EXHIBIT (13)
[Pages 12-28 of 1996 Annual Report to Shareholders]
[Page 12]
Five Year Summary of Selected Financial Data
Selected Income Statement Data
In Thousands - Year Ended
December 31 1996 1995 1994 1993 1992
Net sales $121,997 $98,571 $108,319 $82,422 $68,831
Operating income 10,088 6,662 11,230 7,250 5,771
Net income 5,386 3,328 6,152 3,700 2,707
Selected Balance Sheet Data
In Thousands - Year Ended
December 31 1996 1995 1994 1993 1992
Working capital $ 46,811 $34,537 $ 35,382 $26,725 $26,099
Total assets 92,286 74,862 74,822 46,488 37,849
Long-term obligations 16,002 4,893 7,340 10,751 12,693
Redeemable preferred
stock - 1,957 1,957 1,957 1,957
Shareholders' equity 55,936 51,322 49,154 19,658 15,953
Selected Share Data
Year Ended December 31 1996 1995 1994 1993 1992
Net income per share $ .80 $ .48 $ .98 $ .76 $ .53
Dividends per share $ .11 $ .09 $ .09 $ .08 $ .07
Shares used in per
share calculation (000) 6,674 6,680 6,158 4,694 4,979
[Pages 13-16]
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Net sales generated during the last five months of the year can
account for over 55% of the Company's net sales and have a significant
impact on the Company's results of operations. Because consumers
generally purchase a large percentage of the Company's products from
September through January, retail dealers generally want delivery of
products from June through October for advance orders and from October
through December for restocking (or "fill-in") orders. Generally, mild or
dry weather during the late fall and early winter has a negative impact on
the Company's net sales for the current year, while cold or wet weather
during such time has a favorable impact. Further, weather conditions in
one season can affect future net sales, particularly where weather
contributes to high or low dealer inventory levels at the season's end.
To satisfy demands for its products and to provide for uniform production
levels, the Company generally manufactures its footwear products year-
round. To assist in production scheduling, the Company's sales force
calls on retail dealers from January to June to present the product line,
review inventory levels and prepare an advance order. The Company offers
price discounts for orders placed prior to July, although advance orders
may be canceled at any time. To attempt to balance the flow of shipments
and the need for warehouse space, the Company offers extended terms on
receivables relating to advance orders to induce retail dealers to allow
some shipments of seasonal products prior to the peak shipment period.
The advance order terms provide for payment by December 1 (January 1 in
the case of Southern dealers). Because of seasonal fluctuations,
inventory levels are highest at mid-year and accounts receivable levels
are highest during the fourth quarter.
Each year, the Company introduces a number of new products. A new
product, if successful, often generates growing amounts of net sales
during the first three to five years.
In some cases, net sales of new products will help to offset
adverse factors, such as mild or dry weather or adverse economic
conditions. In addition, the Company's Rainfair, Inc. subsidiary, which
is primarily in the rainwear business, provides products which react
differently to the weather elements than the footwear business.
In May 1996, a Company subsidiary, which is 50% owned by the
Company, purchased the assets of Rainfair, Inc. and then was renamed
Rainfair, Inc. (Rainfair). Rainfair designs, manufacturers and
distributes rainwear, protective clothing and boots. If the acquisition
had occurred on January 1, 1996, net sales and net income reported by the
Company would have been $128.1 million and $5.5 million, respectively.
In May 1996, the Company also acquired certain of the operating
assets and trademarks of Red Ball, Inc. (Red Ball). The Company accounted
for this transaction as a purchase of assets rather than the acquisition
of a business since there is limited continuity of the sale of Red Ball
products, no facility leases were assumed and there is no continuity of
the Red Ball cost structure. During 1996, Red Ball products added $.5
million and $3.0 million to the Company's net sales for the third and
fourth quarters, respectively.
The Company does not anticipate the future seasonality of sales
will be significantly impacted by the net sales of Rainfair and Red Ball.
Results of Operations
The following table shows the percentage relationship to net sales of
items derived from the Consolidated Statements of Income and the
percentage change from year to year.
Percentage of Net Sales Percentage of Increase
(Decrease)
Year Ended December 31 1996 1995 1994 1996 vs. 1995 1995 vs. 1994
Net sales 100.0% 100.0% 100.0% 24% (9)%
Cost of goods sold 72.3 73.1 71.4 22 (7)
Gross profit 27.7 26.9 28.6 27 (14)
Selling and
administrative expenses (19.4) (20.2) (18.2) 19 1
Operating income 8.3 6.7 10.4 51 (41)
Interest expense (1.4) (1.5) (1.4) 15 (5)
Other income .3 .3 .3 36 (19)
Income before income taxes 7.2 5.5 9.3 60 (45)
Income taxes (2.8) (2.1) (3.6) 61 (45)
Net income 4.4% 3.4% 5.7% 62% (46)%
Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995
Net Sales. Net sales in 1996 increased $23.4 million, or 24.0%, to $122.0
million from $98.6 million in 1995. The increase in net sales was largely
attributable to the May 1996 acquisitions of Rainfair and certain assets
of Red Ball. These acquisitions added $11.1 million and $3.5 million,
respectively, of net sales in 1996. Net sales of LaCrosse products
increased $7.3 million in 1996 as compared to 1995, as a result of a $4.7
million increase in sales through the retail channel of distribution due
to (i) more favorable weather conditions, (ii) an improved retail climate
and (iii) new product offerings, and a $3.0 million improvement in sales
through the industrial channel of distribution, mainly as a result of new
products. Danner product sales increased $1.5 million in 1996 compared to
1995 resulting mainly from the introduction of the Dri-Foot boot series.
