FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number:
JUNE 30, 2003 0-21026
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ROCKY SHOES & BOOTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
---- ----------
(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
-----------------------
(Address of principal executive offices)
(740) 753-1951
--------------
(Registrant's telephone number, including area code)
(Former name, former address, and former Fiscal year if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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4,107,930 common shares, no par value, outstanding at August 13, 2003
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2003 and 2002 (Unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months and Six Months Ended June 30, 2003 and 2002 5
Notes to Interim Unaudited Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 June 30, 2002
Unaudited December 31, 2002 Unaudited
-------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,450,044 $ 4,276,722 $ 1,514,834
Trade receivables - net 21,356,964 15,282,618 15,072,183
Other receivables 1,062,552 1,173,714 2,345,324
Inventories 38,332,365 23,181,989 31,319,150
Deferred income taxes 578,951 584,511 615,609
Prepaid expenses 1,706,029 1,267,097 1,491,523
------------- ------------- -------------
Total current assets 64,486,905 45,766,651 52,358,623
FIXED ASSETS - net 18,270,014 19,049,287 19,965,259
DEFERRED PENSION ASSET 1,651,222 1,651,222 2,311,806
DEFERRED INCOME TAXES 153,495 153,495 295,784
OTHER ASSETS 3,208,827 1,796,359 2,469,050
------------- ------------- -------------
TOTAL ASSETS $ 87,770,463 $ 68,417,014 $ 77,400,522
============= ============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 7,637,974 $ 1,642,306 $ 4,207,401
Current maturities - long term debt 490,218 486,161 480,751
Accrued taxes - other 471,780 346,168 606,690
Accrued salaries and wages 904,834 807,611 852,859
Accrued plant closing costs 210,000 210,000 780,499
Accrued other 753,743 523,118 282,721
------------- ------------- -------------
Total current liabilities 10,468,549 4,015,364 7,210,921
LONG TERM DEBT-less current maturities 25,228,589 10,488,388 20,004,450
DEFERRED LIABILITIES 1,842,769 1,520,338 180,500
------------- ------------- -------------
TOTAL LIABILITIES 37,539,907 16,024,090 27,395,871
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and
outstanding June 30, 2003-4,097,930;
December 31, 2002-4,489,065;
June 30, 2002-4,505,465 32,653,420 35,289,038 35,373,578
Accumulated other comprehensive loss (2,311,749) (2,311,749) (831,161)
Retained earnings 19,888,885 19,415,635 15,462,234
------------- ------------- -------------
Total shareholders' equity 50,230,556 52,392,924 50,004,651
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 87,770,463 $ 68,417,014 $ 77,400,522
============= ============= =============
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
NET SALES $ 21,863,148 $ 19,194,071 $ 35,618,089 $ 32,943,659
COST OF GOODS SOLD 15,128,164 14,256,438 25,417,577 25,665,373
------------- ------------- ------------ -------------
GROSS MARGIN 6,734,984 4,937,633 10,200,512 7,278,286
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,944,319 4,517,033 9,194,925 8,416,534
------------- ------------- ------------ -------------
INCOME (LOSS) FROM OPERATIONS 1,790,665 420,600 1,005,587 (1,138,248)
OTHER INCOME AND (EXPENSES):
Interest expense (313,438) (332,959) (509,618) (616,068)
Other - net 88,230 78,198 180,103 167,029
------------- ------------- ------------ -------------
Total other - net (225,208) (254,761) (329,515) (449,039)
INCOME (LOSS) BEFORE INCOME
TAXES 1,565,457 165,839 676,072 (1,587,287)
INCOME TAX (BENEFIT) EXPENSE 469,638 48,752 202,822 (477,186)
------------- ------------- ------------ -------------
NET INCOME (LOSS) $ 1,095,819 $ 117,087 $ 473,250 $ (1,110,101)
============= ============= ============ =============
NET INCOME (LOSS) PER SHARE
Basic $ 0.27 $ 0.03 $ 0.11 $ (0.25)
========= ========= ========= =========
Diluted $ 0.25 $ 0.03 $ 0.11 $ (0.25)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 4,067,353 4,502,608 4,214,417 4,498,240
========= ========= ========= =========
Diluted 4,361,037 4,680,002 4,424,355 4,489,240
========= ========= ========= =========
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 473,250 $ (1,110,101)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,795,013 2,069,977
Deferred taxes and liabilities - net 327,991 (1,581,738)
Loss on sale of fixed assets 8,684 9,508
Change in assets and liabilities:
Receivables (5,963,184) (100,909)
Inventories (13,110,306) (3,605,486)
Prepaid expenses (438,932) (438,331)
Other assets 46,745 (347,810)
Accounts payable 5,993,277 2,643,981
Accrued and other liabilities 453,460 (835,747)
--------------- --------------
Net cash used in operating activities (10,414,002) (3,296,656)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,039,201) (1,267,649)
Acquisition of business (3,510,070)
Proceeds from sale of fixed assets 27,955 12,750
--------------- --------------
Net cash used in investing activities (4,521,316) (1,254,899)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 48,091,811 40,122,478
Payments on long-term debt (33,347,553) (37,082,443)
Purchase of treasury stock (3,106,156)
Proceeds from exercise of stock options 470,538 71,419
--------------- --------------
Net cash provided by financing activities 12,108,640 3,111,454
--------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,826,678) (1,440,101)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,276,722 2,954,935
--------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,450,044 $ 1,514,834
--------------- --------------
See notes to the interim unaudited condensed consolidated financial statements.
