Exhibit 13
Five-Year Summary of Selected Financial Data
Selected Income Statement Data
- -------------------------------------------------------------------------------------------------------------------
In Thousands - Year Ended December 31 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Net sales $133,405 $145,503 $121,997 $98,571 $108,319
Operating income 5,598 13,156 10,088 6,662 11,230
Net income 2,260 6,779 5,386 3,328 6,152
Selected Balance Sheet Data
- -------------------------------------------------------------------------------------------------------------------
In Thousands - Year Ended December 31 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Working capital $44,801 $48,413 $46,811 $34,537 $35,382
Total assets 98,615 101,920 92,286 74,862 74,822
Long-term obligations 9,827 12,499 16,002 4,893 7,340
Shareholders' equity 63,035 61,848 55,936 51,322 49,154
Selected Share Data
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share $.34 $1.02 $.80 $.48 $.98
Diluted earnings per share $.34 $1.01 $.80 $.48 $.98
Dividends per share $.13 $.13 $.11 $.09 $.09
Shares used in
basic per share calculation (000's) 6,662 6,668 6,668 6,680 6,158
Shares used in
diluted per share calculation (000's) 6,676 6,713 6,674 6,680 6,158
4
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
Certain matters discussed below in this 1998 Annual Report (and, thereby, the
1998 Form 10-K) are "forward-looking statements" intended to qualify for the
safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. These forward-looking statements can generally be identified
as such because the context of the statement includes phrases such as the
Company "believes," "expects" or other words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals, as
well as the estimated costs and timetable for Year 2000 compliance, are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which could cause actual results or outcomes to
differ materially from those currently anticipated. Factors that could affect
actual results or outcomes include, without limitation, adverse weather
conditions, dealer inventory levels, actions of companies that compete with the
Company, changes in consumer buying patterns, loss of a material customer and
the success of third parties regarding compliance with Year 2000 issues.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The forward-looking
statements included are only made as of the date of this 1998 Annual Report and
the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
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.
The Company is gradually shifting its retail product mix to become less
dependent on winter weather. This is being accomplished through the growth of
the Danner leather product line and the addition of leather and protective
clothing product offerings under the LaCrosse brand.
The Company markets and distributes its products through both the
industrial and retail channels of distribution. The less weather-sensitive
industrial distribution accounts for approximately 30% of total net sales and
serves the food processing, mining, construction and industrial end use markets
with protective footwear and clothing. In order to build the less
weather-dependent industrial business, the Company in 1996 acquired Rainfair,
Inc., a manufacturer and marketer of rainwear and protective clothing.
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.
5
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 1998 1997 1996 1998 vs. 1997 1997 vs. 1996
- -------------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% (8)% 19%
Cost of goods sold 74.1 72.0 72.3 (6) 19
Gross profit 25.9 28.0 27.7 (15) 21
Selling and administrative expenses (21.7) (19.0) (19.4) 5 17
Operating income 4.2 9.0 8.3 (57) 30
Interest expense (1.7) (1.4) (1.4) 11 22
Other income .3 .4 .3 (36) 64
Income before income taxes 2.8 8.0 7.2 (68) 33
Income taxes (1.1) (3.1) (2.8) (68) 33
Minority interest - (.2) -
Net income 1.7% 4.7% 4.4% (67)% 26%
Year Ended December 31, 1998
Compared to Year Ended December 31, 1997
Net Sales. Net sales in 1998 decreased $12.1 million, or 8.3%, to $133.4 million
from $145.5 million in 1997. The mild winter weather across most of the country
from December 1997 through the first quarter of 1998 significantly reduced
fill-in orders in early 1998 and reduced advance orders for shipment in the
third quarter. In addition, the extremely warm and dry weather from mid-November
through December 1998 lowered retail demand and nearly eliminated late 1998
fill-in orders. While the Company's dealers ended 1998 with excessive inventory,
it is believed the favorable weather conditions in January 1999 reduced
inventory levels below last year's levels. Shipments to L.L. Bean were also down
approximately $1.3 million as compared to 1997, the result of a decision by L.L.