Gross Profit. Gross profit as a percentage of net sales increased to
27.7% in 1996 from 26.9% in 1995. Gross profit margins as a percentage of
net sales on LaCrosse products were up 1.5%, primarily the result of a $.4
million reduction in the LIFO reserve, more favorable pricing on key raw
materials and improved productivity at the La Crosse, Wisconsin factory.
This was partially offset by the lower margin rainwear business and lower
margins on Red Ball brand sales, which were impacted by start-up
inefficiencies.
Selling and Administrative Expenses.
Selling and administrative expenses increased $3.8 million, or 19%, in
1996 as compared to 1995, primarily resulting from the acquisitions of
Rainfair and Red Ball, which added $.6 million and $2.2 million,
respectively, to operating expenses in 1996. As a percent of net sales,
operating expenses decreased from 20.2% of net sales in 1995 to 19.4% of
net sales in 1996. The ability to leverage the LaCrosse operating
expenses across a greater sales base was the primary reason for the
reduction in operating expenses as a percent of net sales. This allowed
for a planned increase in advertising expenses.
Interest Expense. Interest expense increased $223,000, or 15%, in 1996 as
compared to 1995. The increase was the result of a $12.5 million increase
in long-term debt to finance the Rainfair acquisition and the purchase of
Red Ball assets, which was partially offset by lower short-term borrowings
resulting from the reduced inventory levels of LaCrosse products during
the year.
Income Tax Expense. The Company's effective income tax rate in 1996 was
39.2%, the same as the 1995 income tax rate.
Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994
Net Sales. Net sales in 1995 decreased $9.7 million, or 9%, to $98.6
million from $108.3 million in 1994 despite a $2.9 million increase in
reported sales of Danner products due to including Danner results for the
entire year of 1995. The decrease in net sales was primarily due to the
mild winter weather conditions during the 1994/95 winter which reduced the
demand for LaCrosse protective footwear and left dealers with carryover
inventory. The primary products affected were rubber or vinyl
bottom/leather top cold weather boots. Net sales under government
contracts were down $2.4 million, as a result of the completion of a
government contract in 1994.
Gross Profit. Gross profit as a percentage of net sales decreased to
26.9% in 1995 from 28.6% in 1994. Margins on LaCrosse products were down
primarily as a result of lower production levels and increases in raw
material costs (primarily crude rubber) in excess of plan. Margins on
Danner products were down due to lower than planned production levels and
start-up costs associated with new products.
Selling and Administrative Expenses.
Selling and administrative expenses increased $.2 million, or 1%, in 1995
as compared to 1994, primarily due to a $900,000 increase in expenses
reported for Danner in 1995 as compared to 1994 when expenses were
included from the date of acquisition, March 14, 1994. This increase was
partially offset by a $493,000 reduction in phantom stock compensation,
primarily due to the lower level of profitability in 1995 as compared to
1994. As a percent of net sales, operating expenses increased from 18.2%
in 1994 to 20.2% in 1995 primarily due to the reduced sales volume of
LaCrosse products coupled with an additional $300,000 of planned marketing
and advertising expense in support of our dealers.
Interest Expense. Interest expense decreased $72,000, or 5% in 1995 as
compared to 1994. The decrease was primarily the result of lower short-
term interest rates.
Income Tax Expense. The Company's effective income tax rate in 1995
increased to 39.2% from 38.7% in 1994 primarily due to a slight increase
in non-deductible expenses and a higher effective state income tax rate.
Liquidity and Capital Resources
The Company has historically financed its operations with cash
generated from operations, long-term lending arrangements and short-term
borrowings under its line of credit. The Company requires working capital
primarily to support fluctuating accounts receivable and inventory levels
caused by the Company's seasonal business cycle. The Company's working
capital needs are lowest in the first quarter and highest in the third
quarter. The Company invests excess cash balances in short-term
investment grade securities or money market investments.
In May 1996, the Company invested $10.9 million in Rainfair. Of
this investment, approximately $8.0 million was for a secured loan to the
subsidiary to support working capital requirements, consistent with the
Company's intention to fund the working capital requirements of Rainfair
through intercompany loans. It is not anticipated that these loans will
increase substantially during the next two years. Rainfair is a designer,
light manufacturer and distributor of industrial and consumer rainwear,
protective clothing and boots.
