UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) January 6, 2005
ROCKY SHOES & BOOTS, INC.
(Exact name of registrant as specified in its charter)
Ohio 0-21026 31-1364046
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
39 East Canal Street, Nelsonville, Ohio 45764
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 753-1951
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On January 6, 2005, the Company and SILLC Holdings LLC consummated the
transactions contemplated by a Purchase and Sale of Equity Interests Agreement,
by and among SILLC Holdings LLC, Rocky Shoes & Boots, Inc., and solely for the
purposes of Section 5.13, Section 5.14, Article VII, Article IX and Article X
thereof, Strategic Industries LLC (the "Agreement"). Pursuant to the Agreement,
the Company has acquired 100% of the issued and outstanding voting limited
liability interests of EJ Footwear LLC, Georgia Boot LLC, and HM Lehigh Safety
Shoe Co. LLC (the "EJ Footwear Group").
The aggregate purchase price for the interests of EJ Footwear Group was
$91.2 million in cash plus 484,261 shares of the Company's common stock (the
"Shares"), which were valued at $10 million on the date of signing of the
Agreement and $11,573,000 on the closing date.
The foregoing description of the Agreement and the transactions
contemplated thereby does not purport to be complete and is qualified in its
entirety by reference to the complete text of the Agreement. A copy of the
Agreement was filed as Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated December 6, 2004, filed with the Securities and Exchange Commission on
December 8, 2004, and is incorporated herein by reference.
This Form 8-K/A amends Item 9.01 of the Current Report on Form 8-K dated
January 6, 2005, filed with the Securities and Exchange Commission on January
12, 2005, to include financial statements that were not available at the time of
filing of the Form 8-K.
The information contained or incorporated by reference in this Form 8-K/A
contains forward-looking statements, including certain plans, expectations,
goals, and projections, which are subject to numerous assumptions, risks, and
uncertainties. A number of factors, including but not limited to those set forth
under the heading "Business Risks" included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004, and other factors described from
time to time in the Company's other filings with the Securities and Exchange
Commission, could cause actual conditions, events, or results to differ
significantly from those described in the forward-looking statements. All
forward-looking statements included in this Form 8-K are based on information
available at the time of the report. The Company assumes no obligation to update
any forward-looking statement.
2
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The following is a list of the financial information for EJ Footwear
Group filed with this report:
Report of Independent Auditors.............................. F-1
Combined Balance Sheets as of September 30, 2003 and 2004... F-2
Combined Statements of Operations for the Years
Ended September 30, 2002, 2003 and 2004.................. F-3
Combined Statements of Members' Equity (Deficiency) for
the Years Ended September 30, 2003 and 2004.............. F-4
Combined Statements of Cash Flows for the Years
Ended September 30, 2002, 2003 and 2004.................. F-5 - F-6
Notes to Combined Financial Statements ..................... F-7 - F-24
(B) PRO FORMA FINANCIAL INFORMATION.
The following is a list of the pro forma financial information for the
Company and EJ Footwear Group filed with this report:
Introductory Notes to Pro Forma Financial Information....... PF-1
Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 2004........................................ PF-2
Footnotes to Unaudited Pro Forma Consolidated Balance
Sheet as of December 31, 2004............................ PF-3 - PF-4
Unaudited Pro Forma Consolidated Statement of Operations
for the Year ended December 31, 2004..................... PF-5
Footnotes to Unaudited Pro Forma Consolidated Statement of
Operations for the Year ended December 31, 2004.......... PF-6 - PF-7
(C) EXHIBITS.
Exhibit No. Description
----------- -----------
2.1 Purchase and Sale of Equity Interests Agreement, dated
as of December 6, 2004, by and among SILLC Holdings LLC,
Rocky Shoes & Boots, Inc., and solely for the purposes
of Section 5.13, Section 5.14, Article VII, Article IX
and Article X thereof, Strategic Industries LLC
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated December 6,
2004, filed with the Securities and Exchange Commission
on December 8, 2004).
23 Consent of Ernst & Young LLP.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: March 24, 2005 By: /s/ James E. McDonald
------------------------------------
James E. McDonald,
Executive Vice President and
Chief Financial Officer
4
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Purchase and Sale of Equity Interests Agreement, dated as of
December 6, 2004, by and among SILLC Holdings LLC, Rocky Shoes &
Boots, Inc., and solely for the purposes of Section 5.13, Section
5.14, Article VII, Article IX and Article X thereof, Strategic
Industries LLC (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated December 6, 2004,
filed with the Securities and Exchange Commission on December 8,
2004).
23 Consent of Ernst & Young LLP.
5
Combined Financial Statements
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
As of September 30, 2004
EJ FOOTWEAR GROUP
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Combined Financial Statements
September 30, 2004
CONTENTS
Report of Independent Auditors.............................................. 1
Combined Financial Statements
Combined Balance Sheets..................................................... 2
Combined Statements of Operations........................................... 3
Combined Statements of Member's Equity (Deficiency)......................... 4
Combined Statements of Cash Flows........................................... 5
Notes to Combined Financial Statements...................................... 7
Report of Independent Auditors
To the Board of Directors and Member of:
EJ Footwear LLC
HM Lehigh Safety Shoe Co. LLC
Georgia Boot LLC
We have audited the accompanying combined balance sheets as of September 30,
2004 and 2003, of the corporations comprising EJ Footwear Group as listed in
Note 1, and the related combined statements of operations, member's equity
(deficit), and cash flows for each of the three years in the period ended
September 30, 2004. These financial statements are the responsibility of the
companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the combined financial position at September 30, 2004 and
2003, of the corporations comprising EJ Footwear Group as listed in Note 1, and
the combined results of their operations and their cash flows for each of the
three years in the period ended September 30, 2004, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 15, 2004
F-1
EJ FOOTWEAR GROUP
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Combined Balance Sheets
(In thousands)
SEPTEMBER 30
-------------------
2004 2003
-------- --------
ASSETS
Current assets:
Cash $ 94 $ 368
Trade receivables, net 39,584 34,007
Inventories 33,656 34,402
Deferred income taxes 600 183
Other current assets 494 881
Loans to affiliates 8,000 5,500
-------- --------
Total current assets 82,428 75,341
Machinery and equipment, net 1,812 1,886
Deferred income taxes 681 1,548
Deferred financing costs, net 363 752
Other assets 656 1,724
-------- --------
Total assets $ 85,940 $ 81,251
======== ========
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Current liabilities:
Revolver debt $ 30,102 $ --
Trade accounts payable 2,092 1,871
Accrued expenses and other liabilities 16,208 15,963
Income taxes payable 198 100
-------- --------
Total current liabilities 48,600 17,934
Revolver debt -- 27,680
Senior Notes (including $13,926 and $13,726, respectively,
payable to Members of Parent and affiliates) 21,994 21,460
Pension and other employee benefits 9,108 20,604
Other liabilities 2,289 3,483
-------- --------
Total liabilities 81,991 91,161
Commitments and contingencies
Member's equity :
Member's capital 24,902 24,902
Accumulated deficit (2,350) (8,845)
Accumulated other comprehensive loss (18,603) (25,967)
-------- --------
Total member's equity (deficit) 3,949 (9,910)
-------- --------
Total liabilities and member's equity (deficit) $ 85,940 $ 81,251
======== ========
See accompanying notes.
