Exhibit 13
[Pages 8-24 of 1997 Annual Report to Shareholders]
[Page 12]
Five-Year Summary of Selected Financial Data
Selected Income
Statement Data ----------------------------------------
In Thousands - Year
Ended December 31 1997 1996 1995 1994 1993
-----------------------------------------------------------------
Net sales $145,503 $121,997 $98,571 $108,319 $82,422
Operating income 13,156 10,088 6,662 11,230 7,250
Net income 6,779 5,386 3,328 6,152 3,700
Selected Balance Sheet Data
In Thousands - Year
Ended December 31 1997 1996 1995 1994 1993
Working capital $48,413 $46,811 $34,537 $35,382 $26,725
Total assets 101,920 92,286 74,862 74,822 46,488
Long-term
obligations 12,499 16,002 4,893 7,340 10,751
Shareholders'
equity 61,848 55,936 51,322 49,154 19,658
Selected Share Data
---------------------------------------------
Year Ended
December 31 1997 1996 1995 1994 1993
-----------------------------------------------------------------
Basic earnings
per share $1.02 $.80 $.48 $.98 $.76
Diluted earnings
per share $1.01 $.80 $.48 $.98 $.76
Dividends per share $.13 $.11 $.09 $.09 $.08
Shares used in
basic per share
calculation (000) 6,668 6,668 6,680 6,158 4,685
Shares used in
diluted per share
calculation (000) 6,713 6,674 6,680 6,158 4,694
Note: Earnings per share prior to 1997 were not impacted by Statement of
Financial Accounting Standards No. 128.
[Pages 9-12]
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, can generate growing amounts of net sales during
the first two to four 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 Rainfair, Inc. subsidiary, which is
primarily in the rainwear business, provides products which react
differently to the weather elements than the footwear business.
In July 1997, the Company acquired all of the outstanding shares of
capital stock of Pro-Trak Corporation, the company that owns and operates
under the Lake of the Woods tradename. Lake of the Woods is a designer,
manufacturer and marketer of branded leather footwear for both the outdoor
and recreational segment of the market. If the acquisition had occurred on
January 1, 1997, net sales and net income reported by the Company would
have been $149.3 million and $6.9 million, respectively.
The Company does not anticipate the future seasonality of sales will
be significantly impacted by the net sales of Lake of the Woods.
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
1997 vs. 1996 vs.
Year Ended December 31 1997 1996 1995 1996 1995
Net sales 100.0% 100.0% 100.0% 19% 24%
Cost of goods sold 72.0 72.3 73.1 19 22
Gross profit 28.0 27.7 26.9 21 27
Selling and
administrative
expenses (19.0) (19.4) (20.2) 17 19
Operating income 9.0 8.3 6.7 30 51
Interest expense (1.4) (1.4) (1.5) 22 15
Other income .4 .3 .3 64 36
Income before
income taxes 8.0 7.2 5.5 33 60
Income taxes (3.1) (2.8) (2.1) 33 61
Minority interest (.2) - -
Net income 4.7% 4.4% 3.4% 26% 62%
Year Ended December 31, 1997
Compared To Year Ended December 31, 1996
Net Sales. Net sales in 1997 increased $23.5 million, or 19%, to $145.5
million from $122.0 million in 1996. The increase in net sales was largely
attributable to the July 1997 acquisition of the Lake of the Woods product
line, which added approximately $5.2 million in net sales, along with an
additional $15.2 million of net sales contributed by Rainfair and Red
Ball, mainly as a result of including a full year of sales in 1997 as
compared to 1996 when sales were included from their May acquisition
dates. Danner net sales increased $2.7 million in 1997 compared to 1996
mainly due to increased sales of hiking boots and work boots, due in part
to new product introductions. Net sales of LaCrosse products were up less
than 1% with increased sales in injection molded vinyl knee boots largely
offset by a weather related decrease in cold weather pac boot sales, the
result of the mild weather in December 1997.
Gross Profit. Gross profit as a percentage of net sales increased to
28.0% in 1997 from 27.7% in 1996. The improvement in gross margins as a
percentage of net sales was due to more favorable pricing on key raw
materials, a lower defective return rate on Danner and Red Ball products
and improved margins on the Rainfair business, primarily due to increased
volume.
