES):
Interest expense (2,552,732) (2,103,556) (2,100,369) (1,211,646) (2,104,787)
Other - net 108,688 115,945 95,999 14,523 109,649
----------- ----------- ----------- ----------- -----------
Total other - net (2,444,044) (1,987,611) (2,004,370) (1,197,123) (1,995,138)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 6,866,330 3,724,113 (1,525,356) (823,439) 1,236,141
INCOME TAX EXPENSE (BENEFIT) 2,105,000 918,154 (988,395) (333,185) (196,440)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 4,761,330 $ 2,805,959 $ (536,961) $ (490,254) $ 1,432,581
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic $ 1.16 $ 0.77 $ (0.15) $ (0.13) $ 0.39
=========== =========== =========== =========== ===========
Diluted $ 1.10 $ 0.74 $ (0.15) $ (0.13) $ 0.38
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 4,087,682 3,665,548 3,665,548 3,665,548 3,665,548
=========== =========== =========== =========== ===========
Diluted 4,329,907 3,776,045 3,665,548 3,665,548 3,762,226
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
-4-
10
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL
COMMON PREFERRED RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK EARNINGS STOCK EQUITY
YEAR ENDED JUNE 30, 1995:
Balance, June 30, 1994 $14,543,947 $6,000 $ 9,302,915 $(1,226,059) $22,626,803
Net income 1,432,581 1,432,581
----------- ------ ----------- ----------- -----------
BALANCE, JUNE 30, 1995 14,543,947 6,000 10,735,496 (1,226,059) 24,059,384
SIX MONTHS ENDED DECEMBER 31, 1995 - Net loss (490,254) (490,254)
----------- ------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 14,543,947 6,000 10,245,242 (1,226,059) 23,569,130
YEAR ENDED DECEMBER 31, 1996 - Net income 2,805,959 2,805,959
----------- ------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 14,543,947 6,000 13,051,201 (1,226,059) 26,375,089
YEAR ENDED DECEMBER 31, 1997:
Net income 4,761,330 4,761,330
Shares issued (1,570,000) pursuant to public
offering, net of costs of $453,483 26,895,917 26,895,917
Stock options exercised 1,020,794 1,020,794
Tax benefit related to stock options 143,400 143,400
Preferred stock converted to common stock 600 (600)
----------- ------ ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $42,604,658 $5,400 $17,812,531 $(1,226,059) $59,196,530
=========== ====== =========== =========== ===========
See notes to consolidated financial statements.
-5-
11
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS
ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, JUNE 30,
1997 1996 (UNAUDITED) 1995 1995
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 4,761,330 $ 2,805,959 $ (536,961) $ (490,254) $ 1,432,581
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,925,932 2,392,716 2,053,338 1,039,829 1,815,624
Deferred income taxes 156,247 62,375 (701,200) (572,335) 34,587
Deferred compensation and pension - net (13,227) (587,852) 132,525 189,288 (56,763)
Loss on sale of fixed assets 1,213 94,614
Change in assets and liabilities:
Receivables (5,176,709) (1,780,457) (2,330,912) 2,871,466 144,463
Inventories (7,504,334) (7,053,010) 4,777,807 8,854,652 (1,809,282)
Other current assets (143,921) (72,212) 915,979 1,287,108 (1,403,781)
Other assets 78,951 198,674 (789,528) (751,521) (18,538)
Accounts payable (711,792) 1,665,330 (1,467,104) (5,336,585) 3,159,331
Accrued liabilities (740,704) 2,105,676 (173,688) (443,705) (232,169)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (6,367,014) (168,187) 1,880,256 6,647,943 3,066,053
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES - Purchase of fixed assets (4,462,236) (3,302,761) (2,695,732) (683,542) (6,546,127)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt 77,050,000 34,913,394 22,734,117 13,370,000 20,799,547
Payments on long-term debt (86,073,615) (32,946,783) (21,693,655) (17,658,248) (17,393,407)
Proceeds form issuance of stock (net of
offering expenses) 26,895,917
Proceeds from exercise of stock options,
including related tax benefit 1,164,194
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 19,036,496 1,966,611 1,040,462 (4,288,248) 3,406,140
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 8,207,246 (1,504,337) 224,986 1,676,153 (73,934)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 349,637 1,853,974 1,628,988 177,821 251,755
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 8,556,883 $ 349,637 $ 1,853,974 $ 1,853,974 $ 177,821
============ ============ ============ ============ ============
See notes to consolidated financial statements.