Bean effective July 1998 to replace their handcrafted rubber bottoms purchased
from the Company with molded bottoms from another vendor. A full year impact of
the L.L. Bean decision will reduce 1999 net sales an additional $.7 to $1.0
million. Further, consumer rainwear shipments were down approximately $1.0
million, primarily as a result of lower shipments to a large discount mass
merchant. These decreases were partially offset by a 10% increase in shipments
of our less weather-sensitive Danner brand leather products, largely as a result
of new products.
Gross Profit. Gross profit as a percentage of net sales decreased to 25.9% in
1998 from 28.0% in 1997. Gross profit margins were adversely affected by
unabsorbed factory overhead (the result of lower production levels in response
to lower demand), a higher level of closeout sales (primarily related to the
transition of the Lake of the Woods(R) brand product line to the LaCrosse(R)
brand) and a reduced volume of higher margin fill-in orders in both the first
and fourth quarters. The Company believes that shipments of discontinued
products will be lower in 1999 and that reserves are adequate to cover any
potential losses on discontinued products. In addition, production was
discontinued at the Company's factory in Virginia, and transferred to another
Company facility, which negatively impacted margins by approximately .2%.
Selling and Administrative Expenses. Selling and administrative expenses
increased $1.3 million, or 5%, in 1998 as compared to 1997. The increase in
selling and administrative expenses was a result of a planned increase in
consumer advertising, increased selling and marketing expenses in support of the
growth of the Danner brand, increased spending on product development and
increased warehousing costs to support the Lake of the Woods brand and as a
result of the consolidation of the Company's industrial warehousing. These
increases more than offset sales volume related decreases in variable expense.
As a percent of net sales, selling and administrative expenses increased from
19.0% in 1997 to 21.7% in 1998, largely as a result of higher planned expenses
and lower sales volume.
Interest Expense. Interest expense increased $220,000, or 11%, in 1998 as
compared to 1997. The increase was primarily the result of $2.4 million in
additional short-term borrowings for the January 1998 purchase of all Rainfair,
Inc. common stock held by the former principal owner. In addition, higher
inventory levels throughout the year, primarily the result of lower fill-in
sales during the winter of 1997-98, contributed to increased borrowings.
Income Tax Expense. The Company's effective income tax rate in 1998 was 39.2%,
the same as the 1997 income tax rate.
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
6
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. This mild weather in
December 1997, coupled with mild weather during the first quarter of 1998,
resulted in dealers having excess inventories in certain product categories.
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 of a higher level of average
borrowings needed to provide the working capital in support of the increased
sales of Lake of the Woods, Rainfair and the Red Ball product lines, which were
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.
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 from August through October. The Company invests
excess cash balances in short-term investment grade securities or money market
investments.
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 was primarily used to fund
acquisitions, is due December 31, 2001 and requires quarterly payments of $.4
million which commenced in March 1998. The credit agreement expires on May 31,
1999.
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 was a designer, manufacturer
and marketer of branded leather footwear for both the outdoor and occupational
segment of the market. During 1998, the Company began the transition of the Lake
of the Woods brand product line to the LaCrosse brand, which has broader market
recognition.
Cash generated by operations in 1998 amounted to $5.5 million compared to
$2.1 million in 1997. Net income in 1998 decreased $4.5 million from the 1997
level, however this was more than offset by a $4.2 million reduction in
receivables (as compared to a $4.0 million increase in 1997). The reduction in
receivables as of December 31, 1998 was primarily the result of a 25% reduction
in sales in December 1998 as compared to the prior year. During 1998,
inventories increased $.6 million, primarily as a result of lower than
anticipated net sales during November and December 1998. Accounts payable
decreased $2.9 million from the 1997 level, reflecting lower production levels
during December 1998. In 1997, cash generated by operations amounted to $2.1
million as compared to $9.7 million in 1996. Despite a $1.4 million increase in
net income in 1997 as compared to 1996, cash generated by operating activities
was down $7.6 million from 1996. An increase in accounts receivable, primarily
as a result of changing the terms on fill-in orders, and a $3.3 million increase
in inventories compared to a $2.1 million decrease in 1996 were the primary
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.