Selling and Administrative Expenses. As a percent of net sales, selling
and administrative expenses decreased from 19.4% of net sales in 1996 to
19.0% of net sales in 1997. 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. Expenses
increased $3.9 million, or 17%, in 1997 as compared to 1996, partially due
to a $1.4 million increase in expenses reported for Rainfair in 1997 as
compared to 1996 when expenses were included from the date of acquisition
in May 1996. The balance of the increase in spending was largely driven by
the increase in net sales.
Interest Expense. Interest expense increased $363,000, or 22%, in 1997
as compared to 1996. The increase was a result a higher level of average
borrowings needed to provide the working capital in support of the
increased sales of the Lake of the Woods, Rainfair and Red Ball product
lines acquired in July 1997, May 1996 and May 1996, respectively.
Income Tax Expense. The Company's effective income tax rate in 1997 was
39.2%, the same as the 1996 income tax rate.
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 $2.2
million and $.6 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 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.
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. 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, 1997, 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.
In July, 1997, the Company acquired all of the outstanding shares of
capital stock of Pro-Trak Corporation, the company that operated under the
Lake of the Woods tradename. The purchase price, including the assumption
of liabilities, was approximately $7.3 million. Lake of the Woods is a
designer, manufacturer and marketer of branded leather footwear for both
the outdoor and occupational segment of the market.
Cash generated by operations amounted to $2.1 million in 1997, a
decrease from the $9.7 million and $5.7 million generated in 1996 and
1995, respectively. Net income increased $1.4 million in 1997 compared to
1996, however, cash generated by operating activities in total was down
$7.6 million from the 1996 level. An increase in accounts receivable,
primarily as a result of increased sales and extended terms on fill-in
orders, and a $3.3 million increase in inventories compared to a $2.1
million decrease in 1996 were the main reasons for the reduction in cash
generated by operations. Inventories increased primarily as a result of an
increase in Red Ball inventories to support the anticipated increase in
Red Ball sales. Operating cash flow in 1996 was $9.7 million compared to
$5.7 million in 1995. The improvement was 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, Inc. inventories acquired as part
of the May 1996 acquisition). The inventory reduction was the result of
improved production planning.
Net cash used in investing activities during 1997 was $3.7 million,
down significantly from $14.2 million in 1996. During 1996, over $11.0
million of cash was invested in the Rainfair acquisition and the purchase
of the Red Ball trademarks. The only acquisition during 1997 was the
purchase of Pro-Trak Corporation for approximately book value which sis
not result in a significant use of cash for investing activities.
Purchases of property and equipment, which accounted for the bulk of the
cash used in investing activities during 1997, were $3.4 million in 1997
compared to $3.1 million in 1996. It is anticipated 1998 capital spending
will be in excess of $5.0 million, partially as a result of planned
expenditures for a product development center, an injection molding
machine and a new computer software system. In addition, in January 1998,
Rainfair, Inc. became a 100% owned subsidiary when the Company acquired
50% of the common stock of Rainfair, Inc. from the former principal owner
for approximately $2.4 million.
Financing activities used $4.7 million in cash in 1997. In addition
to a $1.7 million scheduled principal payment on long-term debt, over $6.1
million of debt assumed in the Lake of the Woods acquisition was repaid.
This reduction in long-term debt was partially funded by a $4.0 million
increase in short-term borrowings. In addition, the Company paid cash
dividends of $.7 million.
The Company's debt to total capital ratio was 24.3% at December 31,
1997, 24.2% at December 31, 1996 and 11.5% at December 31, 1995.
In March 1994, the Company acquired substantially all of the assets
of Danner Shoe Manufacturing Co. in part by issuing 277,778 shares of
common stock as a portion of the purchase price. In the acquisition, the
Company guaranteed the holders of this common stock a market price of at
least $16.20 per share by March 1, 1999. If the market price is less than
$16.20 per share, the Company will be required to make a cash payment
equal to the difference on March 1, 1999. 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. As of
December 31, 1997, approximately half of these shares have been sold with
no further obligation on the part of the Company.
During 1997, the Company commenced for all of its systems a year 2000
date conversion project to address all necessary code changes, testing and
implementation. Project completion is planned for the middle of 1999 at an
estimated total cost of less than $200,000. The Company expects its year
2000 date conversion project to be completed on a timely basis.
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 during 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 and Lake of the Woods acquisitions. 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.