-6-
12
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, THE SIX
MONTHS ENDED DECEMBER 31, 1995 AND THE YEAR ENDED JUNE 30, 1995
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Rocky Shoes & Boots, Inc. ("Rocky
Inc.") and its wholly-owned subsidiaries, Lifestyle Footwear, Inc.
("Lifestyle") and Five Star Enterprises Ltd. ("Five Star"), collectively
referred to as the "Company." All significant intercompany transactions
have been eliminated.
FISCAL YEAR - Effective December 31, 1995, the Company changed its fiscal
year end from June 30 to December 31. The unaudited financial information
for the twelve months ended December 31, 1995 is presented for comparative
purposes. The following presents unaudited summarized consolidated
financial information, which includes all normal recurring adjustments the
Company considers necessary for a fair presentation of such financial
information in accordance with generally accepted accounting principles,
for the six months ended December 31, 1994:
Net sales $35,967,028
Gross margin 7,832,959
Income taxes 458,770
Net income 1,479,288
Net income per share:
Basic $ 0.39
Diluted $ 0.39
BUSINESS ACTIVITY - The Company designs, manufactures, and markets high
quality men's and women's footwear primarily under the registered
trademark, ROCKY(R). The Company maintains a nationwide network of
independent and Company sales representatives who sell the Company's
products primarily through independent shoe, sporting goods, specialty,
and uniform stores and catalogs throughout the United States. The Company
did not have any customers that accounted for more than 10.0% of
consolidated net sales in 1997 and 1996. The Company had one customer that
accounted for 14.7% of consolidated net sales for the six months ended
December 31, 1995 and 11.9% of consolidated net sales for the year ended
June 30, 1995.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents. The Company's cash and cash equivalents are primarily held in
four banks.
-7-
13
TRADE RECEIVABLES - Trade receivables are presented net of the related
allowance for doubtful accounts of approximately $490,000 and $291,000 at
December 31, 1997 and 1996, respectively.
CONCENTRATION OF CREDIT RISK - The Company's exposure to credit risk is
impacted by the economic climate affecting its industry. The Company
manages this risk by performing ongoing credit evaluations of its
customers and maintains reserves for potential uncollectible accounts.
SUPPLIER AND LABOR CONCENTRATIONS - The Company purchases raw materials
from a number of domestic and foreign sources. The Company currently buys
all of its waterproof fabric, a component used in a significant portion of
the Company's shoes and boots, from one supplier (GORE-TEX(R)). The
Company has had a relationship with this supplier for over 17 years and
has no reason to believe that such relationship will not continue.
A significant portion of the "uppers" for the Company's shoes and boots
are produced in the Company's Dominican Republic operations. The Company
has conducted operations in the Dominican Republic since 1987 and is not
aware of any governmental or economic restrictions that would alter its
current operations.
INVENTORIES - Inventories are valued at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
During the fiscal year ended June 30, 1995, the Company exchanged
inventory totaling approximately $1,200,000 for prepaid advertising
credits. No gain or loss was recognized on the transaction.
FIXED ASSETS - The Company records fixed assets at historical cost and
generally utilizes the straight-line method of computing depreciation for
financial reporting purposes over the estimated useful lives of the assets
as follows:
Years
-----
Building and improvements 5-40
Machinery and equipment 5-12
Furniture and fixtures 8-12
Lasts, dies, and patterns 7-12
For income tax purposes the Company generally computes depreciation
utilizing accelerated methods.
ADVERTISING - The Company expenses advertising costs as incurred.
Advertising expense was $1,334,034 and $1,399,398 for the years ended
December 31, 1997 and 1996, respectively, $1,890,400 for the six months
ended December 31, 1995 and $1,736,617 for the year ended June 30, 1995.
REVENUE RECOGNITION - Revenue is recognized at the time footwear product
is shipped to the customer and is recorded net of estimated sales
discounts and returns.
-8-
14
PER SHARE INFORMATION - Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share", which requires retroactive adoption for all periods presented.