In May 1996, the Company also acquired certain of the operating
assets and trademarks of Red Ball for approximately $5.5 million,
including $.3 million paid for equipment leased from a third party and $.5
million for relocation costs. Red Ball was a designer, manufacturer and
distributor of waders, pac boots and children's footwear.
In May 1996, the Company renegotiated its unsecured credit
agreement with Firstar Bank Milwaukee, N.A. as the lead bank. Under the
terms of the revised agreement, the maximum amount of borrowings were
increased to $62.5 million, including a $12.5 million term loan, from the
previous maximum level of $30.0 million. The $12.5 million term loan,
which is outstanding at December 31, 1996, was primarily used to fund the
investment in Rainfair and the acquisition of assets of Red Ball. The
term loan requires quarterly payments of $.4 million commencing in March
1998.
Cash generated by operations amounted to $9.7 million in 1996, an
increase from the $5.7 million and $1.6 million generated in 1995 and
1994, respectively. The improved operating cash flow in 1996 is primarily
attributable to a $2.0 million increase in net income and a $2.1 million
reduction in inventories (excluding the effect of the Rainfair inventories
purchased). The inventory reduction was the result of improved production
planning and accurate sales forecasts. The improvement in inventory
levels was achieved despite adding over $3.0 million of inventory to
support the Red Ball brand. Due to sales growth anticipated in 1997,
further inventory reductions are not anticipated. A $2.1 million increase
in accounts receivable, due to the increased fourth quarter sales volume,
was largely offset by an increase in accrued expenses and depreciation.
Net cash used in investing activities during 1996 was $14.2
million, up significantly from $3.8 million in 1995. The Rainfair
acquisition and the purchase of the Red Ball trademarks, coupled with $3.1
million of capital spending, accounted for the spending during 1996. The
$3.1 million of capital spending was $.7 million below the 1995 level,
however, it is anticipated 1997 capital spending will increase above the
$4.0 million level.
Net cash provided by financing activities amounted to $8.1 million
during 1996. The $12.5 million of long-term debt incurred to finance the
Rainfair and Red Ball acquisitions was partially offset by a $1.7 million
principal payment on long-term debt and the repurchase of 100% of the
outstanding preferred stock for $2.0 million. In addition, the Company
paid cash dividends of $668,000, including $68,000 on the preferred stock,
during 1996.
The March 1994 acquisition agreement for the purchase of the assets
of Danner Shoe Manufacturing, Co. provides that in the event the cash and
aggregate market value of the Company's common stock (valued as of March
1, 1999) delivered in the Danner acquisition is less than $18.0 million,
the Company will be obligated to make an additional cash payment equal to
the difference. To the extent the aggregate market value of the 277,778
shares of the Company's common stock delivered as part of the purchase
agreement equals or exceeds $4.5 million at or prior to March 1, 1999, the
Company's obligation to make such payment can be reduced or eliminated.
This obligation can be reduced or eliminated by the sale of those shares
by the former Danner shareholders under a Company-filed registration
statement or under Rule 144 promulgated under the Securities Act of 1933,
as amended, prior to March 31, 1999.
The Company's debt to total capital ratio was 24.2% at December 31,
1996, 11.5% at December 31, 1995 and 15.6% at December 31, 1994.
Currently available funds, including the line of credit, together
with the anticipated cash flows generated from future operations, are
believed to be adequate to cover the Company's anticipated capital and
working capital needs for 1997 and 1998.
From time to time, the Company evaluates acquisitions of businesses
or product lines that could complement the Company's business, such as the
Rainfair acquisition. The Company has no present understandings,
commitments or agreements with respect to any acquisition. However, if
the Company makes significant future acquisitions, it may be required to
raise funds through additional bank financing or the issuance of debt or
equity securities.