Subsequent Event
In March 1998, the Company was informed by L.L. Bean, a long-term
customer puchasing hand-crafted rubber pac boot bottoms, that they are
going to replace a significant portion of the hand-crafted rubber bottoms
with molded bottoms from other vendors. This decision will reduce the
Company's 1998 net sales to L.L. Bean by approximately $1.5 million. In
future years, the full year impact will reduce Company net sales to L.L.
Bean an additional $0.5 to $1.0 million.
[Pages 13-23]
Consolidated Balance Sheets
December 31, 1997 and 1996
(In Thousands)
Assets 1997 1996
Current Assets
Cash and cash equivalents $426 $6,716
Trade accounts receivable,
less allowances of $1.6 and $1.5 million 27,390 20,705
Inventories (Note 3) 39,073 31,549
Prepaid expenses and deferred
tax assets (Note 4) 4,670 4,016
------- ------
Total current assets 71,559 62,986
------- ------
Property and Equipment
Land and land improvements and buildings 6,678 6,501
Machinery and equipment 26,896 23,391
------- ------
33,574 29,892
Less accumulated depreciation 20,299 17,262
------- ------
13,275 12,630
------- ------
Other Assets
Goodwill, net of amortization of $1.9
and $1.4 million 13,946 13,823
Deferred tax and other assets (Note 4) 3,140 2,847
------- ------
17,086 16,670
------- ------
$101,920 $92,286
======== =======
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term
obligations (Note 5) $3,349 $1,851
Notes payable, bank (Note 5) 4,000 -
Accounts payable 6,385 5,755
Accrued expenses (Note 7) 9,412 8,569
------- ------
Total current liabilities 23,146 16,175
------- ------
Long-Term Obligations (Note 5) 12,499 16,002
Compensation and Benefits (Note 9) 2,921 2,980
Commitments and Contingencies
(Notes 6, 8, 9 and 10)
Minority Interest in Subsidiary (Note 2) 1,506 1,193
Shareholders' Equity
Common stock, par value $.01 per share;
authorized 50,000,000 shares; issued
and outstanding, 6,717,627 shares
(Notes 8 and 10) 67 67
Additional paid-in capital 27,579 27,579
Retained earnings (Note 5) 34,645 28,733
Less - cost of 49,900 and 50,000 shares
of treasury stock (443) (443)
------- ------
Total shareholders equity 61,848 55,936
------- ------
$101,920 $92,286
======== =======
See Notes to Consolidated Financial Statements.
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
(In Thousands,
except for share and per share data)
1997 1996 1995
Net sales $145,503 $121,997 $98,571
Cost of goods sold 104,692 88,176 72,011
-------- -------- -------
Gross profit 40,811 33,821 26,560
Selling and administrative
expenses 27,655 23,733 19,898
-------- -------- -------
Operating income 13,156 10,088 6,662
Non-operating income (expense):
Interest expense (2,043) (1,680) (1,457)
Miscellaneous 593 361 266
-------- -------- -------
(1,450) (1,319) (1,191)
Income before income
taxes 11,706 8,769 5,471
Provision for income taxes
(Note 4) 4,588 3,440 2,143
-------- -------- -------
Net income before
minority interest 7,118 5,329 3,328
Minority interest in net
(income) loss of subsidiary (339) 57 -
-------- -------- -------
Net income $6,779 $5,386 $3,328
======== ======== =======
Basic earnings per share $1.02 $.80 $.48
======== ======== =======
Diluted earnings per share $1.01 $.80 $.48
======== ======== =======
Weighted average shares outstanding:
Basic earnings per share 6,667,702 6,667,627 6,679,545
Diluted earnings per share 6,712,975 6,673,539 6,679,545
See Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
(In Thousands, except for share and per share data)
Additional Total
Common Paid-In Retained Treasury Shareholders'
Stock Capital Earnings Stock Equity
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 ($.11
per share) - - (733) - (733)
6% preferred
stock dividends - - (39) - (39)
---- ------ ------ ----- ------
Balance,
December 31, 1996 67 27,579 28,733 (443) 55,936
Net income - - 6,779 - 6,779
Common stock dividends
($.13 per share) - - (867) - (867)
---- ------ ------ ----- ------
Balance,
December 31, 1997 $67 $27,579 $34,645 $ (443) $61,848
=== ======= ======= ====== =======
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(In Thousands)
1997 1996 1995
Cash Flows from
Operating Activities
Net income $6,779 $5,386 $3,328
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 3,180 2,925 2,523
Amortization 572 513 484
Other 386 (34) 21
Deferred income taxes 86 (62) (62)
Change in assets and
liabilities, net of
effects from acquisition
of Rainfair, Inc. and
Pro-Trak Corporation:
Trade accounts
receivable (4,033) (2,145) 93
Inventories (3,316) 2,136 (936)
Accounts payable (1,065) 279 382
Other (462) 712 (139)
------ ------ ------
Net cash provided by
operating activities 2,127 9,710 5,694
Cash Flows from Investing Activities
Acquisition of Rainfair, Inc.,
