ITEM 1. BUSINESS
a) The Registrant's Products and Services
The Registrant, Penobscot Shoe Company (herein referred to as the "Company"), was incorporated in 1935, and has been engaged in the manufacture, importing and sale of branded footwear to retailers. Its principal products today are women's casual and tailored footwear, including boots and sandals, selling in the moderate price range.
In 1997, all of the Company's sales were made under the exclusive brand name, TROTTERS, to approximately 1,600 locations.
To achieve these sales, the Company employs a national sales force which is compensated on a commission basis. The efforts of this sales force and the identity and value of the Company's principal trademark, TROTTERS, are supported by trade advertising on a national basis, cooperative advertising programs and promotional assistance to retailers.
The Company is continually seeking new customers, but, since it does not have long-term contracts with its customers, there can be no assurance that its business will be constant or grow. On February 6, 1998, the Company had orders in-house of approximately $6,130,000, as compared to orders of approximately $5,368,000 one year ago. Changes in backlog do not necessarily indicate sales trends, as in-house orders frequently fluctuate according to customers' inventory plans as well as the Company's ability to deliver.
Net sales for 1997 decreased 4% from the preceding year which had increased by 22% from 1995. Total pairs of footwear shipped were approximately the same in 1997 as in 1996. A poor winter boot season affected the first quarter of 1997 and was followed by unseasonable weather in much of the country resulting in weak demand for Spring merchandise. Despite some short-term up-ticks in the retail environment for footwear later in the year, much of fiscal 1997 suffered from general weakness in the footwear market. During the fourth quarter, net sales included significant shipments of inventory at reduced prices. This had the effect of reducing the overall average selling price per pair, which decreased approximately 3% from the preceding year.
The Company expects 1998 to produce a moderate increase in sales, fueled primarily by new products and greater penetration into top accounts.
In August 1996, the Company ceased production at its manufacturing facility in Old Town, Maine. The decision to cease domestic assembly of footwear was due to a decline in the portion of the product line which had been produced in that facility. The profitability of the products which had been assembled in Old Town had declined to a point where the operation was no longer economically viable. Approximately 15% of the Company's products were assembled in Old Town in 1996, down from 27% in 1995. All of the Company's products are purchased as finished footwear from overseas sources. The emphasis on sourcing finished footwear from overseas has helped the Company to maintain its price competitiveness and quality control.
PART I
ITEM 1. BUSINESS (continued)
(a) The Registrant's Products and Services (continued)
The Company had approximately 42 employees on November 28, 1997, while the number of employees at November 29, 1996 was 43.
The Company's sole line of business is the importing and sale of footwear, as described above.
(b) Material Factors Affecting the Company's Business.
(1) Competition There are many well-managed, well-financed competitors supplying moderately-priced footwear to the market served by the Company. Pricing continues to be a major area of competition inasmuch as imports constitute a sizable majority of all footwear sold in the American market. Other important areas of competition include quality, fashion, the reliability and timeliness of delivery, and the provision of in-stock service in a range of sizes and widths. The Company makes a special effort to maintain an inventory of its better selling styles in a large variety of sizes and widths. This allows it to satisfy retailers' needs more efficiently and more quickly than can some of its competitors. The Company believes that it is recognized as one of the leaders in the industry in its ability to provide this service, known as open-stock reorder availability.
(2) Seasonality
The Company's business is characterized by two major selling seasons, one for the Fall retail season and the other for the Spring retail season. Sales for the Fall season generally account for slightly more than half of a year's sales, while the Spring sales account for the balance. Although a portion of the Company's products are not imported until orders for them have been received, the Company imports a certain amount of its basic and more traditional styles ahead of the receipt of orders. This is necessary in order to mitigate the current trend whereby incoming orders are concentrated in a shorter period of time and closer to the retail selling season. In addition, the Company imports for in-stock inventories those shoes projected to be best sellers, in order to facilitate open-stock reorder availability as described above. The risk involved with the early purchase of the Company's product is the potential for surplus inventory if the selling patterns do not materialize as forecast. The resulting surplus inventory must be sold at reduced margins with a corresponding negative impact on earnings. Considerable effort has been devoted to minimizing this risk through improved forecasting techniques and sound inventory management. The Company finances the normal buildup of its finished goods inventory by the use of available liquid working capital.
(3) Forward-Looking Statements
This report contains certain forward looking statements regarding the Company. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Act of 1995 and in that regard is cautioning the readers of this report that a number of important risk factors could affect the Company's actual results of operations and may cause changes in the Company's strategy with the result that the Company's operations and results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risk factors include, among others, general economic and market conditions, the rate of growth in the footwear market and consumer acceptance of the Company's product line, and the risk factors that are discussed from time-to-time in the Company's SEC reports, including, but not limited to, the report on Form 10-K for the fiscal year ended November 28, 1997. PART I
ITEM 1. BUSINESS (continued)
(c) Executive Officers of the Registrant
PART I
ITEM 2.