[Pages 17-27]
Consolidated Balance Sheets
December 31, 1996 and 1995
(In Thousands)
Assets 1996 1995
Current Assets
Cash and cash equivalents $ 6,716 $ 3,036
Trade accounts receivable,
less allowances of $1.5 and $.8 million 20,705 15,563
Inventories (Note 3) 31,549 26,007
Prepaid expenses and deferred tax assets
(Note 4) 4,016 3,281
------- -------
Total current assets 62,986 47,887
------- -------
Property and Equipment
Land and land improvements and buildings 6,501 5,818
Machinery and equipment 23,391 20,994
-------- -------
29,892 26,812
Less accumulated depreciation 17,262 14,964
-------- -------
12,630 11,848
-------- -------
Other Assets
Goodwill, net of amortization of $1.4 and
$.9 million 13,823 13,653
Deferred tax and other assets (Note 4) 2,847 1,474
------- -------
16,670 15,127
------- -------
$92,286 $74,862
======= =======
Liabilities and Common Shareholders' Equity
Current Liabilities
Current maturities of long-term obligations
(Note 5) $ 1,851 $ 1,761
Accounts payable 5,755 4,812
Accrued expenses (Note 7) 8,569 6,777
------- -------
Total current liabilities 16,175 13,350
------- -------
Long-Term Obligations (Note 5) 16,002 4,893
Compensation and Benefits (Note 9) 2,980 3,340
------- -------
Total liabilities 35,157 21,583
------- -------
Commitments and Contingencies
(Notes 6, 8, 9 and 10)
Minority Interest in Subsidiary 1,193 -
Redeemable Preferred Stock, at redemption price - 1,957
Common Shareholders' Equity
Common stock, par value $.01 per share;
authorized 50,000,000 shares;
issued and outstanding, 6,667,627 shares,
respectively (Notes 8 and 10) 67 67
Additional paid-in capital 27,579 27,579
Retained earnings (Note 5) 28,733 24,119
Less cost of 50,000 shares of treasury stock (443) (443)
-------- --------
Total common shareholders' equity 55,936 51,322
-------- --------
$92,286 $74,862
======== ========
See Notes to Consolidated Financial Statements.
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
(In Thousands,
except for share and per share data)
1996 1995 1994
Net sales $121,997 $98,571 $108,319
Cost of goods sold 88,176 72,011 77,386
------- ------- -------
Gross profit 33,821 26,560 30,933
Selling and administrative expenses 23,733 19,898 19,703
------- ------- -------
Operating income 10,088 6,662 11,230
Non-operating income (expense):
Interest expense (1,680) (1,457) (1,529)
Miscellaneous 361 266 330
------- ------- ------
(1,319) (1,191) (1,199)
------- ------- ------
Income before income
taxes 8,769 5,471 10,031
Provision for income taxes (Note 4) 3,440 2,143 3,879
------- ------- ------
Net income before minority
interest 5,329 3,328 6,152
Minority interest in net loss
of subsidiary 57 - -
======= ======= =======
Net income $ 5,386 $ 3,328 $ 6,152
Earnings per common and
common equivalent share $.80 $.48 $.98
======= ======= =======
Weighted average common and
common equivalent shares
outstanding 6,673,539 6,679,545 6,158,175
========= ========= =========
See Notes to Consolidated Financial Statements.
Consolidated Statements of Common Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994
(In Thousands, except for share and per share data)
Common Total
Additional Stock Common
Common Paid-In Retained Acquisition Treasury Shareholders'
Stock Capital Earnings Notes Stock Equity
Balance, December 31, 1993 $47 $3,723 $16,078 $(190) $- $19,658
Net income - - 6,152 - - 6,152
Issuance of common
stock, including
1,725,000 shares
issued to the public
at $13 per share,
net of offering costs 20 23,856 - - - 23,876
Common stock dividends
($.09 per share) - - (605) - - (605)
6% preferred stock
dividends - - (117) - - (117)
Payment received on
stock subscription note - - - 190 - 190
---- -------- -------- -------- -------- --------
Balance, December 31, 1994 67 27,579 21,508 - - 49,154
Net income - - 3,328 - - 3,328
Common stock dividends
($.09 per share) - - (600) - - (600)
6% preferred stock
dividends - - (117) - - (117)
Purchase of 50,000 shares
of treasury stock - - - - (443) (443)
---- -------- -------- -------- -------- --------
Balance, December 31, 1995 67 27,579 24,119 - (443) 51,322
Net income - - 5,386 - - 5,386
Common stock dividends
($.11 per share) - - (733) - - (733)
6% preferred stock
dividends - - (39) - - (39)
---- -------- -------- -------- -------- --------
Balance, December 31, 1996 $67 $27,579 $28,733 $0 $(443) $55,936
==== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
1996 1995 1994
Cash Flows from Operating Activities
Net income $ 5,386 $3,328 $ 6,152
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 2,925 2,523 2,274
Amortization 513 484 362
Other (34) 21 46
Deferred income taxes (62) (62) (239)
Change in assets and
liabilities, net of
effects from acquisition
of Danner Shoe Manufacturing
Co. and Rainfair, Inc.:
Trade accounts receivable (2,145) 93 (1,117)
Inventories 2,136 (936) (4,268)
Accounts payable 279 382 (2,492)
Other 712 (139) 923
------- ------- -------
Net cash provided by
operating activities 9,710 5,694 1,641
Cash Flows from Investing Activities
Acquisition of Rainfair, Inc.,
net of cash acquired (9,597) - -
Purchase of property and equipment (3,060) (3,779) (4,942)
Purchase of trademarks (1,439) - -
Acquisition of Danner Shoe
Manufacturing Co., net of cash
acquired - - (13,569)
Other (67) (13) (35)
------- ------- -------
Net cash (used in) investing
activities (14,163) (3,792) (18,546)
Cash Flows from Financing Activities
Proceeds from long-term obligations 12,500 - -
Principal payments on long-term
obligations (1,742) (2,444) (3,457)
Cash dividends paid (668) (722) (494)
Purchase of redeemable preferred
stock (1,957) - -
Purchase of treasury stock - (443) -
Net proceeds from issuance of
common stock - - 20,265
Proceeds from common stock acquisition
notes - - 190
Other - - (47)
------- ------- -------
Net cash provided by
(used in) financing
activities 8,133 (3,609) 16,457
------- ------- -------
Increase (decrease) in cash
and cash equivalents 3,680 (1,707) (448)
Cash and cash equivalents:
Beginning 3,036 4,743 5,191
------- ------- -------
Ending $ 6,716 $ 3,036 $ 4,743
======= ======= =======
Supplemental Information
Cash payments for:
Interest $ 1,594 $ 1,396 $ 1,542
Income taxes $ 2,939 $ 1,762 $ 3,985
Supplemental Schedule of Noncash
Investing Activity
Issuance of 277,778 shares of
common stock for Danner
acquisition $ - $ - $ 3,611
------- ------- -------
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business:
The Company designs, manufactures, and markets premium quality protective
footwear and rainwear for sale principally throughout the United States.