net of cash acquired - (9,597) -
Acquisition of Pro-Trak
Corporation, net of cash
acquired 77 - -
Purchase of property
and equipment (3,364) (3,060) (3,779)
Purchase of trademarks - (1,439) -
Other (416) (67) (13)
------ ------ ------
Net cash (used in)
investing activities (3,703) (14,163) (3,792)
Cash Flows from Financing Activities
Proceeds from long-term
obligations - 12,500 -
Principal payments on
long-term obligations (7,981) (1,742) (2,444)
Net proceeds from
short-term borrowings 4,000 - -
Cash dividends paid (733) (668) (722)
Purchase of redeemable
preferred stock - (1,957) -
Purchase of treasury stock - - (443)
------ ------ ------
Net cash provided by (used in)
financing activities (4,714) 8,133 (3,609)
------ ------ ------
Increase (decrease)
in cash and
cash equivalents (6,290) 3,680 (1,707)
Cash and cash equivalents:
Beginning 6,716 3,036 4,743
------ ------ ------
Ending $426 $6,716 $3,036
====== ====== ======
Supplemental Information
Cash payments for:
Interest $1,891 $1,594 $1,396
Income taxes $4,055 $2,939 $1,762
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 clothing 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. The
Company acquired 100% ownership of its 50% owned subsidiary in January
1998 (Note 2). 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 and wholesalers, 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 periods of 8 to 30 years.
The Red Ball trademarks are being amortized on a straight-line basis over
15 years.
Impairment of long-lived assets:
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 intangibles 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:
The Company accounts 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. Disclosures about the fair value
of outstanding stock options are contained in Note 8.
Earnings per share:
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which
supersedes APB Opinion No. 15. Statement No. 128 requires the presentation
of earnings per share by all entities that have common stock or potential
common stock (such as options and convertible securities) outstanding that
trade in a public market. Those entities that have only common stock
outstanding are required to present basic earnings per share amounts. All
other entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce the loss or increase the income per common share from continuing
operations.
The Company initially applied Statement No. 128 for the year ended
December 31, 1997 and, as required by the Statement, has restated all per
share information for the prior years to conform to the Statement. Because
the Company has potential common stock outstanding, as discussed in Note
8, the Company is required to present basic and diluted earnings per
share.
The numerators are the same for the basic and diluted earnings per
share computations for all years presented. The impact of the stock
options on the denominators of the diluted earnings per share computation
was to increase the shares outstanding by 45,273 shares, 5,912 shares and
0 shares for the years ended December 31, 1997, 1996 and 1995,
respectively.
Recent accounting pronouncements:
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and displaying
comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. The Company
will adopt SFAS No. 130 for its year ending December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information, which changes the way public
companies report information about operating segments. SFAS No. 131, which
is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to
report entity-wide disclosures about products and services, major
customers and the major countries in which the entity holds assets and
reports revenue. The Company will adopt SFAS No. 131 for its year ended
December 31, 1998. Management is evaluating whether it will have
reportable segments under the new standard.
Note 2. Acquisitions
In July 1997, the Company acquired all of the outstanding shares of
capital stock of Pro-Trak Corporation, which operates under the Lake of
the Woods tradename. The purchase price, including the assumption of
liabilities, was approximately $7.3 million. The acquisition has been
accounted for as a purchase. Accordingly, the purchase price has been
allocated to assets and liabilities based on their estimated fair values
as of the date of acquisition.
The value of assets acquired and liabilities assumed is as follows
(in thousands):
Current assets,
including cash of $77 $7,002
Equipment 547
Goodwill 695
Current liabilities (2,113)
Long-term liabilities (6,131)
------
$ --
======
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
the 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.