Under SFAS No. 128, basic net income per common share is computed based on
the weighted average number of common shares outstanding during the
period. Diluted net income per common share is computed similarly but
including the effect of the Company's Series A preferred stock and stock
options. A reconciliation of the shares used in the basic and diluted
income per share computations is as follows:
TWELVE MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995 1995
(UNAUDITED)
Basic - Weighted
average shares
outstanding 4,087,682 3,665,548 3,665,548 3,665,548 3,665,548
Dilutive securities:
Preferred stock 85,549 92,857 92,857
Stock options 156,676 17,640 3,821
--------- --------- --------- --------- ---------
Diluted - Weighted
average shares
outstanding 4,329,907 3,776,045 3,665,548 3,665,548 3,762,226
========= ========= ========= ========= =========
Dilutive securities were not considered in the per share computations for
the twelve months and six months ended December 31, 1995 as the effect
would have been antidilutive. No adjustments to net income (loss) was
required for purposes of computing diluted per share amounts.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - In June 1997, the
Financial Accounting Standards Board issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which will
require adoption in 1998. SFAS No. 131 requires companies to report
financial and descriptive information about its reportable operating
segments. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
has not yet determined what, if any, impact the adoption of this Statement
will have on its financial statements.
2. INVENTORIES
Inventories are comprised of the following:
DECEMBER 31,
----------------------------------
1997 1996
Raw materials $ 6,210,161 $ 4,482,381
Work-in-process 3,348,275 5,192,326
Manufactured finished goods 21,140,951 13,891,772
Factory outlet finished goods 2,194,849 1,823,423
----------- -----------
Total $32,894,236 $25,389,902
=========== ===========
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15
3. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
---------------------------
1997 1996
Land $ 224,115 $ 218,130
Building and improvements 5,769,949 5,060,207
Machinery and equipment 17,187,561 14,432,261
Furniture and fixtures 2,303,893 2,014,616
Lasts, dies and patterns 4,482,705 3,782,250
Construction work-in-progress 589,547 36,896
----------- -----------
Total 30,557,770 25,544,360
Less - accumulated depreciation (12,949,316) (10,035,763)
----------- -----------
Net fixed assets $17,608,454 $15,508,597
=========== ===========
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
DECEMBER 31,
---------------------------
1997 1996
Bank - revolving credit facility $10,600,000 $19,820,000
Equipment and other obligations 3,388,242 1,027,952
Real estate obligations 83,634 1,596,292
Note payable - shareholder 367,818
Other 508,926 317,612
----------- -----------
Total long-term debt 14,580,802 23,129,674
Less current maturities 1,173,840 3,609,645
----------- -----------
Net long-term debt $13,406,962 $19,520,029
=========== ===========
The Company has a loan agreement with a bank, as amended, that provides
for advances based on a percentage of eligible accounts receivable and
inventory with maximum borrowings that range from $25,000,000 to
$42,000,000 through April 30, 1999. Interest on the revolving credit
facility is payable monthly as a factor of the bank's prime rate (8.5% at
December 31, 1997) and the principal is due April 30, 1999. At December
31, 1997, $29,687,481 was available under the credit agreement of which
$10,600,000 had been borrowed. At December 31, 1997 and 1996, $0 and
$2,820,000 was classified as current based on the expected reduction in
the available line in the subsequent year in accordance with management's
projection of eligible accounts receivable and inventory balances.
Any amounts borrowed under the agreement are secured by the accounts
receivable, inventories, and equipment of the Company. The agreement
contains restrictive covenants which, among others, require the Company to
maintain a certain level of tangible net worth, as defined. At December
31, 1997 approximately $10,450,439 of retained earnings are available for
distribution.
-10-
16
Equipment and other obligations at December 31, 1997 bear interest at
fixed and variable rates ranging from 3% to 8.75% and are payable in
monthly installments to 2002. The obligations are secured by equipment and
are subject to the security agreement and covenants applicable to the
revolving credit facility.
Real estate obligation at December 31, 1997 bears interest at a variable
rate of 7.875% and is payable in monthly installments through 2003. The
obligation is secured by real estate and is subject to the security
agreement and covenants applicable to the revolving credit facility.
In December 1993, the Company entered into a Stock Purchase and Pledge
Agreement with a shareholder of the Company whereby the Company purchased
116,952 shares of its common stock and 7,143 shares of preferred stock for
$1,226,059, including a note for $919,544. The note was paid in full in
1997.
At December 31, 1997, essentially all trade accounts receivable,
inventories and property are held as collateral for the Company's
long-term debt.
Long-term debt matures as follows for the years ended December 31:
1998 $ 1,173,840
1999 11,530,971
2000 1,707,328
2001 142,772
2002 18,191
Thereafter 7,700
-----------
Total $14,580,802
===========
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 1997 and 1996, based on
current market prices for the same or similar issues or on debt available
to the Company with similar rates and maturities.