Net cash used in investing activities during 1998 was $6.6 million, up from
$3.7 million in 1997. During 1998, spending on property and equipment was up
approximately $.9 million from the prior year primarily as a result of the
construction of a product design/development center
7
and the purchase of Enterprise Resource Planning (ERP) software. The ERP
software will be installed during 1999 and 2000, replacing the Company's
existing operating software. It is anticipated that capital expenditures in 1999
will be at approximately the same level as in 1998. Also contributing to the
1998 increase in cash used in investing activities was the January 1998 purchase
of all of the Rainfair, Inc. common stock held by the former principal owner for
approximately $2.4 million, which made Rainfair, Inc. a 100% owned subsidiary of
the Company. During 1997, net cash used in investing activities 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 did 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 as compared to $3.1 million in 1996.
Net cash provided by financing activities was $1.1 million in 1998 as
compared to a usage of $4.7 million in 1997. During 1998, additional short-term
borrowings provided $5.5 million of cash, which was primarily used to repay $3.3
million of long-term debt. Cash dividends of $.9 million and the repurchase of
$.2 million of common stock used an additional $1.1 million of cash in 1998.
During 1997, $8.0 million of debt was repaid and $.7 million of dividends were
paid, which were partially offset by $4.0 million of additional short-term
borrowings.
In March 1995, the Company announced plans to repurchase up to 130,000
shares of common stock in the open market. During the third and fourth quarters
of 1998, the Company repurchased 25,000 shares at a cost of $227,000. This
brings the total shares repurchased to 75,000 shares.
The Company's debt to total capital ratio was 25.9% at December 31, 1998,
24.3% at December 31, 1997 and 24.2% at December 31, 1996.
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 of the remaining 135,178 shares subject to
this guarantee is less than $16.20 per share, the Company will be required to
make a cash payment equal to the difference shortly after March 1, 1999. As of
December 31, 1998, the common stock of the Company closed at $9.25 per share
which would indicate an obligation of the Company to such shareholders of
$939,000.
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 1999.
From time to time, the Company evaluates acquisitions of businesses or
product lines that could complement the Company's business. 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.
Year 2000
The Year 2000 (Y2K) issue is the result of computer programs using a two digit
format, as opposed to four digits, to indicate the year. Such computer systems
may be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to a disruption in operations.
The Company began work on Y2K issues in early 1997. In early 1998, the
Company established a team of people (Y2K team) to evaluate whether, and to what
extent, the Year 2000 issue would impact the Company's business. While the
Company sells no products which are impacted by the Y2K issue, the team did
review application programs, operating systems and equipment used in operations.
A vendor contact program was established which to date has uncovered no material
issues. The Y2K team is monitoring the Company's progress in resolving all Y2K
issues. To date, the Company is not aware of any Y2K issues which cannot be
resolved in a timely manner.
The Company is using outside consultants to address the Y2K issue for the
application programs at one subsidiary, otherwise all work is being done
internally. The Company believes it will be Y2K compliant by the second quarter
of 1999, except for one subsidiary which is scheduled to be compliant during the
third quarter of 1999. The Company currently estimates that it will spend
approximately $300,000 during the years 1997 through 1999 to address the Y2K
issue, with approximately $125,000 of these funds to be expended during 1999.
These costs include the use of outside consultants, the purchase of new and/or
updated software where required, the purchase of new equipment and the internal
costs to change application programs. The estimated costs of Y2K compliance do
not give effect to any future corporate acquisitions made by the Company or its
subsidiaries.
The Company does not believe that the implementation of its Y2K compliance
plan will have a material effect on the Company's business operations, financial
condition, liquidity or capital resources. Management of the Company believes it
has an effective program in place to address the Y2K issue in a timely manner.
As a component of the Company's Y2K compliance plan, the Company will be
developing contingency plans to mitigate the effects of potential problems
experienced by it or its key vendors or suppliers in the timely implementation
of its Y2K compliance plan. Nevertheless, since it is not possible to anticipate
all future outcomes, especially when third parties are involved, there could be
circumstances in which the Company's operations would be adversely affected.