In January 1998, the Company purchased all Rainfair common stock of
the former principal owner for approximately $2.4 million.
The Company's consolidated statements of income for the years ended
December 31, 1997 and 1996 include the results of operations of Pro-Trak
Corporation and Rainfair, Inc. since the dates of acquisition. The
following unaudited pro forma information presents the consolidated
results of operations as if the acquisitions had occurred as of the
beginning of 1996 and does not purport to be indicative of what would have
occurred had the acquisitions 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,
1997 1996
(Unaudited)
Net sales $149,282 $135,900
Net income 6,918 5,154
Diluted earnings
per share 1.03 .77
In May 1996, the Company 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 was
allocated to the assets based on their fair values as of the date of
acquisition.
Note 3. Inventories
A summary of inventories is as follows:
(In Thousands)
December 31,
1997 1996
Finished goods $28,889 $22,188
Work in process 1,967 2,222
Raw materials 8,217 7,139
------- -------
Total inventories $39,073 $31,549
======= =======
If all inventories were valued on the FIFO method, total inventories
for 1997 and 1996 would have been $42.2 and $35.3 million, respectively.
Note 4. Income Tax Matters
Net deferred tax assets and liabilities consist of the following
components:
(In Thousands)
December 31,
1997 1996
Deferred tax assets:
Receivable allowances $531 $523
Inventory differences 365 525
Compensation and benefits 1,969 1,752
Insurance reserves and other 416 500
----- -----
3,281 3,300
Deferred tax liabilities,
principally intangibles 664 597
------ ------
$2,617 $2,703
====== ======
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,
1997 1996
Current assets $2,132 $2,017
Noncurrent assets 485 686
------ ------
$2,617 $2,703
====== ======
The provision for income taxes consists of
the following:
(In Thousands)
Years Ended December 31,
1997 1996 1995
Current:
Federal $3,684 $2,947 $1,723
State 818 555 482
Deferred 86 (62) (62)
------ ------ ------
$4,588 $3,440 $2,143
====== ====== ======
The differences between statutory federal tax rates and the effective
tax rates are as follows:
Years Ending December 31,
1997 1996 1995
Statutory federal
tax rate 35.0% 35.0% 35.0%
State taxes, net
of federal tax
benefit and other 4.2 4.2 4.2
---- ---- ----
Effective tax rate 39.2% 39.2% 39.2%
==== ==== ====
Note 5. Financing Arrangements
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 May 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, 1997). 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, 1997 and 1996,
there was $4.0 million and $0 outstanding under the revolving line of
credit and there were letter of credit commitments outstanding of $2.9
million and $1.0 million, respectively.
Long-term obligations:
(In Thousands)
December 31,
1997 1996
Term loan under credit
agreement, due in quarterly
installments of $.4 million
commencing in March 1998,
interest payable monthly $12,500 $12,500
10.26% unsecured note
payable, due in annual
installments of $1.4 million
excluding interest, interest
payable semi-annually (a) 2,286 3,714
10.73% unsecured note
payable, due in annual
installments of $.3 million
excluding interest, interest
payable semi-annually (a) 457 743
Other 605 896
------- -------
15,848 17,853
Less current maturities 3,349 1,851
------- -------
$12,499 $16,002
======= =======
(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 $12.8 million
at December 31, 1997.
Maturities of long-term obligations for the next five years are as
follows (in millions): 1998, $3.3; 1999, $2.7; 2000, $1.7; 2001, $7.8;
2002, $0; and $.3 thereafter.
Note 6. Lease Commitments and Total Rental Expense
The Company leases office space, retail stores, manufacturing facilities,
equipment and warehouse space under non-cancelable agreements, which
expire on various dates through 2007, and are recorded as operating
leases. The total rental expense included in the consolidated statements
of income for the years ended December 31, 1997, 1996 and 1995 is
approximately $1.8, $1.6 and $1.2 million, respectively. Approximate
future minimum lease payments are as follows (in millions): 1998, $1.8;
1999, $1.8; 2000, $1.5; 2001, $.7 , 2002, $.5 and $1.4 thereafter.