5. OPERATING LEASES
The Company leases certain machinery and manufacturing facilities under
operating leases that generally provide for renewal options. The Company
incurred approximately $643,000, $541,000, $245,000 and $455,000 in rent
expense under operating lease arrangements for the years ended December
31, 1997 and 1996, the six months ended December 31, 1995, and the year
ended June 30, 1995, respectively.
Included in total rent expense above are payments of $6,000 per month for
the Company's Ohio manufacturing facility leased from an entity in which
the owners are also shareholders of the Company.
-11-
17
Future minimum lease payments under non-cancelable operating leases are as
follows for the years ended December 31:
1998 $345,000
1999 225,000
2000 121,000
2001 63,000
2002 41,000
--------
Total $795,000
========
6. INCOME TAXES
Rocky Inc. and its wholly-owned subsidiary doing business in Puerto Rico,
Lifestyle, are subject to U.S. Federal income taxes; however, the
Company's income earned in Puerto Rico is allowed favorable tax treatment
under Section 936 of the Internal Revenue Code if conditions as defined
therein are met. Five Star is incorporated in the Cayman Islands and
conducts its operations in a "free trade zone" in the Dominican Republic
and, accordingly, is currently not subject to Cayman Islands or Dominican
Republic income taxes.
At December 31, 1997, a provision has not been made for U.S. taxes on the
accumulated undistributed earnings of Five Star through the third quarter
of 1996 of approximately $3,079,000 that would become payable upon
repatriation to the United States. In addition, the Company has not
provided any U.S. tollgate taxes on approximately $2,257,000 of
accumulated undistributed earnings of Lifestyle prior to the fiscal year
ended June 30, 1994, that would be payable if such earnings were
repatriated to the United States. It is the intention of the Company to
reinvest all such earnings. If the Five Star and Lifestyle undistributed
earnings were distributed to the Company in the form of dividends, the
related taxes on such distributions would be approximately $1,047,000 and
$226,000, respectively.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes.
Accordingly, deferred income taxes have been provided for the temporary
differences between the financial reporting and the income tax basis of
the Company's assets and liabilities by applying enacted statutory tax
rates applicable to future years to the basis differences.
-12-
18
Income taxes (benefits) are summarized as follows:
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995
Federal:
Current $1,556,631 $640,053 $ 217,000 $(296,827)
Deferred 146,143 115,883 (635,234) 172,685
---------- -------- --------- ---------
Total Federal 1,702,774 755,936 (418,234) (124,142)
---------- -------- --------- ---------
State and local:
Current 392,122 215,726 22,150 65,800
Deferred 10,104 (53,508) 62,899 (138,098)
---------- -------- --------- ---------
Total state and local 402,226 162,218 85,049 (72,298)
---------- -------- --------- ---------
Total $2,105,000 $918,154 $(333,185) $(196,440)
========== ======== ========= =========
A reconciliation of recorded Federal income tax expense (benefit) to the
expected expense computed by applying the Federal statutory rate of 34%
for all periods to income before income taxes follows:
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995
Expected (benefit) expense at
statutory rate $2,334,552 $1,266,198 $(279,969) $ 420,288
Increase (decrease) in income
taxes resulting from:
Exempt income from operations in
Puerto Rico, net of tollgate taxes (476,493) (279,414) 8,279 (362,540)
Exempt income from Dominican
Republic operations (158,075) (72,527) (298,775)
State and local income taxes (136,757) (55,154) (28,917) 24,581
Other - net (18,528) (17,619) (45,100) 92,304
---------- ---------- --------- ---------
Total $1,702,774 $ 755,936 $(418,234) $(124,142)
========== ========== ========= =========
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19
Deferred income taxes recorded in the consolidated balance sheets at
December 31, 1997 and 1996 consist of the following:
DECEMBER 31,
----------------------------
1997 1996
Deferred tax assets:
State and local income taxes $ 55,644 $ 38,167
Asset valuation allowances 398,959 600,973
Pension and deferred compensation 296,952 197,673
Net operating loss carryforwards 287,260 359,075
Inventories 812,437 152,423
----------- -----------
Total deferred tax assets 1,851,252 1,348,311
----------- -----------
Deferred tax liabilities:
Fixed assets (1,706,586) (1,260,837)
Tax on Five Star earnings (64,339) (64,339)
Tollgate tax on Lifestyle earnings (654,784) (441,345)
----------- -----------
Total deferred tax liabilities (2,425,709) (1,766,521)
----------- -----------
Net deferred tax liability $ (574,457) $ (418,210)
=========== ===========
At December 31, 1997, the Company has approximately $845,000 of net
operating loss carryforwards for Federal income tax purposes with annual
utilization limitations over the next four years and expiring in 2010.