F-2
EJ FOOTWEAR GROUP
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Combined Statements of Operations
(In thousands)
2004 2003 2002
-------- -------- --------
Net sales $146,802 $124,787 $124,541
Operating costs and expenses:
Cost of products sold 78,914 67,225 76,578
Selling, general and adminstrative expenses 52,116 47,550 44,948
Management and advisory fees 1,347 1,116 1,622
Provision for doubtful accounts 803 510 750
Impairment, restructuring and other charges -- -- 2,426
-------- -------- --------
Operating income (loss) 13,622 8,386 (1,783)
Interest expense 5,101 4,967 6,329
Interest income from affiliates (289) (67) --
Loss on debt extinguishment, net -- -- 1,099
Other expense, net 788 591 592
-------- -------- --------
Income (loss) before income taxes 8,022 2,895 (9,803)
Income tax expense (benefit) 1,527 (1,590) 1,298
-------- -------- --------
Net income (loss) $ 6,495 $ 4,485 $(11,101)
======== ======== ========
See accompanying notes.
F-3
EJ FOOTWEAR GROUP
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Combined Statements of Member's Equity (Deficit)
(In thousands)
MEMBER'S ACCUMULATED ACCUMULATED OTHER
EQUITY DEFICT COMPREHENSIVE LOSS TOTAL
-------- ----------- ------------------ --------
Balance at October 1, 2001 $ 117 $ (2,229) $ -- $ (2,112)
Transfer of Senior Notes to SILLC Holdings 6,694 -- -- 6,694
Capital contribution from SILLC Holdings 20,929 -- -- 20,929
Assets transferred and liabilities assumed from affiliate (2,838) -- -- (2,838)
Net loss -- (11,101) -- (11,101)
Minimum pension liability adjustment
(net of income tax benefit of $1,240) -- -- (18,705) (18,705)
--------
Comprehensive loss (29,806)
------- -------- -------- --------
Balance at September 30, 2002 24,902 (13,330) (18,705) (7,133)
Net income -- 4,485 -- 4,485
Minimum pension liability adjustment
(net of income taxes of nil) -- -- (7,262) (7,262)
--------
Comprehensive loss (2,777)
------- -------- -------- --------
Balance at September 30, 2003 24,902 (8,845) (25,967) (9,910)
Net income -- 6,495 -- 6,495
Minimum pension liability adjustment
(net of income taxes of $4) -- -- 7,364 7,364
--------
Comprehensive income 13,859
------- -------- -------- --------
Balance at September 30, 2004 $24,902 $ (2,350) $(18,603) $ 3,949
======= ======== ======== ========
See accompanying notes
F-4
EJ FOOTWEAR GROUP
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Combined Statements of Cash Flows
(In thousands)
YEAR ENDED SEPTEMBER 30
----------------------------
2004 2003 2002
------- ------- --------
OPERATING ACTIVITIES
Net income (loss) $ 6,495 $ 4,485 $(11,101)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 691 831 1,568
Amortization of debt discount and deferred financing costs 923 923 876
Deferred income taxes 446 (1,731) 1,298
Provision for doubtful accounts 803 510 750
Loss on sale of machinery and equipment and idle assets, net 278 -- 55
Loss on debt extinguishment, net -- -- 1,099
Impairment, restructuring and other charges -- -- 1,860
Changes in operating assets and liabilities:
Trade receivables (6,380) (3,729) 2,146
Inventories 746 (2,572) 11,812
Other current assets 387 (136) 436
Other assets 342 (13) (523)
Trade accounts payable 221 (887) (1,068)
Accrued expenses and other liabilities 343 3,217 1,303
Other non-current liabilities (5,323) 428 (676)
------- ------- --------
Net cash (used in) provided by operating activities (28) 1,326 9,835
INVESTING ACTIVITIES
Loans to affiliates (2,500) (5,500) --
Purchases of machinery and equipment (602) (543) (579)
Proceeds from sale of machinery and equipment and idle assets 434 -- 5,867
------- ------- --------
Net cash (used in) provided by investing activities (2,668) (6,043) 5,288
FINANCING ACTIVITIES
Proceeds from (repayment of) revolver, net 2,422 4,694 (13,370)
Proceeds from long-term debt -- -- 9,401
Repayments of Senior Notes -- -- (32,200)
Deferred financing costs -- -- (322)
Capital contribution - Parent -- -- 20,929
------- ------- --------
Net cash provided by (used in) financing activities 2,422 4,694 (15,562)
------- ------- --------
Net decrease in cash (274) (23) (439)
Cash at beginning of year 368 391 830
------- ------- --------
Cash at end of year $ 94 $ 368 $ 391
======= ======= ========
See accompanying notes.
F-5
EJ FOOTWEAR GROUP
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Combined Statements of Cash Flows
(In thousands)
YEAR ENDED SEPTEMBER 30
--------------------------
2004 2003 2002
------- ------ -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 5,622 $4,005 $ 4,120
======= ====== =======
Cash paid for income taxes $ 982 $ -- $ --
======= ====== =======
NON-CASH TRANSACTIONS
Minimum pension liabilty $(7,368) $7,262 $19,945
======= ====== =======
Senior Notes transferred to SILLC Holdings
(net of debt discount) $ -- $ -- $ 6,694
======= ====== =======
Assets transferred and liabilities assumed from affiliate $ -- $ -- $(2,838)
======= ====== =======
F-6
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE GROUP
EJ Footwear Group ("the Group") is made up of three separate companies, EJ
Footwear LLC ("EJ Footwear"), HM Lehigh Safety Shoe Co. LLC ("Lehigh"), and
Georgia Boot LLC ("Georgia Boot"), each of which are wholly owned subsidiaries
of SILLC Holdings, LLC ("SILLC Holdings"). SILLC Holdings, a wholly-owned
subsidiary of Strategic Industries, LLC ("Strategic"), acquired EJ Footwear on
March 24, 2000, and has owned 100% of EJ Footwear since such date. Prior to
December 1, 2001 Lehigh and Georgia Boot were wholly-owned subsidiaries of EJ
Footwear. The acquisitions of Georgia Boot and Lehigh by SILLC Holdings from EJ
Footwear on December 1, 2001 did not result in a change in the historical
carrying values of their respective assets and liabilities as all entities were
under common control. The members of Strategic are not personally liable for any
liabilities of the Group. Strategic and its majority member, Citicorp Venture
Capital LP Holdings, Limited ("CVC"), individually or collectively are referred
to as the Parent depending on the context.
NATURE OF BUSINESS
The Group is a designer, developer, marketer, and distributor of high-quality,
branded footwear products in the work, western boot, outdoor, and occupational
safety markets. The Group's products are sold primarily in the United States
under owned brands including Georgia Boot, Lehigh, Durango, and Barclay Shoe,
and licensed brands including Dickies, John Deere, and After Six. The Group
sources 100% of its products from low-cost suppliers, primarily throughout Asia.
These suppliers work closely with the Group in the design, development, and
manufacture of its products.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION: The combined financial statements include the
accounts of EJ Footwear, Georgia Boot, Lehigh and their subsidiaries. The
accounts, results of operations and cash flows of the companies in the Group
have been combined due to the common ownership of SILLC Holdings in these
entities. The accompanying financial statements do not represent those of a
single legal entity. Intercompany accounts and transactions within the Group are
eliminated.
FISCAL YEAR: The Group's fiscal year ends on the Saturday nearest to September
30. The fiscal year data contained herein reflect results of operations for the
53 week period ended October 2, 2004, and the 52 week periods ended September
27, 2003 and September 28, 2002. Fiscal year end dates are presented as
September 30 for convenience of reference.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
INVENTORIES AND CONCENTRATION OF SUPPLIERS: Inventories are valued at the lower
of cost, determined under the first-in, first-out method, or market and consist
predominately of finished goods.