Note 7. Accrued Expenses
Accrued expenses are comprised of the following:
(In Thousands)
December 31,
1997 1996
Compensation $4,311 $4,423
Workers' compensation
insurance 824 889
Income taxes payable 1,514 1,066
Other, including dividends 2,763 2,191
------ ------
Total accrued expenses $9,412 $8,569
====== ======
Note 8. Stock Options
The Company has granted stock options to officers and key employees under
its 1993 and 1997 stock option plans pursuant to which options for up to
550,000 shares of common stock may be granted. 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. Substantially all of
the options vest in equal increments over a five-year period.
The following summarizes all stock options granted under the plans:
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
Granted 63,500 10.88-14.50
Canceled (3,300) 9.06
Exercised (100) 9.06
-------
December 31, 1997 268,225 9.06-14.50
Options for approximately 82,000 shares were exercisable at
December 31, 1997.
Compensation expense under the plans 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 provided by
SFAS No. 123, pro forma net income would have been reduced by $.1 million
and $.1 million and the pro forma diluted earnings per share would have
been $.99 and $.79 for the years ended December 31, 1997 and 1996,
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:
1997 1996
Expected dividend yield 1% 1%
Expected stock price volatility 25% 25%
Risk-free interest rate 6.5% 7.0%
Expected life of options 8 years 8 years
The weighted average exercise price of the options granted during
1997 is $11.59 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,
1997 1996
Actuarial present value
of benefit obligations:
Vested benefits $ 11,068 $ 10,543
-------- --------
Accumulated benefits $ 11,619 $ 11,103
-------- --------
Projected benefits $(12,568) $(12,574)
Plan assets at fair value
(equity securities
and pooled funds) 14,719 12,948
-------- --------
Plan assets in excess of
projected benefit obligation 2,151 374
Unrecognized net gain (3,244) (1,362)
Unrecognized
transition obligation 163 214
Unrecognized
prior service costs 342 383
-------- --------
(Accrued) pension cost $(588) $(391)
======== ========
Actuarial assumptions used at December 31, 1997 and 1996 were as
follows:
1997 1996
Discount rate 7.0% 7.0%
Rate of increase in
compensation levels 4.5% 5.25%
Expected long-term rate
of return on plan assets 8.0% 8.0%
Net pension expense for these plans for each of the years ended
December 31, 1997, 1996 and 1995 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 at both December 31, 1997 and 1996 and the related expense is
approximately $.1 million, $.2 million and $.2 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The assumed annual rate of
increase in cost of covered health care benefits used by the Company in
the determination of postretirement benefit information was 6.0% as of
December 31, 1997 and 7.0% as of December 31, 1996 and 1995. The assumed
discount rate was 7.0% as of December 31, 1997, 1996 and 1995.
Note 10. Commitments
In March 1994, the Company acquired substantially all of the assets of
Danner Shoe Manufacturing Co. in part by issuing 277,778 shares of common
stock as a portion of the purchase price. In the acquisition, the Company
guaranteed the holders of this common stock a market price of at least
$16.20 per share by March 1, 1999. If the market price is less than $16.20
per share, the Company will be required to make a cash payment equal to
the difference on March 1, 1999. 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. As of December 31, 1997,
approximately half of these shares have been sold with no further
obligation on the part of the Company.
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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
La Crosse, Wisconsin
February 6, 1998
[Page 24]
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 1997 and 1996.
Thousands of dollars
except per share data First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
Net sales $32,698 $28,421 $41,884 $42,500
Gross profit 8,286 7,652 12,422 12,451
Operating income 1,565 1,101 5,152 5,338
Net income 545 539 2,933 2,762
Basic earnings per share* .08 .08 .44 .41
Diluted earnings per share* $.08 $.08 $.44 $.41
Thousands of dollars
except per share data First Second Third Fourth
1996 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
Basic earnings per share* .04 .04 .32 .40
Diluted earnings per share* $.04 $.04 $.32 $.40
* There was no impact on quarterly earnings per share when calculated in
accordance with Statement of Financial Accounting Standard No. 128.
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 for the past three
years. The approximate number of holders of record of common stock on
March 20, 1998 was 400.
1st 2nd 3rd 4th Year end
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
1997 $10 3/4 - 14 3/8 $11 - 13 1/2 $12 1/2 - 17 1/4 $14 - 16 $14 1/2
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 three years:
1997 1996 1995
Dividends declared per share $.13 $.11 $.09