Effective during 1996 the Company began to provide U.S. income taxes on
the earnings of Five Star based on the Company's intention to repatriate
these earnings in the future.
7. RETIREMENT PLANS
The Company sponsors separate noncontributory defined benefit pension
plans covering the union and non-union workers of the Company's Ohio and
Puerto Rico operations. Benefits under the union plan are primarily based
upon negotiated rates and years of service. Benefits under the non-union
plan are based upon years of service and highest compensation levels as
defined. Annually, the Company contributes to the plans at least the
minimum amount required by regulation.
Net pension cost of the Company's plans is as follows:
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1995 1995
Service cost $ 215,263 $ 182,955 $ 86,551 $ 130,310
Interest 284,420 231,140 111,767 204,551
Actual return on plan assets (953,212) (306,853) (171,109) (135,486)
Amortization and deferral 781,589 177,854 126,980 72,263
--------- --------- --------- ---------
Net pension cost $ 328,060 $ 285,096 $ 154,189 $ 271,638
========= ========= ========= =========
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20
The funded status of the Company's plans and reconciliation of accrued
pension cost at December 31, 1997 and 1996 are presented below
(information with respect to benefit obligations and plan assets is as of
September 30):
DECEMBER 31,
--------------------------
1997 1996
Plan assets at fair value $3,897,093 $2,669,944
---------- ----------
Actuarial present value of benefit obligations:
Vested 3,967,364 3,590,876
Nonvested 153,319 131,549
---------- ----------
Accumulated benefit obligation 4,120,683 3,722,425
Effects of salary progression 365,854 359,989
---------- ----------
Projected benefit obligation 4,486,537 4,082,414
---------- ----------
Funded status - excess of projected benefit
obligation over plan assets 589,444 1,412,470
Remaining unrecognized benefit obligation existing
at transition (316,039) (343,931)
Unrecognized prior service costs due to
plan amendments (562,859) (610,320)
Unrecognized net (loss) gain 296,784 (358,949)
Adjustment required to recognize minimum liability 216,260 953,211
Additional contributions (September 30 - December 31) (216,460) (300,000)
---------- ----------
Accrued pension cost $ 7,130 $ 752,481
========== ==========
The assets of the plans consist primarily of common stocks, bonds, and
cash equivalents. The assets of the plans include 31,900 shares of the
Company's common stock with a market value of $576,210 at September 30,
1997. The Company's unrecognized benefit obligations existing at the date
of transition for the union and non-union plans are being amortized over
23 and 21 years, respectively. Actuarial assumptions used in the
accounting for the plans were as follows:
DECEMBER 31,
-------------
1997 1996
Discount rate 7.0% 7.0%
Average rate of increase in compensation levels
(non-union only) 3.0% 3.0%
Expected long-term rate of return on plan assets 9.0% 9.0%
-15-
21
SFAS No. 87, "Employers' Accounting for Pensions," generally requires the
Company to recognize a minimum liability in instances in which a plan's
accumulated benefit obligation exceeds the fair value of plan assets. In
accordance with the Statement, the Company has recorded in the
accompanying financial statements a non-current pension liability and a
non-current intangible asset of $216,260 and $953,211 as of December 31,
1997 and 1996, respectively.
8. CAPITAL STOCK
The Company has authorized 250,000 shares of voting preferred stock
without par value. No shares are issued or outstanding. Also, the Company
has authorized 250,000 shares of non-voting preferred stock without par
value. Of these, 125,000 shares have been designated Series A non-voting
convertible preferred stock with a stated value of $.06 per share, of
which 90,000 and 100,000 shares are issued and 82,857 shares and 92,857
shares are outstanding at December 31, 1997 and 1996, respectively. In
accordance with its terms, all of the outstanding Series A preferred stock
was converted into common shares of the Company on a one for one basis on
February 3, 1998.
In November 1997, the Company's Board of Directors adopted a Rights
Agreement which provides for one preferred share purchase right to be
associated with each share of the Company's outstanding common stock.