A significant portion of the Group's purchases are made from four suppliers,
which together accounted for approximately 56%, 61% and 69% of the total
inventory purchases for the years ended September 30, 2004, 2003 and 2002,
respectively. These suppliers are located in foreign countries, principally the
Far East. Although there is a concentration of sources of supply, management has
taken steps to broaden the supplier base thereby reducing the reliance place on
the suppliers.
F-7
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MACHINERY AND EQUIPMENT: Machinery and equipment are stated on the basis of cost
less accumulated depreciation provided under the straight-line method over the
estimated useful lives of the assets. Machinery and equipment are depreciated
based on lives varying from three to ten years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the initial terms
of the Group's leases.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Group
reviews the recoverability of machinery and equipment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be recoverable. If impairment has been determined, the carrying amount of
the long-lived assets is reduced by the difference between the carrying amount
and estimated fair value, as determined by discounted cash flow analysis over
the remaining useful life.
DEFERRED FINANCING COSTS: Deferred financing costs consist of costs incurred in
connection with the Strategic Credit Facility and the Senior Notes and are being
amortized on a straight-line basis over the terms of the respective agreements.
Amortization expense related to these costs was $389, $389 and $363 for the
fiscal years ended September 30, 2004, 2003, and 2002, respectively, would not
differ materially from amortization computed using the interest method, and is
included in interest expense.
REVENUE RECOGNITION: Revenue is recognized upon shipment of product to the
customer. Provisions are made for warranty and return costs at the time of sale.
SHIPPING AND HANDLING COSTS: Shipping and handling costs are included in
selling, general and administrative expenses and were $4,107, $3,505 and $3,128
for the years ended September 30, 2004, 2003 and 2002, respectively.
ADVERTISING COSTS: Advertising costs are expensed as incurred. Such amounts
totaled $3,813, $2,933 and $2,692 for the years ended September 30, 2004, 2003
and 2002, respectively.
F-8
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: Effective with the sale of Georgia Boot and Lehigh by EJ Footwear
to SILLC Holdings, each of the companies in the Group elected to be treated as a
C Corporation for tax purposes. Each company independently generates its own
income taxes and files its own tax returns. The sum of such is reflected in the
income taxes as presented in the combined statements of operations. Prior to
December 1, 2001 the companies within the Group were not subject to income
taxation at the entity level as they filed as limited liability companies which,
for income tax purposes, passed items of income and expense through to its
members. Accordingly, such members were responsible for any income tax
liabilities resulting from the Group's operations prior to December 1, 2001.
Deferred tax assets and liabilities of the Group are computed based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws. Deferred income tax expense or
benefit is based on the changes in the asset or liability from period to period.
FINANCIAL INSTRUMENTS: The fair market value of all short-term financial
instruments approximates their carrying value due to their short maturity. The
fair market value of all long-term financial instruments, other than the Group's
Senior Notes, also approximate carrying value as they are based on floating
interest rates and terms that continue to be available to the Group. The fair
value of the Group's Senior Notes approximates $20,274 at September 30, 2004 and
$19,600 at September 30, 2003.
ACCUMULATED OTHER COMPREHENSIVE LOSS: Accumulated other comprehensive loss
consists of the Group's minimum pension liability adjustment net of taxes.
RECENT ACCOUNTING PRONOUNCEMENTS: In December 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB statements No. 87, 88 and 106. This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement and recognition of those plans required by FASB
Statements 87, 88 and 106. This Statement retains the disclosure requirements
contained in the original Statement 132. It requires additional disclosures
about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit plans and other defined benefit postretirement plans. This
Statement is effective for financial statements with fiscal years ending after
December 15, 2003, except for the disclosure of estimated future benefit
payments and information about foreign plans, which is effective for fiscal
years ending after June 15, 2004. The Group adopted this Statement in fiscal
2004 and has incorporated all required disclosure provisions relating to the
Group.
F-9
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
established standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. FAS
150 was effective for financial instruments entered into or modified after May
31, 2003, and was otherwise effective for the Company during the fourth quarter
of 2003. The adoption of SFAS No. 150 did not have any impact on the Group's
operating results or financial position.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities with certain defined characteristics.
FIN 46 applies immediately to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first annual reporting period
beginning after December 15, 2004, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Group does not have any interests in any variable interest entities. This
interpretation is not expected to have any impact on the accompanying financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit of Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a Restructuring). The primary difference
between this Statement and EITF Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Group adopted this Statement on
January 1, 2003 and has incorporated the requirements of this statement into
these combined financial statements.
F-10
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
3. TRADE RECEIVABLES
Trade receivables are summarized as follows:
SEPTEMBER 30,
-----------------
2004 2003
------- -------
Trade receivables $41,813 $35,721
Allowances for doubtful accounts and returns (2,229) (1,714)
------- -------
$39,584 $34,007
======= =======
The Group operates principally in North America. The Group performs periodic
credit evaluations of its customers' financial condition and does not require
collateral. Credit losses have been within management's estimates and historical
trends. For each period presented in the accompanying financial statements, no
single customer accounted for more than 5% of combined net trade receivables or
of combined net sales.
4. MACHINERY AND EQUIPMENT
Machinery and equipment are summarized as follows:
SEPTEMBER 30,
-----------------
2004 2003
------- -------
Machinery and equipment $ 4,394 $ 3,918
Computer hardware and software 1,705 1,575
Accumulated depreciation and amortization (4,287) (3,607)
------- -------
$ 1,812 $ 1,886
======= =======
Depreciation expense was $691, $831 and $1,558 for the years ended September 30,
2004, 2003 and 2002, respectively.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
SEPTEMBER 30,
-----------------
2004 2003
------- -------
Accrual for inventory purchases $11,031 $ 8,995
Compensation related 1,255 1,263
Accrued interest 21 1,493
Other 3,901 4,212
------- -------
$16,208 $15,963
======= =======
F-11
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
6. DISPOSITIONS
In April 2004, EJ Footwear sold its Glendale, New York facility that it held as
an idle asset in other non-current assets in the amount of $727 at September 30,
2003. The transaction resulted in a loss of $293 that is included in "other
expense, net". EJ Footwear received a $129 property tax refund on the property
that is also included in "other expense, net".
In May 2004, Georgia Boot exercised its option to terminate the Hummer licensing
agreement with a third party and sold all remaining inventory and dedicated
production molds for $387, resulting in a loss of $430 (including costs to
terminate the license agreement). The loss incurred on the sale is principally
included in cost of products sold in fiscal 2004. Georgia Boot had entered into
the license agreement in December 2002. The accompanying combined financial
statements of the Group include the following operating results for the Hummer
brand of products:
YEAR ENDED SEPTEMBER 30,
------------------------
2004 2003
------- -----
Sales $ 1,259 $ 279
Pre-tax loss (1,359) (638)
7. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
The impairment, restructuring and other charges in fiscal 2002 are a result of
the Group's management assessing its long-term strategy and deciding to
eliminate all manufacturing operations and to focus principally on marketing and
distributing product sourced from outside suppliers.