Significant accounting policies:
Principles of consolidation:
The consolidated financial statements include the accounts of LaCrosse
Footwear, Inc. and its wholly owned and 50% owned subsidiaries (the
"Company"). The Company consolidates 50% owned subsidiaries where it has
board, operating and financial control. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of estimates in the preparation of financial statements:
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.
Fair value of financial instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those investments.
The carrying amount of long-term debt approximates fair value based on the
interest rates, maturities and collateral requirements currently available
for similar financial instruments.
Concentrations of credit risk:
The Company grants credit to its customers, who are primarily domestic
retail stores, direct mail catalog merchants, wholesalers, industrial and
private label customers, based on an evaluation of the customer's
financial condition. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company monitors
its exposure for credit losses and maintains an allowance for anticipated
losses.
Cash and cash equivalents:
The Company considers all highly liquid debt instruments (including short-
term investment grade securities and money market instruments) purchased
with maturities of three months or less to be cash equivalents. The
Company maintains its cash in bank deposit accounts which, at times,
exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Inventories:
Inventories are stated at the lower of cost or market. All inventories,
except for vinyl products, boot liners, leather boots, leather boot
components and rainwear are valued using the last-in, first-out (LIFO)
method. Vinyl products, boot liners, leather boots, leather boot
components and rainwear are valued using the first-in, first-out (FIFO)
method.
Property and equipment:
Property and equipment are carried at cost and are being depreciated using
straight-line and accelerated methods over their estimated useful lives as
follows: land improvements, 15 years; buildings and improvements, 20 to 39
years; and machinery and equipment, 3 to 7 years.
Intangible assets:
Goodwill, representing the excess of cost over net assets acquired, is
being amortized on a straight-line basis over 30 years for the Danner
acquisition and 15 years for the Rainfair acquisition. The Red Ball
trademarks are being amortized on a straight-line basis over 15 years.
Impairment of long-lived assets:
The Company was required to adopt SFAS No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of",
effective January 1, 1996. SFAS No. 121 requires that long-lived assets
and certain identified intangibles held and used by a company be reviewed
for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company reviews its long-lived assets and intangibles periodically to
determine potential impairment by comparing the carrying value of these
assets with expected future net cash flows provided by operating
activities of the business. Should the sum of the expected future net
cash flows be less than the carrying value, the Company would determine
whether an impairment loss should be recognized. An impairment loss would
be measured by comparing the amount by which the carrying value exceeds
the fair value of the long-lived assets and intangible based on appraised
market value.
Revenue recognition and product warranty:
Revenue is recognized at the time products are shipped to customers.
Revenue is recorded net of freight, estimated discounts and returns. The
Company warrants its products against defects in design, materials and
workmanship generally for one year. A provision for estimated future
warranty costs is recorded when products are shipped.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax
assets and liabilities are recognized for temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Stock-based compensation:
SFAS No. 123 "Accounting for Stock-Based Compensation" which the Company
adopted in 1996 encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has continued to account for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, since the exercise price is equal to the market price at the
date of the grant, no compensation costs have been recognized.
Earnings per common and common equivalent share:
Per share earnings are based on the weighted average number of common and
common equivalent shares outstanding during each year, after reducing net
income by dividends on preferred stock. Common equivalent shares consist
of the dilutive effect of common stock options.