8
Consolidated Balance Sheets
December 31, 1998 and 1997
(In Thousands)
- -----------------------------------------------------------------------------------------------
Assets 1998 1997
- -----------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $364 $426
Trade accounts receivable,
less allowances of $1.0 and $1.6 million 23,151 27,390
Inventories (Note 3) 39,698 39,073
Prepaid expenses and deferred tax assets (Note 4) 4,289 4,670
------- -------
Total current assets 67,502 71,559
------- -------
Property and Equipment
Land and land improvements and buildings 7,997 6,678
Machinery and equipment 29,389 26,896
------- -------
37,386 33,574
Less accumulated depreciation 23,384 20,299
------- -------
14,002 13,275
------- -------
Other Assets
Goodwill, net of amortization of
$2.6 and $1.9 million (Note 2) 14,125 13,946
Deferred tax and other assets (Note 4) 2,986 3,140
------- -------
17,111 17,086
------- -------
$98,615 $101,920
======= =======
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of long-term obligations (Note 5) $2,669 $3,349
Notes payable, bank (Note 5) 9,500 4,000
Accounts payable 3,469 6,385
Accrued expenses (Note 7) 7,063 9,412
------- -------
Total current liabilities 22,701 23,146
------- -------
Long-Term Obligations (Note 5) 9,827 12,499
Compensation and Benefits (Note 9) 3,052 2,921
Commitments and Contingencies (Notes 6, 8, 9 and 10)
Minority Interest in Subsidiary (Note 2) - 1,506
Shareholders' Equity
Common stock, par value $.01 per share;
authorized 50,000,000 shares; issued
and outstanding, 6,717,627 shares (Note 8) 67 67
Additional paid-in capital (Note 10) 27,582 27,579
Retained earnings (Note 5) 36,041 34,645
Less - cost of 73,200 and 49,900 shares of treasury stock (655) (443)
------- -------
Total shareholders' equity 63,035 61,848
------- -------
$98,615 $101,920
======= =======
See Notes to Consolidated Financial Statements.
9
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(In Thousands,
except for share and per share data)
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Net sales $133,405 $145,503 $121,997
Cost of goods sold 98,829 104,692 88,176
------- ------- -------
Gross profit 34,576 40,811 33,821
Selling and administrative expenses 28,978 27,655 23,733
------- ------- -------
Operating income 5,598 13,156 10,088
Non-operating income (expense):
Interest expense (2,263) (2,043) (1,680)
Miscellaneous 381 593 361
------- ------- -------
(1,882) (1,450) (1,319)
------- ------- -------
Income before income taxes 3,716 11,706 8,769
Provision for income taxes (Note 4) 1,456 4,588 3,440
------- ------- -------
Net income before minority interest 2,260 7,118 5,329
Minority interest in net (income) loss of subsidiary - (339) 57
------- ------- -------
Net income $2,260 $6,779 $5,386
======= ======= =======
Basic earnings per share $0.34 $1.02 $.80
======= ======= =======
Diluted earnings per share $0.34 $1.01 $.80
======= ======= =======
Weighted average shares outstanding:
Basic earnings per share 6,661,683 6,667,702 6,667,627
Diluted earnings per share 6,675,708 6,712,975 6,673,539
See Notes to Consolidated Financial Statements.
10
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
(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, 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
($.13 per share) - - (867) - (867)
----------------------------------------------------------------
Balance, December 31, 1997 67 27,579 34,645 (443) 61,848
Net income - - 2,260 - 2,260
Common stock dividends
($.13 per share) - - (864) - (864)
Purchase of 25,000 shares
of treasury stock - - - (227) (227)
Issuance of 1,700 shares
of treasury stock - 3 - 15 18
----------------------------------------------------------------
Balance, December 31, 1998 $67 $27,582 $36,041 $(655) $63,035
================================================================
See Notes to Consolidated Financial Statements.
11
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $2,260 $6,779 $5,386
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,437 3,180 2,925
Amortization 680 572 513
Other 126 386 (34)
Deferred income taxes 207 86 (62)
Change in assets and liabilities,
net of effects from acquisitions
in 1997 and 1996:
Trade accounts receivable 4,239 (4,033) (2,145)
Inventories (625) (3,316) 2,136
Accounts payable (2,916) (1,065) 279
Accrued expenses and other (1,900) (462) 712
------- ------ -------
Net cash provided by operating activities 5,508 2,127 9,710
Cash Flows from Investing Activities
Purchase of the minority interest in Rainfair, Inc. (2,365) - -
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 (4,288) (3,364) (3,060)
Purchase of trademarks - - (1,439)
Other 11 (416) (67)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (6,642) (3,703) (14,163)
Cash Flows from Financing Activities
Proceeds from long-term obligations - - 12,500
Principal payments on long-term obligations (3,352) (7,981) (1,742)
Net proceeds from short-term borrowings 5,500 4,000 -
Cash dividends paid (867) (733) (668)
Purchase of redeemable preferred stock - - (1,957)
Other (209) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,072 (4,714) 8,133
Increase (decrease) in cash and
cash equivalents (62) (6,290) 3,680
Cash and cash equivalents:
Beginning 426 6,716 3,036
- -------------------------------------------------------------------------------------------------------------------
Ending $364 $426 $6,716
- -------------------------------------------------------------------------------------------------------------------
Supplemental Information
Cash payments for:
Interest $2,178 $1,891 $1,594
Income taxes $2,101 $4,055 $2,939
See Notes to Consolidated Financial Statements.