In January 2002, management approved a plan to close the remaining domestic
manufacturing facility and sell the warehouse operated by the Group. The
production and distribution activities for these businesses have been out
sourced to third parties. The restructuring plan, substantially completed in
March 2002, resulted in a charge of $2,426 relating to employee costs of $1,056
(workforce reduction of 144 employees consisting primarily of production
laborers), asset impairment of $852 and $518 for closing costs. In connection
with the restructuring of the Group's operations, the Group also incurred
inventory markdowns and other related costs aggregating $3,111. These costs are
reflected in cost of products sold ($1,835) and selling, general and
administrative costs ($1,276). During the year ended September 30 2002, the
Group paid $566 related to the restructuring and other charges. The remaining
costs related to the restructuring and other charges were paid in fiscal 2003.
F-12
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
8. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30,
-----------------
2004 2003
------- -------
Strategic Credit Facility $30,102 $27,680
Senior Notes 23,594 23,594
------- -------
53,696 51,274
Less:
Current portion of long-term debt 30,102 --
Unamortized debt discount 1,600 2,134
------- -------
Long-term debt $21,994 $49,140
======= =======
Strategic Credit Facility: The Group participates with other subsidiaries of
SILLC Holdings in a revolving credit facility ("the Strategic Credit Facility").
The Strategic Credit Facility, as amended, provides for a senior secured
revolving credit facility of up to $175,000 that matures March 24, 2005. The
Strategic Credit Facility is collateralized by substantially all of the assets
of the subsidiaries of SILLC Holdings, excluding certain foreign entities, and
is guaranteed by SILLC Holdings. Total available borrowings are limited to
certain percentages of certain eligible assets, primarily accounts receivable,
inventory and equipment. Management of SILLC Holdings is currently in
negotiations with the lender to amend the facility and to extend its terms and
is of the opinion this will be accomplished before the Strategic Credit Facility
matures. Borrowings under the Strategic Credit Facility are classified as a
current liability at September 30, 2004.
Interest rates on the Strategic Credit Facility are variable and are based on,
at the option of SILLC Holdings, LIBOR or prime plus an applicable margin. In
addition to paying interest on borrowings under the credit facility, SILLC
Holdings is required to pay a commitment fee to the lenders on the unused
portion of the revolving credit line. At September 30, 2004, 2003 and 2002,
amounts outstanding under the Strategic Credit Facility bore interest at an
average effective rate of 4.8%, 3.9% and 4.5% per annum, respectively. SILLC
Holdings had approximately $43,000 available under the Strategic Credit Facility
at September 30, 2004 (including $22,211 relating to the Group). The Group's
usage of credit under the Strategic Credit Facility at September 30, 2004 and
2003 includes $1,740 and $2,053, respectively, under letters of credit
(including standby letters of credit of nil and $355, respectively).
F-13
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
8. LONG-TERM DEBT (CONTINUED)
The Strategic Credit Facility contains mandatory prepayment provisions, subject
to certain exceptions. The Strategic Credit Facility also contains financial
covenants based on EBITDA, as defined in the amended facility, and limitations
on incurrence of liens, incurrence of debt, issuance of equity interests,
payment of dividends, transactions with affiliates, capital expenditures, loans,
advances and investment. In addition, SILLC Holding's subsidiaries participating
in the Strategic Credit Facility are restricted by their respective credit
agreements from making payment of cash dividends, loans or advances to SILLC
Holdings.
Senior Notes: On March 24, 2000, in connection with the formation of SILLC
Holdings and the acquisition of EJ Footwear (see Note 1), Strategic Finance
Company, a wholly owned subsidiary of SILLC Holdings, issued, as agent for
several of SILLC Holdings' subsidiaries, the original Senior Notes to members of
the Parent. The Senior Notes bear interest payable semiannually on April 1 and
October 1 of each year at 12 1/2% per annum through maturity on October 1, 2007,
with a principal payment of $3,500 from SILLC Holdings due on April 1, 2007. The
Senior Notes are guaranteed on an unsecured senior basis by SILLC Holdings, the
Group and several of SILLC Holdings' other domestic subsidiaries, and are
subordinated to all existing and future secured indebtedness. SILLC Holdings and
the guaranteeing subsidiaries have the option to redeem the Senior Notes at
prices set forth in the Indenture Agreement, or as agreed to with specific
noteholders, and may repurchase the Senior Notes if certain assets are sold or
must offer to repurchase if there is a change in control (as defined in the
Indenture Agreement). SILLC Holdings and its domestic subsidiaries had $99,628
of Senior Notes outstanding at September 30, 2004.
The Senior Notes of the Group have been reduced by unamortized debt discount of
$1,600 and $2,134 at September 30, 2004 and 2003, respectively, which was
recorded to reflect the fair value of the Senior Notes allocated to the Group at
the time of issuance. The debt discount is being amortized over the life of the
issuance.
Debt Refinancing: On January 16, 2002, SILLC Holdings completed a transaction
whereby the Group and the other domestic subsidiaries of SILLC Holdings acquired
the original Senior Notes from affiliates of U.S. Industries, Inc. ("USI"), the
former parent of the Group, and settled the accrued interest thereon at a
discount. The Group realized a net loss of $1,099 in connection with the
repurchase of the Senior Notes (write off of debt discount of $1,934 net of $835
gain due to the lower interest payment). SILLC Holdings funded the repurchase of
the Senior Notes and payment of other costs incurred in connection with the
transaction principally with proceeds from (i) the issuance of new Senior Notes,
(ii) borrowings under the Strategic Credit Facility, (iii) and additional equity
from its Parent. In connection with the transaction, the Group repaid $32,200 of
Senior Notes owed to USI, issued new Senior Notes for $9,275 (including $2,111
to members and related parties of the Parent), borrowed $2,849 under the
Strategic Credit Facility and received a capital contribution of $20,929 from
SILLC Holdings. In addition, at the time of this transaction with USI, CVC
charged a $462 advisory fee to the Group.
F-14
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
8. LONG-TERM DEBT (CONTINUED)
Principal payments on long-term debt recorded by the Group for the next five
years ended September 30 are as follows:
2005 $30,102
2006 --
2007 --
2008 23,594
2009 --
Thereafter --
-------
$53,696
=======
9. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Group is a member of the Strategic Industries Group Pension Plan ("Pension
Plan") which covers all of the employees of the Parent and its domestic
subsidiaries. The investments of the Pension Plan are managed under a single
master trust. Benefits under the Pension Plan are based primarily on years of
credited service and compensation as defined under the respective plan
provisions or on a flat amount per credited year of service. SILLC Holdings'
funding policy is to contribute amounts to the plans sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act of 1974. SILLC Holdings uses a measurement date of June 30 for its
pension plan and September 30 for the other postretirement plan.
On June 30, 2003, the Board of Directors of SILLC Holdings approved a plan to
freeze the Pension Plan for all non-bargained employees effective July 1, 2003.
The impact of the plan freeze resulted in a decrease to the Group's benefit
obligation of $2,548 related to an unrecognized gain.
In connection with the fiscal 2004 and 2003 valuations, the Group was required
to recognize a minimum pension liability of $19,839 and $27,207 as of September
30, 2004 and 2003, respectively, and a related benefit (charge) to other
comprehensive income (loss) of $7,364 (net of income taxes of $4) and $(7,262)
(net of income tax benefit of nil) for the years then ended. The minimum
liability is equal to the excess of the accumulated benefit obligation over plan
assets.
SILLC Holdings and certain subsidiaries, including the Group, participate in the
Strategic Industries LLC Retirement and Savings Investment Plan (the "Plan").