ITEM 2. PROPERTIES
The Company owns two buildings in Old Town, Maine, which is approximately 15 miles from Bangor, Maine. Both of the buildings in Old Town are made of steel, brick and concrete construction. One of the buildings had been used for manufacturing and is currently surplus to the Company's needs. That building contains approximately 69,000 square feet and is listed for sale or lease. The other, which is used for the Company's executive offices and warehousing, contains approximately 74,500 square feet.
Both buildings are in good condition and have suitable transportation facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In September 1987, the Company and numerous other parties entered into two Administrative Orders by Consent issued by the U.S. Environmental Protection Agency and the Maine Department of Environmental Protection, regarding the removal of hazardous wastes from two locations in Maine. The Company initially established a loss contingency of $75,000 to cover anticipated liabilities in these two proceedings. The amount of this accrual was determined based on several factors which were known at that time. These factors included the EPA apportionment percentage applicable to Penobscot Shoe Company, the volume and type of materials contributed to the sites by the Company, and the estimated costs for remedial actions at the sites. Additionally, costs of cleanup were estimated utilizing available past experience of other companies and sites. The loss contingency was charged against earnings during fiscal 1987. Costs totaling $14,000 have been incurred to date and a reserve of $61,000 remains in place.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the last quarter of the Company's fiscal year.
PART II ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reference is made to the information set forth on page 25 of the Company's annual report to stockholders for the fiscal year ended November 28, 1997 ("1997 Annual Report"), filed herewith as Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the Selected Financial Data set forth on page 25 of the Company's 1997 Annual Report filed herewith as Exhibit 13.
PART II
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth on page 24 of the Company's 1997 Annual Report, filed herewith as Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the financial statements of the Company included in the 1997 Annual Report, filed herewith as Exhibit 13. See Index to Financial Statements and Schedules set forth in response to Part IV, Item 14 of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors and Directorships
Reference is made to the information set forth in the Company's definitive Proxy Statement which is to be filed with the Securities and Exchange Commission on or about February 25, 1998.
Identification of Executive Officers
This information is set forth in Part I, Item 1 (c) of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth in the Company's definitive Proxy Statement which is to be filed with the Securities and Exchange Commission on or about February 25, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth in the Company's definitive Proxy Statement which is to be filed with the Securities and Exchange Commission on or about February 25, 1998.
PART III
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedules:
Incorporated by reference to the financial statements of the Company included in the 1997 Annual Report filed herewith as Exhibit 13. See the Index to Financial Statements and Schedules included with the Additional Financial Statements and Schedules filed with this Annual Report.
(a) 3. Exhibits:
The index on page 13, directly preceding the exhibits, lists all of the exhibits either filed as a part of this annual report or incorporated herein by reference.
(b) Reports on Form 8-K:
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PENOBSCOT SHOE COMPANY
Paul Hansen By: Paul Hansen President and Chief Executive Officer
David L. Keane By: David L. Keane Vice President/Finance and Administration
Date: February 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Irving Kagan Date Gerald E. Rudman Date Director Director
Paul Hansen Date Director
PENOBSCOT SHOE COMPANY FINANCIAL STATEMENTS FORM 10K, PART IV, ITEM 14 (a)1 AND (a)2 YEAR ENDED NOVEMBER 28, 1997
PENOBSCOT SHOE COMPANY FINANCIAL STATEMENTS FORM 10K, PART IV, ITEM 14 (a)1 AND (a)2
(a) 1. Financial Statements
The report of independent certified public accountants and the following financial statements of the registrant included in the Annual Report of the registrant to its stockholders for the year ended November 28, 1997, are incorporated herein by reference:
Balance sheets at November 28, 1997 and November 29, 1996 Statements of income for the years ended November 28, 1997, November 29, 1996, and November 24, 1995 Statements of shareholders' equity for the years ended November 28, 	 1997, November 29, 1996, and November 24, 1995 Statements of cash flows for the years ended November 28, 1997, November 29, 1996, and November 24, 1995 Notes to financial statements
2. Financial Statement Schedules
Report of independent certified public accountants Schedule II - Valuation and qualifying accounts and reserves
Other schedules have been omitted because they are either not required, not applicable, or the information is given in the Financial Statements, including the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Penobscot Shoe Company Old Town, Maine
The audits referred to in our report dated January 13, 1998, relating to the financial statements of Penobscot Shoe Company which is incorporated in Item 8 of this Form 10-K by reference to the annual report to shareholders for the year ended November 28, 1997, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedules present fairly, in all material respects, the information set forth therein.
Boston, Massachusetts January 13, 1998 BDO Seidman, LLP
Index to Exhibits
3(a) Articles of Incorporation and by-laws of the Registrant, filed with the Commission in 1965 as Exhibit 3(a) to the Registrant's Form S-1 Registration Statement (Registration No. 2-23907) are incorporated herein by reference.
13 Annual Report to Stockholders for the fiscal year ended November 28, 1997.