12
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 1998 consolidated financial statements include
the accounts of LaCrosse Footwear, Inc. and its wholly owned subsidiaries (the
"Company"). The 1997 and 1996 consolidated financial statements include a 50%
owned subsidiary where the Company had 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. Trademarks are
being amortized on a straight-line basis over 15 years.
13
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.
Advertising and promotion:
The Company advertises and promotes its products through national and regional
media, displays, catalogs and through cooperative advertising programs with
retailers. Costs for these advertising and promotional programs are generally
charged to expense as incurred. Advertising and promotional expense included in
the consolidated statements of income for the years ended December 31, 1998,
1997 and 1996 is approximately $2.9, $2.2, and $2.1 million, respectively.
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 Company grants
options where 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:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," 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. 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. 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 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 14,025 shares, 45,273 shares, and 5,912 shares for the
years ended December 31, 1998, 1997 and 1996, respectively.
Recent accounting pronouncements:
The Company adopted SFAS No. 132, "Employers Disclosures about Pensions and
Other Postretirement Benefits," as of January 1, 1998. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans, however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis.
14
Note 2. Acquisitions
In July 1997, the Company acquired all of the outstanding shares of capital
stock of Pro-Trak Corporation, which operated under the Lake of the Woods trade
name. The total purchase price was approximately $7.3 million which included the
immediate paydown of liabilities of $6.6 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.
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 purchase price
resulted in a decrease in minority interest of approximately $1.5 million and an
increase in goodwill of approximately $.9 million.
Note 3. Inventories
A summary of inventories is as follows:
(In Thousands)
December 31,
1998 1997
Finished goods $29,622 $28,889
Work in process 1,536 1,967
Raw materials 8,540 8,217
-------- --------
Total inventories $39,698 $39,073
======== ========
If all inventories were valued on the FIFO method, total inventories for
1998 and 1997 would have been $42.5 and $42.2 million, respectively.
Note 4. Income Tax Matters
Net deferred tax assets and liabilities consist of the following components:
(In Thousands)
December 31,
1998 1997
Deferred tax assets:
Receivable allowances $455 $531
Inventory differences 324 365
Compensation and benefits 1,997 1,969
Insurance reserves and other 453 416
------- -------
3,229 3,281
Deferred tax liabilities,
principally intangibles 819 664
------- -------
$2,410 $2,617
======= =======
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,
1998 1997
Current assets $1,993 $2,132
Noncurrent assets 417 485
------- -------
$2,410 $2,617
======= =======
The provision for income taxes consists of the following:
(In Thousands)
Years Ended December 31,
1998 1997 1996
Current:
Federal $892 $3,684 $2,947
State 357 818 555
Deferred 207 86 (62)
------ ------ ------
$1,456 $4,588 $3,440
====== ====== ======
15
The differences between statutory federal tax rates and the effective tax
rates are as follows:
Years Ending December 31,
1998 1997 1996
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, 1998).
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, 1998 and 1997, there was $9.5 million and
$4.0 million outstanding under the revolving line of credit and there were
letter of credit commitments outstanding of $3.7 million and $2.9 million,
respectively. In 1998, the Company entered into interest rate swap agreements to
manage its exposure to interest rate fluctuations on its floating rate debt. As
of December 31, 1998, the Company had swap agreements in effect totaling $11.0
million, of which $7.0 million will mature in 2002 with $4.0 million maturing in
2003. The variable rate borrowings not offset by swap agreements at December 31,
1998, totaled $9.4 million.