The 401(k) defined contributions plan covers substantially all employees. The
Plan provides that eligible employees may contribute a portion of their eligible
earnings to the Plan. On July 1, 2003, the Plan was amended from an employer's
matching contribution of 50% of the employee's first 6% of contributions to 100%
of the employees first 4% of contributions. Employees are immediately vested in
the Plan once they have met the eligibility requirements. The Plan, similar to
the Pension Plan, is managed under a single master trust. The Group contributed
$451, $258 and $299 during the years ended September 30, 2004, 2003, and 2002,
respectively.
Several of the Parent's subsidiaries also provide health care and life insurance
benefits for certain groups of retirees. In October 2003, the Group curtailed
the benefits offered to certain retirees and recognized a gain of $975. The
resulting gain is netted in selling, general and administrative expenses for the
year ended September 30, 2004.
F-15
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
9. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)
The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and the funded status of the
Group's share of the Pension Plan and their postretirement benefit plans with
the amounts recognized in the combined balance sheets:
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
------------------------ ------------------------------
2004 2003 2004 2003
-------- -------- ----- -----
CHANGES IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at beginning of period $ 60,591 $ 57,498 $ 291 $ 557
Service cost -- 720 -- 2
Interest cost 3,754 4,065 -- 21
Plan amendments (curtailment and settlement) -- -- (291) --
Actuarial (loss) gain (4,013) 2,692 -- (122)
Benefits paid (4,687) (4,384) -- (167)
-------- -------- ----- -----
Benefit obligation at end of period $ 55,645 $ 60,591 $ -- $ 291
======== ======== ===== =====
CHANGES IN FAIR VALUE OF PLAN ASSETS
Fair value of assets at beginning of period $ 40,963 $ 44,785 $ -- $ --
Actual return on plan assets 5,783 550 -- --
Employer contributions 1,490 -- -- --
Benefits paid (4,675) (4,372) -- --
Assets transferred 309 -- -- --
-------- -------- ----- -----
Fair value of assets at end of period $ 43,870 $ 40,963 $ -- $ --
======== ======== ===== =====
FUNDED STATUS OF PLANS
Plan assets less than projected benefit
obligation $(11,775) $(19,628) $ -- $(291)
Employer contributions 2,692 3 -- --
Unrecognized prior service cost -- -- -- --
Unrecognized net actuarial (gain) loss 19,814 27,203 -- (684)
-------- -------- ----- -----
Net amount recognized $ 10,731 $ 7,578 $ -- $(975)
======== ======== ===== =====
AMOUNTS RECOGNIZED IN THE BALANCE
SHEET CONSIST OF
Prepaid benefit cost $ -- $ -- $ -- $ --
Accrued benefit liability (9,108) (19,629) -- (975)
Intangible asset -- -- -- --
Accumulated other comprehensive income 19,839 27,207 -- --
-------- -------- ----- -----
Net amount recognized $ 10,731 $ 7,578 $ -- $(975)
======== ======== ===== =====
At September 30, 2004 and 2003, the Group's projected benefit obligation is in
excess of the fair value of plan assets. The Group's accumulated benefit
obligation for all defined pension plans was $55,363 and $60,300 at September
30, 2004 and 2003, respectively. Included in the accrued pension benefit
liability is the Group's unfunded Supplemental Executive Retirement Plan of $330
and $325 at September 30, 2004 and 2003. The Group's accumulated benefit
obligation for this plan was $282 and $291 at September 30, 2004 and 2003
respectively.
F-16
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
9. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)
The change in the Pension Plan's actuarial assumptions had the effect of
decreasing the Group's projected benefit obligation by $3,056 and increasing the
projected benefit obligation by $5,180 for the years ended September 30, 2004
and 2003, respectively.
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
---------------------------- ------------------------------
2004 2003 2002 2004 2003 2002
------- ------- -------- ----- ----- -----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATIONS
Discount rate 7.00% 6.50% 7.25% N/A 6.50% 6.75%
Rate of compensation increase -- -- 3.00% N/A -- 4.00%
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE NET PERIODIC BENEFIT COST
Discount rate 6.50% 7.25% 7.25% N/A 6.50% 6.75%
Expected return on plan assets 10.00% 10.00% 10.00% N/A -- --
Rate of compensation increase -- 3.00% 3.00% N/A -- 4.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Defined benefit plans:
Service cost $ -- $ 720 $ 2,406 $ -- $ 2 $ --
Interest cost 3,754 4,065 8,103 -- 21 42
Expected return on plan assets (3,943) (4,265) (10,368) -- -- --
Amortization of gain 1,245 1,019 379 (684) (77) (33)
Curtailment -- -- -- (291) -- --
------- ------- -------- ----- ----- -----
Net periodic benefit cost (income) for
defined benefit plans 1,056 1,539 520 (975) (54) 9
Defined contribution plans 451 258 299 -- -- --
------- ------- -------- ----- ----- -----
Net periodic benefit cost $ 1,507 $ 1,797 $ 819 $(975) $ (54) $ 9
======= ======= ======== ===== ===== =====
(Decrease) increase in minimum liability
included in other comprehensive loss $(7,368) $ 7,262 $ 19,945 N/A N/A N/A
======= ======= ======== ===== ===== =====
The Pension Plan's weighted average asset allocations at June 30, 2004 and 2003
by asset category are as follows:
PLAN ASSETS
TARGET AT JUNE 30,
ALLOCATION -----------
ASSET CATEGORY 2005 2004 2003
-------------- ---------- ---- ----
Equity securities 65% 68% 54%
Fixed income funds 30 17 35
Limited Partnership 5 14 --
Real estate -- -- 9
Other -- 1 2
--- --- ---
100% 100% 100%
=== === ===
The fair value of the plan assets for the Pension Plan was $104,406 and $86,125
at September 30, 2004 and 2003, respectively.
F-17
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
9. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)
The pension trust is managed by an outside investment manager. The investment
objectives for the trust are to satisfy all pension benefit payments and to earn
a real (inflation-adjusted) rate of return over an extended time period.
The Group expects to contribute $533 to its pension plan in fiscal 2005.
The expected benefit payments from the plan over the next ten years are as
follows:
2005 $ 4,390
2006 4,414
2007 4,498
2008 4,628
2009 4,669
2010-2014 25,476
10. INCOME TAXES
Federal and state income tax expense (benefit) consists of:
YEAR ENDED SEPTEMBER 30,
-------------------------
2004 2003 2002
------ ------- ------
Current:
Federal $ 770 $ 113 $ --
State 311 28 --
------ ------- ------
1,081 141 --
DEFERRED:
Federal 160 (1,731) 1,177
State 286 -- 121
------ ------- ------
446 (1,731) 1,298
------ ------- ------
$1,527 $(1,590) $1,298
====== ======= ======
Income before taxes was generated principally in the United States.