Note 2. Acquisitions
In May 1996, the Company and the former principal owner of Rainfair, Inc.
established a new corporation and each purchased one-half of the new
corporation's common stock for $1,250,000. The Company also purchased all
of the new corporation's outstanding preferred stock for $500,000. On May
31, 1996, this 50% owned subsidiary of the Company purchased substantially
all of the assets of Rainfair, Inc. for approximately $10.9 million in
cash and approximately $1.4 million in assumed liabilities for an
aggregate purchase price of approximately $12.3 million. The name of the
subsidiary was changed to Rainfair, Inc. (Rainfair) in June 1996 after
completion of the acquisition. The Company loaned Rainfair approximately
$8.0 million (secured by all assets of Rainfair) to fund the portion of
the purchase price which was not funded by the initial capital
contributions. The acquisition has been accounted for as a purchase.
Accordingly, the purchase price was allocated to assets and liabilities
based on 50% of their estimated fair values and 50% of the predecessor's
historical cost as of the date of acquisition. The cost in excess of net
assets acquired of approximately $.7 million is being amortized on a
straight-line basis over a 15-year term.
The value of assets acquired (net of cash of $64,617) and liabilities
assumed is as follows (in thousands):
Current assets $10,774
Leasehold improvements
and equipment 659
Deferred taxes 151
Goodwill 683
Current liabilities (965)
Long-term liabilities (455)
-------
10,847
Less minority interest contribution (1,250)
-------
$9,597
=======
In connection with the purchase, the Company entered into a shareholders'
agreement with the former principal owner which prohibits (1) the
declaration or payment of dividends on Rainfair common stock and (2) the
disposal or transfer of Rainfair stock by either party. The shareholders'
agreement contains a put and call provision which may be exercised after 3
years with the purchase price determined based upon the provision in the
shareholders' agreement.
The Company's consolidated statement of income for the year ended December
31, 1996 includes Rainfair's results of operations since its acquisition
in May, 1996. The following unaudited pro forma information presents the
consolidated results of operations as if the acquisition had occurred as
of the beginning of 1995 and does not purport to be indicative of what
would have occurred had the acquisition been made as of that date or of
results which may occur in the future.
(In Thousands, Except
For Earnings Per Share)
Years Ending December 31,
1996 1995
(Unaudited)
Net sales $128,147 $114,947
Net income 5,465 3,377
Earnings per common and
common equivalent share .81 .49
In May 1996, the Company also acquired trade accounts receivable,
inventories, machinery and equipment and trademarks from Red Ball, Inc.
for a cash price of approximately $5.5 million. The Company has accounted
for the transaction as a purchase of assets rather than the acquisition of
a business. The primary purpose of the transaction was to purchase the
Red Ball trademarks and there is limited continuity of the sale of Red
Ball products, no facility leases were assumed and there is no continuity
of Red Ball's sales, production or cost structure. The purchase price is
being allocated to the assets based on their fair values as of the date of
acquisition. The Company's consolidated statement of income for the year
ended December 31, 1996 includes net sales of Red Ball products of
approximately $3.5 million and the effect on net income is immaterial.
Note 3. Inventories
A summary of inventories is as follows:
(In Thousands)
December 31,
1996 1995
Finished goods $22,188 $18,371
Work-in process 2,222 1,922
Raw materials 7,139 5,714
------- -------
Total inventories $31,549 $26,007
======= =======
If all inventories were valued on the FIFO method, total inventories for
1996 and 1995 would have been $35.3 and $30.1 million, respectively.
Note 4. Income Tax Matters
Net deferred tax assets and liabilities consist of the following
components:
(In Thousands)
December 31,
1996 1995
Deferred tax assets:
Receivable allowances $523 $366
Inventory differences 525 493
Compensation and benefits 1,752 1,661
Insurance reserves and other 500 497
------- -------
3,300 3,017
Deferred tax liabilities,
principally intangibles 597 527
------- -------
$2,703 $2,490
======= =======
The components giving rise to the net deferred tax assets described above
have been included in the accompanying consolidated balance sheets as
follows:
(In Thousands)
December 31,
1996 1995
Current assets $2,017 $1,621
Noncurrent assets 686 869
------- -------
$2,703 $2,490
======= =======
No valuation allowance is required on the deferred tax assets as of
December 31, 1996 and 1995.
The provision for income taxes consists of
the following:
(In Thousands)
Years Ended December 31,
1996 1995 1994
Current:
Federal $2,947 $1,723 $3,539
State 555 482 579
Deferred (62) (62) (239)
------- ------- -------
$3,440 $2,143 $3,879
======= ======= =======
The differences between statutory federal tax rates and the effective tax
rates are as follows:
Years Ending December 31,
1996 1995 1994
Statutory federal
tax rate 35.0% 35.0% 35.0%
State taxes, net
of federal tax
benefit and other 4.2 4.2 3.7
------- ------- -------
Effective tax rate 39.20% 39.2% 38.7%
======= ======= =======
Note 5. Long-Term Obligations
Credit agreement:
The Company has a $62.5 million unsecured credit agreement. Under the
agreement, the Company has (1) a $50 million revolving line of credit
which expires on December 31, 1999 ($10 million of which can be used to
support letters of credit) and (2) a $12.5 million term loan due December
31, 2001. At the Company's option, the interest rate is either the bank's
prime rate or LIBOR plus .75% or 1% for the revolving line of credit and
LIBOR plus 1% or 1.25% for the term loan, depending upon the Company's
leverage ratio. (LIBOR plus .75% and LIBOR plus 1% for the revolving line
of credit and term loan, respectively, as of December 31, 1996). The
credit agreement contains various covenants, including minimum
consolidated tangible net worth, sale of assets, indebtedness, current
ratio, interest coverage ratio and leverage ratio. The revolving line of
credit is used to finance peak inventory and accounts receivable levels
and commitments for letters of credit. At December 31, 1996 and 1995,
there were no amounts outstanding under the revolving line of credit but
there were letter of credit commitments outstanding of $1.0 and $2.7
million, respectively.