Long-term obligations:
(In Thousands)
December 31,
1998 1997
Term loan under credit agreement,
due in quarterly payments of
$.4 million through December 31,
2001, interest payable monthly $10,900 $12,500
10.26% and 10.73% unsecured
notes payable, due in annual
installments of $1.7 million
excluding interest, interest
payable semi-annually(a) 1,028 2,743
Other 568 605
------- -------
12,496 15,848
Less current maturities 2,669 3,349
------- -------
$9,827 $12,499
======= =======
(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, 1998.
Maturities of long-term obligations for the next five years are as follows
(in millions): 1999, $2.7; 2000, $1.7; 2001, $7.8; 2002, $0; 2003, $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 2009 and are recorded as operating leases. The total
rental expense included in the consolidated statements of income for the years
ended December 31, 1998, 1997 and 1996 is approximately $1.9, $1.8, and $1.6
million, respectively. Approximate future minimum lease payments are as follows
(in millions): 1999, $1.7; 2000, $1.6; 2001, $.7, 2002, $.5; 2003, $.5 and $1.9
thereafter.
16
Note 7. Accrued Expenses
Accrued expenses are comprised of the following:
(In Thousands)
December 31,
1998 1997
Compensation $3,000 $4,311
Workers' compensation
insurance 665 824
Income taxes payable 662 1,514
Other, including dividends 2,736 2,763
------ ------
Total accrued expenses $7,063 $9,412
====== ======
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, 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
Granted 58,563 8.75-14.25
Canceled (23,275) 9.06-14.25
Exercised (1,700) 9.06-10.88
--------
December 31, 1998 301,813 9.06-14.50
Options for approximately 128,000 shares were exercisable at December 31,
1998.
Compensation expense under the plans is 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 $.32 and $.99 for the years ended
December 31, 1998 and 1997, 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:
1998 1997
Expected dividend yield 1% 1%
Expected stock price volatility 25% 25%
Risk-free interest rate 6.5% 6.5%
Expected life of options 7 years 8 years
The weighted average exercise price of the options granted during 1998 is
$13.84 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. In 1998, the Company's union
pension plan was amended to increase the benefit rate for participants retiring
or terminating after September 30, 1998. The amendment resulted in increases of
approximately $1.0 million in both unrecognized prior service cost and projected
benefit obligation as of December 31, 1998.
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.
17
Information relative to the Company's defined pension and other
postretirement benefit plans is presented below.
Pension Benefits Other Benefits
(In Thousands) (In Thousands)
December 31, December 31,
1998 1997 1998 1997
Changes in benefit obligations:
Obligations at beginning of year $ 12,568 $ 12,574 $ 797 $ 1,328
Service cost 443 471 74 22
Interest cost 856 844 89 60
Plan amendment 996 -- -- --
Benefits paid (603) (685) (34) (112)
Actuarial losses (gains) (308) (636) 469 (501)
-------- -------- -------- --------
Obligations at end of year $ 13,952 $ 12,568 $ 1,395 $ 797
======== ======== ======== ========
Changes in plan assets:
Fair value of assets at beginning of year $ 14,719 $ 12,948 $ -- $ --
Actual return on assets 1,977 2,410 -- --
Company contributions 34 46 34 112
Participant contributions -- -- 27 41
Benefits paid (603) (685) (61) (153)
-------- -------- -------- --------
Fair value of assets at end of year $ 16,127 $ 14,719 $ - $ -
======== ======== ======== ========
Funded status at end of year:
Plan assets in excess of (less than) obligations $ 2,175 $ 2,151 $ (1,395) $ (797)
Unrecognized gains (4,267) (3,244) (914) (1,484)
Unrecognized prior service cost 1,291 342 -- --
Unrecognized transition obligation 112 163 847 917
-------- -------- -------- --------
Accrued benefit cost $ (689) $ (588) $ (1,462) $ (1,364)
======== ======== ======== ========
Cost recognized during the year:
Service cost $ 443 $ 471 $ 74 $ 22
Interest cost 856 844 89 60
Expected return on plan assets (1,156) (1,017) -- --
Amortization of prior losses (gains) (106) 30 (101) (66)
Amortization of prior service cost 47 31 -- --
Amortization of transition obligation 51 51 70 70
-------- -------- -------- --------
Net periodic benefit cost $ 135 $ 410 $ 132 $ 86
======== ======== ======== ========
Assumptions used in computations:
Discount rate 7.0% 7.0% 7.0% 7.0%
Rate of compensation increase 4.5% 4.5% N/A N/A
Expected return on plan assets 8.0% 8.0% * *
* This plan does not have separate assets, so there is no actual or expected
return on plan assets.