Effective income taxes for the Group differ from statutory federal income taxes
as follows:
YEAR ENDED SEPTEMBER 30,
---------------------------
2004 2003 2002
------- ------- -------
Statutory federal income taxes $ 2,819 $ 1,013 $(3,430)
State income taxes (net of federal benefit) 373 141 (268)
Losses with no tax benefit -- -- 670
Change in tax status of subsidiary -- -- 1,575
Change in valuation allowance (1,748) (2,919) 2,749
Other 83 175 2
------- ------- -------
$ 1,527 $(1,590) $ 1,298
======= ======= =======
F-18
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Finacial Statements
(Dollars in thousands)
10. INCOME TAXES (CONTINUED)
SEPTEMBER 30,
------------------
2004 2003
------- --------
DEFERRED TAX LIABILITIES
Machinery and equipment $ (257) $ (185)
Unamortized debt discount (46) (61)
------- --------
Total deferred tax liabilities (303) (246)
DEFERRED TAX ASSETS
Accruals and allowances 1,401 1,986
Inventories 733 534
Pension and other employee benefits 3,529 7,981
Deductible goodwill 991 1,088
Net operating loss carryforwards 888 1,061
Valuation allowance (5,958) (10,673)
------- --------
Total deferred tax assets 1,584 1,977
------- --------
Net deferred tax assets $ 1,281 $ 1,731
======= ========
The classification of the deferred tax balance is:
SEPTEMBER 30,
---------------
2004 2003
------ ------
Current assets $ 600 $ 183
Non-current assets 681 1,548
------ ------
Net deferred tax (liability) assets $1,281 $1,731
====== ======
Approximately $2,900 of the change in the valuation allowance for the year ended
September 30, 2004 is attributable to the decrease in the Group's minimum
pension liability which has been recorded as an other comprehensive loss.
The Group has net operating loss carryforwards (NOLs) of $2,322 for federal
income tax purposes that expire fiscal 2017 through 2024. For financial
reporting purposes, a valuation allowance of $888 at September 30, 2004 was
recognized to offset the deferred tax assets related to these NOLs.
The change in the Group's, tax status from a limited liability company to a C
corporation, resulted in a deferred tax expense and related liability of $1,575
in fiscal 2002.
F-19
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Finacial Statements
(Dollars in thousands)
11. MEMBER'S EQUITY
100% of the outstanding common units of each company comprising the Group are
owned by SILLC Holdings, LLC. The following table depicts the composition of the
member's equity at September 30, 2004:
RETAINED ACCUMULATED
EARNINGS/ OTHER
MEMBER'S (ACCUMULATED COMPREHENSIVE
CAPITAL DEFICIT) LOSS
-------- ------------ -------------
EJ FOOTWEAR $ 7,589 $(1,749) $(13,043)
LEHIGH 13,544 (6,986) (2,228)
GEORGIA BOOT 3,769 6,385 (3,332)
------- ------- --------
$24,902 $(2,350) $(18,603)
======= ======= ========
Each company in the group has 100 common units authorized and outstanding.
In November 2001, the Group transferred $7,000 face value of Senior Notes to
SILLC Holdings, less $306 of unamortized debt discount. The transaction resulted
in a net increase to Member's Capital of $6,694.
In connection with SILLC Holding's debt refinancing transaction in January 2002,
(see note 8), a capital contribution of $20,929 was made to the Group by SILLC
Holdings.
In June 2002, SILLC Holdings sold the majority of the assets of its wholly-owned
subsidiary, SCF Industries, Inc ("SCF"), a manufacturer and distributor of
folding chairs and tables. On September 28, 2002, SILLC Holdings transferred the
remaining assets and liabilities of SCF to EJ Footwear, resulting in a $2,838
decrease to Member's Capital. The following table summarizes the assets and
liabilities transferred to EJ Footwear:
Accounts receivable, net $ 106
Deferred financing costs, net 64
------
Total assets 170
Trade accounts payable 65
Accrued expenses and other liabilities 606
Revolver debt 689
Other long-term liabilities 511
Senior notes (net of debt discount of $63) 1,137
------
Total liabilities 3,008
------
Net liabilities assumed $2,838
======
F-20
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
12. RELATED PARTY TRANSACTIONS
MANAGEMENT AND ADVISORY FEES:
Strategic and a subsidiary have provided certain services to the Group in
connection with its operations. These services principally included legal,
finance, tax, risk management, employee benefits and acquisition and divestiture
related services. The management fees charged to the Group for these services
were $999, $928, and $1,064 for the years ended September 30, 2004, 2003, and
2002, respectively. Management fees were paid prior to year-end and were
allocated in the direct proportion of the Group's revenues to the consolidated
revenues of SILLC Holdings. The management fees are not necessarily indicative
of the costs that would have been incurred if the Group had been a stand-alone
entity.
Effective January 15, 2002, CVC began to charge the domestic subsidiaries of
SILLC Holdings an annual fee for advisory services that will be the greater of
$1,000 or 2% of annual combined EBITDA (as defined in the agreement). The Group
was charged $348, $188, and $558 for the years ended September 30, 2004, 2003,
and 2002, respectively. The advisory fees were paid to CVC after the Group's
fiscal year end for each period.
LOANS WITH AFFILIATES:
The Group made loans of $2,500 in fiscal 2004 and $5,500 in fiscal 2003 to two
wholly-owned subsidiary companies of SILLC Holdings. The principal balances of
$8,000 and $5,500 were outstanding at September 30, 2004 and 2003, respectively.
The loans are payable on demand and bear interest (paid monthly) at the annual
rate of 4%. The Group recognized interest income relating to these loans of $289
and $67 for the years ended September 30, 2004 and 2003, respectively.
For the years ended September 30, 2004, 2003 and 2002, the Group incurred
interest expense of $2,015, $2,015, and $3,175, respectively, on its Senior
Notes payable to the majority members and affiliates of Strategic. At September
30, 2004 and 2003, the Group had accrued interest of nil and $908, respectively,
payable to the majority members and affiliates of Strategic.
OTHER TRANSACTIONS WITH AFFILIATES:
The Group performs certain importing services for two wholly-owned subsidiaries
of SILLC Holdings. In 2004, the Group recorded sales of $796 relating to one of
these entities for activities started in such period. Net profit relating to the
services rendered were $69, $79 and $31 for the years ended September 30, 2004,
2003 and 2002, respectively, and is recorded in the cost of products sold. The
charges are settled in the normal course of business.
F-21
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
In 2003, pursuant to the pending sale of a wholly-owned subsidiary by SILLC
Holdings, Georgia Boot purchased the receivable balance of an account in
bankruptcy from the subsidiary at the estimated net realizable value (carrying
value) of $430. Subsequent to the transfer of the receivable, the bankruptcy
case was settled, and the Group realized net gains of $787 and $769 in 2004 and
2003, respectively, which was recorded in Selling, General and Administrative
expense.
13. COMMITMENTS AND CONTINGENCIES
LICENSING AGREEMENTS:
The Group has a licensing agreement with a third party for the use of the
"Dickies" trademark. The agreement, which matures in December 2007, may be
terminated by Dickies if contract minimums are not met for any contract year.
The Group is contracted to pay royalties at 5% of net shipments with minimum
royalties averaging approximately $350 in each calendar year through 2007.
Royalty expense under the agreement was $644, $418, and $219 for fiscal years
ended September 30, 2004, 2003 and 2002, respectively.
In fiscal 2003, the Group entered into a licensing agreement with a third party
for the use of the "John Deere" trademark. The agreement covers the United
States of America and its possessions, military posts exchanges, and Canada. The
agreement expires in July 2005 with an early cancellation clause that is
exercisable if royalties earned through January 2005 are less than $125. The
agreement requires minimum royalties of $600 for the period of July 30, 2003 to
July 30, 2006 if the early cancellation clause is not exercised. The agreement
automatically renews for an additional 3-year term if minimum royalties are met.
Royalty expense was $75 for the year ended September 30, 2004 for royalties
earned under this agreement.
The Group has a licensing agreement with a third party for the use of the "After
Six" trademark. The agreement covers the United States of America and its
territories and possessions, Mexico and Canada. The current term expires in June
2005. Renewals must be negotiated. The agreement calls for royalties earned
based upon 5% of applicable net sales with minimum annual royalties of $100.