Long-term obligations:
(In Thousands)
December 31,
1996 1995
Term loan under credit
agreement, due in quarterly
installments of $.4 million
commencing in March 1998,
interest payable monthly $12,500 $-
10.26% unsecured note
payable, due in annual
installments of $1.4 million
excluding interest, interest
payable semi-annually (a) 3,714 5,143
10.73% unsecured note
payable, due in annual
installments of $.3 million
excluding interest, interest
payable semi-annually (a) 743 1,028
Other 896 483
------- -------
17,853 6,654
Less current maturities 1,851 1,761
------- -------
$16,002 $4,893
======= =======
(a) The loan agreement contains various covenants, including minimum
tangible net worth, working capital, current ratio, permitted
indebtedness, net income before income taxes to interest expense and total
permitted investments and restricted payments. Retained earnings
available for dividends under these agreements amount to approximately
$10.2 million at December 31, 1996.
Maturities of long-term obligations for the next five years are as follows
(in millions): 1997, $1.9; 1998, $3.4; 1999, $2.7; 2000, $1.7; 2001, $7.8
and $.4 thereafter.
Note 6. Lease Commitments and
Total Rental Expense
The Company leases office space, retail stores, a manufacturing facility,
equipment and warehouse space under non-cancelable agreements, which
expire on various dates through 2004, and are recorded as operating
leases. The total rental expense included in the consolidated statements
of income for the years ended December 31, 1996, 1995 and 1994 is
approximately $1.6, $1.2 and $1.0 million, respectively. Approximate
future minimum lease payments, estimated utilities and real estate taxes
are as follows (in millions): 1997, $1.6; 1998, $1.4; 1999, $1.4; 2000,
$1.3; 2001, $.5 and $.7 thereafter.
Note 7. Accrued Expenses
Accrued expenses are comprised of the following:
(In Thousands)
December 31,
1996 1995
Compensation $4,423 $3,301
Workers' compensation insurance 889 1,174
Income taxes payable 1,066 504
Other, including dividends 2,191 1,798
------- -------
Total accrued expenses $8,569 $6,777
======= =======
Note 8. Stock Options
In December 1993, the Board of Directors adopted a 1993 Employee Stock
Incentive Plan pursuant to which options for up to 250,000 shares of
common stock may be granted to officers and key employees of the Company,
of which no more than 125,000 shares may be granted to any one employee.
The option price per share shall not be less than 100% of the fair market
value at the date of grant and the options expire 10 years after grant or
such shorter period as the compensation committee of the Board so
determines. The options vest in equal increments over a five-year period.
The following summarizes all stock options granted under the above plan:
Common Per Share
Shares Option Price
December 31, 1994 87,500 $13.00
Granted 41,500 10.25-11.25
-------
December 31, 1995 129,000 10.25-13.00
Granted 89,125 9.06-10.38
Canceled (10,000) 9.06-13.00
-------
December 31, 1996 208,125 9.06-13.00
Options for 41,100 shares were exercisable at December 31, 1996.
Grants under the plan are accounted for following the provisions of APB
Opinion No. 25 and its related interpretations. Accordingly, no
compensation cost has been recognized for grants made to date. If the
Company had elected to recognize compensation cost based on the fair value
of the options granted at the grant date as prescribed by SFAS No. 123,
pro forma net income would have been reduced by less than $.1 million and
the pro forma earnings per share would have been $.79 and $.48 for the
years ended December 31, 1996 and 1995, respectively.
The fair value of each option is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 1%
Expected stock price volatility 25%
Risk-free interest rate 7.0%
Expected life of options 8 years
The weighted average exercise price of the options granted during 1996 is
$9.29 per share.
Note 9. Compensation and
Benefit Agreements
The Company has defined benefit pension plans covering a majority of its
employees. Eligible employees are entitled to monthly pension benefits
beginning at normal retirement age (65). The monthly benefit payable at
the normal retirement date under the Company's pension plans is equal to a
specified dollar amount or percentage of average monthly compensation, as
defined in the plans, multiplied by years of benefit service (maximum of
38 years). The Company's funding policy is to make not less than the
minimum contribution that is required by applicable regulations, plus such
amounts as the Company may determine to be appropriate from time to time.