For measurement purposes, a 6 percent annual rate of increase in the cost
of covered health care benefits was assumed for 1998 and 1997. A
one-percentage-point change in the assumed rates of health care cost increase
would have the following effects relative to 1998 amounts included above for the
other benefit plans (in thousands):
Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest
cost components $18 $(16)
Effect on postretirement benefit obligation 108 (96)
18
Note 10. Commitments
In March 1994, the Company acquired substantially all of the assets of Danner
Shoe Manufacturing Co. in part by issuing 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 of the remaining 135,178 shares subject to the guarantee is
less than $16.20 per share, the Company will be required to make a cash payment
equal to the difference shortly after March 1, 1999. Based on the December 31,
1998 closing market price, the Company's obligation would be approximately
$939,000.
Note 11. Enterprise-wide Disclosures
Segment information is not presented since all of the Company's revenue is
attributed to a single reportable segment. Information about the Company's
groups of products within its one segment is presented below.
(In Thousands)
Years Ending December 31,
1998 1997 1996
Footwear $115,643 $126,750 $112,164
Protective clothing 17,762 18,753 9,833
-------- -------- --------
$133,405 $145,503 $121,997
======== ======== ========
The following table presents information about the Company's revenue
attributed to countries based on the location of the customer.
(In Thousands)
Years Ending December 31,
1998 1997 1996
United States $128,570 $142,459 $119,705
Foreign Countries 4,835 3,044 2,292
-------- -------- --------
$133,405 $145,503 $121,997
======== ======== ========
All long-lived assets are located in the United States.
No single customer provided revenue of 10% or more of consolidated revenues
in any of the years presented.
Independent Auditors' 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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
La Crosse, Wisconsin
February 5, 1999
19
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 1998 and 1997.
Thousands of dollars except per share data - 1998 First Quarter Second Quarter Third Quarter Fourth Quarter
Net sales $29,936 $29,461 $37,506 $36,502
Gross profit 7,767 7,689 10,160 8,960
Operating income 633 483 2,836 1,646
Net income 189 12 1,321 738
Basic earnings per share .03 .00 .20 .11
Diluted earnings per share $.03 $.00 $.20 $.11
Thousands of dollars except per share data - 1997 First Quarter Second Quarter Third Quarter Fourth 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
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. On
March 26, 1999, there were approximately 325 shareholders of record and
approximately 2,400 beneficial owners of the Company's common stock.
1st 2nd 3rd 4th Year-end
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
1998 $11 1/2 - 14 1/8 $11 3/8 - 12 1/2 $7 3/4 - 11 1/2 $7 3/4 - 10 $9 1/4
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 three years:
1998 1997 1996
Dividends declared per share $.13 $.13 $.11
Market Risk Management
The Company enters into interest rate swap agreements ("Swap Agreements") to
reduce its exposure to interest rate fluctuations on its floating rate debt. The
Swap Agreements exchange floating rate for fixed rate interest payments
periodically over the life of the agreements without exchange of the underlying
notional amounts. The notional amounts of interest rate agreements are used to
measure interest to be paid or received and do not represent an amount of
exposure to credit loss. For interest rate instruments that effectively hedge
interest rate exposures, the net cash amounts paid or received on the agreements
are accrued and recognized as an adjustment to interest expense. As of December
31, 1998, the Company had Swap Agreements in effect totaling $11.0 million
notional amount, of which $7.0 million will mature in 2002 with another $4.0
million maturing in 2003. The variable rate borrowings not offset by Swap
Agreements at December 31, 1998 totaled $9.4 million. Swap Agreement rates are
based on the three-month LIBOR rate. Based on average floating rate borrowings
outstanding throughout fiscal year 1998, a 100-basis point change in LIBOR would
have caused the Company's monthly interest expense to change by approximately
$16,000. The Company believes that these amounts are not material to the
earnings of the Company.
20