Royalty expense was $96, $117, and $212 for the years ended September 30, 2004,
2003 and 2002, respectively. Royalty expenses are included in selling, general
and administrative expenses.
F-22
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SERVICE AGREEMENT:
In fiscal 2002, the Group entered into a warehouse and fulfillment service
agreement with a third party to warehouse and distribute the Group's product.
The agreement runs through October 2007 and contains an early cancellation
clause. Charges under the agreement are based upon set rates per pair shipped
with minimum monthly charges of $138 per month. Distribution and handling
charges incurred under the agreement were $2,862 and $2,158 for the years ended
September 30, 2004 and 2003, respectively. The agreement required the Group to
share in the initial set up costs of the distribution center. For the year ended
September 30, 2002, $1,276 for set up costs was included in selling, general and
administrative expenses.
ENVIRONMENTAL:
The Group is subject to a wide range of environmental protection laws. EJ
Footwear has been named as a Potentially Responsible Party ('PRP') at three
'Superfund' sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 or comparable statutes. Remediation work
has been completed at two of the sites and remedial and investigatory activities
are currently underway at the third site. It is often difficult to estimate the
future impact of environmental matters, including potential liabilities. The
Group accrues for losses associated with environmental remediation obligations
when such losses are probable and reasonably estimable. This practice is
followed whether the claims are asserted or unasserted. Accruals for estimated
losses from environmental remediation are based primarily upon internal or third
party environmental studies, and estimates as to the number, participation
level, and financial viability of any other PRP's, the extent of contamination,
and the nature of required remedial actions. Such accruals are adjusted as
further information develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value.
At September 30, 2004, the Group had accrued as long-term obligations
approximately $362 for various environmental related liabilities of which the
Group is aware. Management expects that the amount accrued will be paid out over
the periods of remediation for the applicable sites which range up to 30 years
and that such accruals are adequate based on all current data. Remediation work
has been completed at two of the sites and remedial and investigatory activities
are currently underway at the third site; however, no currently available
information reasonably suggests that projected expenditures associated with
remedial action or compliance with environmental laws for any single site or for
all sites in the aggregate, will have a material adverse effect on the Group's
financial condition, results of operations or cash flow.
Recoveries of environmental remediation costs from other parties are recognized
as assets when their receipt is deemed probable. The Group recovered $328 in
fiscal 2003 which is netted in selling, general and administrative expenses. In
2004, the Group filed proof of claims for environmental remediation costs
already paid totaling $722 against its excess insurance carrier. The insurance
carrier is currently in liquidation, controlled by the state of New Hampshire. A
supplemental claim was also filed with the New York State Department of
Insurance Liquidation Bureau under their insurance guarantee fund. Collection of
the claim is uncertain and recovery of this claim has not been recognized by the
Group.
F-23
EJ Footwear Group
(Comprised of wholly-owned subsidiaries of SILLC Holdings, LLC)
Notes to Combined Financial Statements
(Dollars in thousands)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER LEGAL MATTERS
The Group is a defendant or plaintiff in lawsuits that have arisen in the normal
course of business. While certain of these matters involve substantial amounts,
it is management's opinion, based on the advice of counsel, that the ultimate
resolution of such litigation will not have a material adverse effect on the
Group's financial condition, results of operations or cash flows.
LEASES:
The Group leases office and warehouse facilities under noncancellable operating
leases. These leases, for the most part, contain renewal options as well as
inflationary escalation clauses. Rental expense for operating leases was $2,897,
$2,875 and $2,914 for the years ended September 30, 2004, 2003 and 2002,
respectively.
Future minimum rental commitments under non-cancelable operating leases as of
September 30, 2004 are:
2005 $2,093
2006 1,226
2007 758
2008 225
------
$4,302
======
14. SUBSEQUENT EVENT (UNAUDITED)
On December 6, 2004, SILLC Holdings executed a definitive agreement to sell the
Group to Rocky Shoes and Boot ("Rocky"). The total purchase price for 100% of
the equity interest of EJ Footwear, Georgia Boot and Lehigh will be $87,700 in
cash plus 484,254 restructured shares of Rocky's common stock, which were valued
at an aggregate of $10,000 at the date of the definitive agreement. Net proceeds
to SILLC Holdings after closing and other related costs is estimated to be
approximately $90,758. The closing is expected in early January 2005 and is
subject to Rocky's receipt of obtaining a firm financing commitment and other
customary conditions. In connection with this transaction, SILLC Holdings will
repay or retain the Group's debt obligations of $52,096 at September 30, 2004
and will retain the Group's pension obligation and certain other employee
related obligations totaling $10,176, and environmental liabilities of $362 at
September 30, 2004.
F-24
PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated financial statements have been derived from
the application of pro forma adjustments to the historical consolidated
financial statements of Rocky Shoes & Boots, Inc. and EJ Footwear LLC, Georgia
Boot LLC, and HM Lehigh Safety Shoe Co. LLC (the "EJ Footwear Group"). The
unaudited pro forma consolidated financial statements are not necessarily
indicative of the results that would have actually occurred if the transaction
had been in effect on the dates indicated below or that may occur in the future.
The accompanying unaudited pro forma consolidated balance sheet of the combined
companies at December 31, 2004, and the related unaudited statement of
operations for the year then ended give effect of the pro forma basis of the
transaction.
The unaudited pro forma consolidated statement of operations for the year ended
December 31, 2004 includes the consolidated statement of operations of Rocky
Shoes & Boots, Inc. for the year ended December 31, 2004, and the consolidated
statement of operations of the EJ Footwear Group for the year ended September
30, 2004, as if the transaction were consummated on January 1, 2004. The
unaudited pro forma adjustments and preliminary allocation of the purchase price
are based on valuations and other studies that have not yet been completed.
Accordingly, the actual allocation of purchase price and the resulting effect on
net income may differ significantly from the pro forma accounts included herein.
The unaudited pro forma financial information is presented for informational
purposes only.
The EJ Footwear acquisition will be accounted for by the purchase method of
accounting. Under purchase accounting, the total purchase price will be
allocated to the tangible and intangible assets and liabilities of EJ Footwear
based upon their respective fair values. A preliminary allocation of the
purchase price has been made to major categories of assets and liabilities based
on available information. The actual allocation of purchase price and the
resulting effect on income from operations may differ significantly from the pro
forma amounts included herein.
The aggregate purchase price for the interests of EJ Footwear Group was $91.2
million in cash, 484,261 shares of the Company's common stock (the "Shares"),
which were valued at $10 million on the date of signing of the Agreement and
$11,573,000 on the closing date, and direct transactions costs of $1.6 million,
including legal, accounting and advisory services.