The following table sets forth the funded status of the plans and the
amount recognized in the Company's consolidated balance sheets:
(In Thousands)
December 31,
1996 1995
Actuarial present value
of benefit obligations:
Vested benefits $10,543 $8,479
======= =======
Accumulated benefits $11,103 $9,046
======= =======
Projected benefits ($12,574) ($10,757)
Plan assets at fair value
(equity securities and
pooled funds) 12,948 10,469
------- -------
Plan assets in excess of
(less than) projected
benefit obligation 374 (288)
Unrecognized net gain (1,362) (414)
Unrecognized transition
obligation 214 264
Unrecognized prior
service costs 383 415
------- -------
(Accrued) pension cost ($391) ($23)
======= =======
Actuarial assumptions used at December 31, 1996 and 1995 were as follows:
discount rate of 7%, rate of increase in compensation levels of 5.25% and
expected long-term rate of return on plan assets of 8%.
Net pension expense for these plans for each of the years ended December
31, 1996, 1995 and 1994 approximates $.4 million.
The Company sponsors an unfunded defined benefit postretirement medical
and life insurance plan that covers a majority of its employees until they
qualify for Medicare. The plan is contributory for retirees with
contributions established annually as a specified dollar amount. The
Company funds the postretirement benefit obligation as the costs are
incurred. The accrued postretirement benefit cost is approximately $1.4
million and $1.3 million at December 31, 1996 and 1995, respectively and
the related expense is approximately $.2, $.2 and $.4 million for the
years ended December 31, 1996, 1995 and 1994, respectively. The assumed
discount rate and annual rate of increase in cost of covered health care
benefits used by the Company in the determination of postretirement
benefit information was 7.0% as of December 31, 1996 and 1995 and 8% as of
December 31, 1994.
Note 10. Commitments
In March 1994, the Company acquired substantially all of the assets of
Danner Shoe Manufacturing Co. for an aggregate purchase price of
approximately $21.5 million. The acquisition has been accounted for as a
purchase. The acquisition agreement provides that in the event the cash
and aggregate market value of the common stock (valued as of March 1,
1999) delivered in the Danner acquisition is less than $18.0 million, the
Company will make an additional cash payment on March 1, 1999 equal to the
difference. If the Danner shareholders have the opportunity to sell their
common stock under a Company-filed registration statement or under Rule
144 promulgated under the Securities Act of 1933, as amended, and choose
not to sell after receiving a Company request to sell, then the Company's
obligation can be reduced or eliminated to the extent of the number of
shares permitted to be sold based upon the then prevailing market price
for the common stock. The Company has also guaranteed that Danner's
shareholders will realize, by March 31, 1999, after-tax proceeds from this
transaction of not less than $10.0 million.
Independent Auditor's Report
To the Board of Directors and Shareholders of LaCrosse Footwear, Inc.
We have audited the accompanying consolidated balance sheets of LaCrosse
Footwear, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, common shareholders' equity,
and cash flows for each of the three years in the period ended December
31, 1996. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
LaCrosse Footwear, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
La Crosse, Wisconsin
February 3, 1997
[Page 28]
Quarterly Results of Operations - Unaudited
The Company reports its quarterly results of operations on the basis of
13-week periods for each of the first three quarters with the year ending
on December 31st.
The following tabulation presents the Company's unaudited quarterly
results of operations for 1996 and 1995.
Thousands of dollars
except per share
data - 1996 First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales $22,131 $23,054 $35,714 $41,098
Gross profit 5,807 6,107 10,315 11,592
Operating income 554 651 3,965 4,918
Net income 297 276 2,125 2,688
Net income per share $.04 $.04 $.32 $.40
Thousands of dollars
except per share
data - 1995 First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales $19,676 $20,486 $31,092 $27,317
Gross profit 5,092 5,055 8,854 7,559
Operating income 34 389 3,595 2,644
Net income (52) 106 1,958 1,316
Net income per share $(.01) $.01 $.29 $.19
Market Information
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol BOOT. The following table shows
the high and low transaction prices by calendar quarter since the stock
started trading publicly in April 1994. The approximate number of holders
of record of common stock on March 20, 1997 was 400.
1st 2nd 3rd 4th Year end
1994 $ - $10 7/8-14 3/4 $11 -14 3/16 $10 3/4-14 1/4 $ 11
1995 $ 8-12 $ 8 3/4-11 1/4 $10 1/4-11 3/4 $ 8 1/2-12 $ 8 3/4
1996 $8 3/4-12 $ 9 1/4-11 3/4 $ 9 1/2-10 3/4 $10 -12 1/4 $10 3/4
Cash Dividends Declared Per Share
It is the Company's policy to pay annual cash dividends. The chart below
shows annual cash dividends declared per share for the past five years:
1996 1995 1994 1993 1992
Dividends declared
per share $.11 $.09 $.09 $.08 $.07