Shareholders exercising these rights would become entitled to purchase
shares of Series B Junior Participating Cumulative Preferred Stock. The
rights may be exercised after the time when a person or group of persons
without the approval of the Board of Directors acquire beneficial
ownership of 20 percent or more of the Company's common stock or announce
the initiation of a tender or exchange offer which if successful would
cause such person or group to beneficially own 20 percent or more of the
common stock. Such exercise may ultimately entitle the holders of the
rights to purchase for $80 per right, common stock of the Company having a
market value of $160. The person or groups effecting such 20 percent
acquisition or undertaking such tender offer will not be entitled to
exercise any rights. These rights expire November 2007 unless earlier
redeemed by the Company under circumstances permitted by the Rights
Agreement.
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22
On December 21, 1992, the Company adopted the 1992 Stock Option Plan which
provides for the issuance of options to purchase up to 400,000 common
shares of the Company. On October 11, 1995, the Company adopted the 1995
Stock Option Plan which provides for the issuance of options to purchase
up to an additional 400,000 common shares of the Company. All employees,
officers, directors, consultants and advisors providing services to the
Company are eligible to receive options under the Plans. In addition, the
Plans provide for the annual issuance of options to purchase 3,000 (5,000
effective January 1, 1998) shares of common stock to each non-employee
director of the Company. The plans generally provide for grants with the
exercise price equal to fair value on the date of grant, graduated vesting
periods of up to 5 years, and lives not exceeding 8 years. The following
summarizes all stock option transactions from July 1, 1994 through
December 31, 1997:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at June 30, 1994 127,250 10.12
Issued 170,300 9.79
Forfeited (9,900) 9.82
-------
Outstanding at June 30, 1995 287,650 9.94
Issued 97,250 7.59
-------
Outstanding at December 31, 1995 384,900 9.34
Issued 93,000 6.25
Forfeited (30,000) 8.81
-------
Outstanding at December 31, 1996 447,900 8.74
Issued 85,500 9.37
Exercised (114,120) 8.94
Forfeited (11,320) 8.28
-------
Outstanding at December 31, 1997 407,960 $ 8.82
=======
Options exerciseable at December 31:
1995 171,085 $10.05
1996 240,253 $ 9.62
1997 235,140 $ 9.24
-17-
23
The following table summarizes information about options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$5.625 - $6.00 83,250 5.5 $ 5.91 34,750 $ 5.89
$7.50 - $8.875 139,000 6.1 $ 8.61 38,250 $ 8.40
$9.50 - $10.125 171,210 3.2 $ 9.77 156,140 $ 9.77
$13.125 - $20.00 14,500 5.0 $16.38 6,000 $20.00
------- -------
Total 407,960 4.8 $ 8.82 235,140 $ 9.24
======= ====== ======= ======
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation costs for
the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with
the method of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have resulted in the amounts as reported below. In
determining the estimated fair value of each option granted on the date of
grant the Company uses the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in the years ended
December 31, 1997, 1996, and 1995, respectively; dividend yield of 0%;
expected volatility of 40%, 47% and 47%; risk-free interest rates of
6.40%, 6.50%, and 6.50%; and expected life of 6 years. The weighted
average grant date fair value of options issued during the years ended
December 31, 1997 and 1996 and the six months ended December 31, 1995 was
$4.62, $3.39, and $4.01, respectively.
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
1997 1996 1995
---------- ---------- -----------
Net income (loss):
As reported $4,761,330 $2,805,959 $(490,254)
Pro forma $4,498,370 $2,561,260 $(675,838)
Income (loss) per share:
As reported:
Basic $ 1.16 $ 0.77 $ (0.13)
Diluted $ 1.10 $ 0.74 $ (0.13)
Pro forma:
Basic $ 1.10 $ 0.70 $ (0.18)
Diluted $ 1.04 $ 0.68 $ (0.18)
The pro forma amounts are not representative of the effects on reported net
income (loss) for future years.
-18-
24
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
TWELVE MONTHS
ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, JUNE 30,
1997 1996 (UNAUDITED) 1995 1995
Interest $2,619,374 $2,066,365 $1,956,831 $1,262,057 $1,913,000
========== ========== ========== ========== ==========
Federal, state
and local
income taxes -
net of refunds $2,306,150 $ (813,225) $ 22,150 $ 10,150 $ 487,000
========== ========== ========== ========== ==========
During the years ended December 31, 1997 and 1996, and the six months
ended December 31, 1995, the Company entered into capital lease
arrangements for certain equipment which had a present value of $474,743,
$216,832, and $111,591, respectively. Accounts payable at December 31,
1997 and 1996 include a total of $133,017 and $42,994, respectively,
relating to the purchase of fixed assets.
-19-