PF-1
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2004
Rocky Shoes and Adjustments
Boots, Inc EJ Footwear Group for Seller- Transaction
December 31, 2004 December 31, 2004 retained Items Adjustments Total
----------------- ----------------- -------------- ----------- ------------
ASSETS
Cash and cash equivalents $ 5,060,859 $ (317,633) $ 317,633 $ -- $ 5,060,859
Trade receivables - net 27,182,198 29,521,892 -- 56,704,090
Other receivables 1,114,959 8,000,000 (8,000,000) 1,114,959
Inventories 32,959,124 33,880,758 -- 66,839,882
Deferred income taxes 230,151 600,000 (600,000) 1,071,154(E) 1,301,305
Income tax receivable 2,264,531 2,264,531
Prepaid expenses & other current assets 588,618 263,086 -- 851,704
----------- ------------ ------------
Total current assets 69,400,440 71,948,103 134,137,330
Fixed assets - net 20,179,486 1,708,155 825,000(A) 22,712,641
Deferred pension asset 1,347,824 -- 1,347,824
Deferred income taxes 681,000 (681,000) -- --
Finite-lived intangible assets 8,500,000(B) 8,500,000
Indefinite lived intangible assets 2,725,886 38,500,000(B) 41,225,887
Goodwill 1,557,861 361,000 (361,000) 16,378,517(G) 17,936,378
Other assets 1,494,157 735,366 (159,351) 1,968,300(C) 4,038,472
----------- ------------ ------------
Total Assets $96,705,654 $ 75,433,624 $229,898,532
=========== ------------ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current Liabilities
Accounts Payable $ 4,349,248 $ 449,179 $ -- $ -- $ 4,798,427
Current maturities - long-term debt 6,492,020 27,928,305 (27,928,305) 6,492,020
Income taxes 627,074 (627,074) --
Accrued salaries and wages 1,295,722 1,115,781 -- 2,411,503
Accrued other 1,651,400 6,664,157 (663,570) 7,651,987
----------- ------------ ------------
Total current liabilities 13,788,390 36,784,496 -- 21,353,937
Long-term debt - less current maturities 10,044,544 22,127,079 (22,127,079) 94,783,812(D) 104,828,356
Pension and other employee benefits 89,195 8,770,573 (8,770,573) 89,195
Deferred income taxes 1,205,814 -- 17,935,223(E) 19,141,037
Deferred liabilities 206,913 2,742,296 (1,407,838) 1,541,371
----------- ------------ ------------
Total liabilities 25,334,856 70,424,444 146,953,896
SHAREHOLDERS' EQUITY:
Common stock - no par value 38,399,114 -- 11,573,838(F) 49,972,952
Additional paid-in capital 24,901,868 (24,901,868) 0
Accumulated other comprehensive loss (1,077,586) (18,603,233) 18,603,233 (1,077,586)
Retained earnings (deficit) 34,049,270 (1,289,455) 1,289,455 34,049,270
----------- ------------ ------------
Total Shareholders' equity 71,370,798 5,009,180 82,944,636
----------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $96,705,654 $ 75,433,624 $229,898,532
=========== ============ ============
See notes to pro forma consolidated balance sheet
PF-2
Rocky Shoes & Boots, Inc.
Footnotes to Pro Forma Consolidated Balance Sheet
December 31, 2004
(A) Adjust fixed assets to estimated fair value
(B) Record estimated fair value of intangible assets acquired
Finite lived intangibles:
Customer list $ 3,500,000
License agreements 2,000,000
Patents 2,000,000
Internet domain names 1,000,000
-----------
$ 8,500,000
-----------
Indefinite lived intangibles:
Trade names & trademarks $38,500,000
-----------
Estimated amounts are subject to final allocation based on independent
appraisal of the fair value of assets acquired.
(C) Record debt financing costs
Total costs $2,901,803
Amounts paid prior to December 31, 2004 (933,503)
----------
$1,968,300
----------
(D) Record debt incurred:
GMAC term loan $18,000,000
American Capital Financial Services term loan 30,000,000
GMAC revolving credit agreement 46,783,812
-----------
$94,783,812
-----------
(E) Record deferred tax related to the acquisition.
(F) Record the issuance of 484,261 common shares at $23.90, the average price
of three days prior to and three days following the announcement of the
transaction.
PF-3
(G) Purchase price allocation:
Cash $ 91,227,215
Common shares - 484,261 at $23.90 a share 11,573,838
Transaction costs 1,588,296
------------
104,389,349
------------
Allocated to:
Accounts receivable - net 29,521,892
Inventories 33,880,758
Deferred taxes 1,071,154
Other current assets 263,086
Fixed assets 2,533,155
Identified intangible assets 47,000,000
Other assets 576,015
Liabilities (8,900,005)
Deferred taxes - long term (17,935,223)
------------
Goodwill $ 16,378,517
------------
Cash purchase price is subject to final working capital adjustment.
Estimated amounts are subject to final allocation based on independent
appraisal of the fair value of assets acquired.
Goodwill is not tax deductible.
PF-4
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
AS OF DECEMBER 31, 2004
Eliminate
Impact of
Rocky Shoes and EJ Footwear Items
Boots, Inc Group Retained by Transaction
December 31, 2004 September 30, 2004 Seller Adjustments Total
----------------- ------------------ ----------- ------------- ------------
Net sales $132,248,963 $146,801,962 $279,050,925
Cost of sales 93,606,600 78,914,242 172,520,842
------------ ------------ ------------
Gross margin 38,642,363 67,887,720 -- -- 106,530,083
Selling, general and administrative
expenses 25,617,944 54,267,123 (2,638,835)(A) 2,039,583(E) 79,285,815
------------ ------------ ------------
Income (loss) before interest and taxes 13,024,419 13,620,597 27,244,268
Other income and (expenses)
Interest expense (1,335,100) (5,101,347) 5,101,347(B) (6,677,838)(F) (8,012,938)
Other - net 381,073 (498,976) (289,444)(C) (407,347)
------------ ------------ ------------
Total other - net (954,027) (5,600,323) (8,420,285)
------------ ------------ ------------
Income (loss) before income taxes 12,070,392 8,020,274 18,823,983
Total income taxes (benefit) 3,476,000 1,527,000 (1,527,000)(D) 2,566,400(G) 6,042,400
------------ ------------ ------------
Net income $ 8,594,392 $ 6,493,274 $ 12,781,583
============ ============ ============
Net income (loss) per share
Basic $ 1.89 $ 2.54
Diluted $ 1.74 $ 2.35
Weighted average number of common shares
outstanding
Basic 4,557,283 5,041,544
Diluted 4,953,529 5,437,790
See notes to pro forma consolidated statement of income
PF-5
Rocky Shoes & Boots, Inc.
Footnotes to Pro Forma Consolidated Statement of Income
Year ended December 31, 2004
(A) Eliminate EJ Footwear expenses related to pension expense ($1,037,787),
management fees ($1,347,000), transaction costs incurred by EJ Footwear
related to the transaction ($242,654) and deferred compensation ($11,394).
(B) Eliminate EJ Footwear interest expense
(C) Eliminate EJ Footwear related party interest income.
(D) Eliminated EJ Footwear income tax expense.
(E) Record depreciation and amortization.
Cost Life Expense
---------- -------- ----------
Fixed assets $ 825,000 4 years $ 206,250
Customer list 3,500,000 5 years 700,000
License agreements 2,000,000 3 years 666,667
Patents 2,000,000 15 years 133,333
Internet domain names 1,000,000 3 years 333,333
----------
$2,039,583
----------
Estimated amounts and amortization lives are subject to final allocation
based on independent appraisal of the fair value of assets acquired.
(F) Record interest expense on debt incurred.
Debt Rate Interest
----------- ----- ----------
GMAC term loan $18,000,000 5.65% $ 889,878
American Capital Financial
Services term loan 30,000,000 10.40% 3,120,000
GMAC revolving credit
agreement 46,783,812 4.90% 2,292,408
Amortization of debt financing costs 375,552
----------
$6,677,838
All debt incurred is variable rate based on LIBOR. Interest rates assume a
LIBOR rate of 2.25% throughout the period.
PF-6
(G) Record tax effect.
EJ Footwear pre tax income $ 8,020,274
Net effect of adjustments (1,266,683)
-----------
6,753,591
Effective tax rate 38%
-----------
$ 2,566,400
-----------
PF-7