5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements reflect all adjustments which are necessary
for a fair presentation of the financial results. All such adjustments reflected
in the unaudited interim consolidated financial statements are considered to be
of a normal and recurring nature. The results of the operations for the three
month and six month periods ended June 30, 2003 and 2002 are not necessarily
indicative of the results to be expected for the whole year. Accordingly, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Annual Report to the Shareholders on Form 10-K for year ended December 31, 2002.
Certain reclassifications have been made to the prior year amounts in order to
conform to the current year presentation.
The Company accounts for its stock option plans in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", under which no compensation
cost has been recognized. Had compensation cost for all stock option plans been
determined consistent with the SFAS No. 123, "Accounting for Stock Based
Compensation," the Company's net income (loss) and income (loss) per share would
have resulted in the amounts as reported below.
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported $ 1,095,819 $ 117,087 $ 473,250 $ (1,110,101)
Deduct: Stock based employee
compensation expense
determined under fair value
based method for all awards, net 9,758 333,640 405,853
------------ ---------- ---------- -------------
Pro forma net income (loss) $ 1,095,819 $ 107,329 $ 139,610 $ (1,515,954)
============ ========== ========== =============
Earnings (loss) per share:
Basic - as reported $ 0.27 $ 0.03 $ 0.11 $ (0.25)
Basic - pro forma $ 0.27 $ 0.02 $ 0.03 $ (0.34)
Diluted - as reported $ 0.25 $ 0.03 $ 0.11 $ (0.25)
Diluted - pro forma $ 0.25 $ 0.02 $ 0.03 $ (0.34)
The pro forma amounts are not representative of the effects on reported net
income for future years.
6
2. INVENTORIES
Inventories are comprised of the following:
June 30, 2003 December 31, 2002 June 30, 2002
------------- ----------------- -------------
Raw materials $ 8,008,009 $ 3,535,884 $ 5,348,288
Work in process 1,617,562 436,435 1,798,754
Finished good 27,602,186 18,301,351 23,049,609
Factory outlet finished goods 1,276,608 1,080,319 1,283,499
Reserve for obsolescence or
lower of cost or market (172,000) (172,000) (161,000)
------------- ------------- -------------
Total $ 38,332,365 $ 23,181,989 $ 31,319,150
============= ============= =============
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as follows:
Six Months Ended
June 30,
2003 2002
---- ----
Interest $506,499 $624,184
======== ========
Federal, state and local
income taxes $ 80,000 $ 75,000
======== ========
Accounts payable at June 30, 2003 and December 31, 2002 include a total of
$5,084 and $34,198 respectively, relating to the purchase of fixed assets.
4. PER SHARE INFORMATION
Basic earnings/(loss) per share (EPS) is computed by dividing net income (loss)
applicable to common shareholders by the basic weighted average number of common
shares outstanding during each period. The diluted earnings per share
computation includes common share equivalents, when dilutive. There are no
adjustments to net income necessary in the calculation of basic and diluted
earnings per share.
A reconciliation of the shares used in the basic and diluted income per common
share computation for the three months and six months ended June 30, 2003 and
2002 is as follows:
7
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Basic Weighted average
shares outstanding 4,067,353 4,502,608 4,214,417 4,498,240
Diluted securities:
Stock options 293,684 177,394 209,938 --
--------- --------- --------- ---------
Diluted Weighted average
shares outstanding 4,361,037 4,680,002 4,424,355 4,498,240
========= ========= ========= =========
5. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires a guarantor to recognize a liability, at the inception of the
guarantee, for the fair value of obligations it has undertaken in issuing the
guarantee and also include more detailed disclosures with respect to guarantees.
FIN 45 is effective for guarantees issued or modified starting January 1, 2003
and required the additional disclosures beginning with the Company's fiscal year
ended December 31, 2002. The provisions of FIN 45 have been adopted with no
material impact on the Company's results of operations or financial condition.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
EITF 00-21 provides guidance on how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting. EITF
00-21 will be effective for arrangements entered into after June 30, 2003. The
adoption of EITF 00-21 is not expected to have a material impact on the
Company's results of operations or financial condition.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (see Footnote 1). SFAS No. 148
provides alternative methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123. The transition provisions of
this Statement are effective for fiscal years ending after December 15, 2002,
and the disclosure requirements of the Statement are effective for interim
periods beginning after December 15, 2002. The Company accounts for stock-based
employee compensation arrangements in accordance with the provision of APB No.
25 and complies with the disclosure provisions of SFAS No. 123 and SFAS No. 148.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities ("FIN 46"), to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest
8
entity, as defined, to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both. FIN
46 also requires disclosures about variable interest entities that the company
is not required to consolidate but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003 and to older entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements, none of which appear to apply to the Company at
this time, are effective in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established. The
provisions of FIN 46 have been adopted and based upon a review of such
provisions it has been determined that there are no variable interest entities
which would require consolidation or disclosure at this time.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for certain derivative instruments,
and hedging activities for decisions made as part of the Derivatives
Implementation Group. This Statement is generally effective for contracts
entered into or modified after June 30, 2003. The Company has not completed its
evaluation of SFAS No. 149, but does not believe it will have a significant
impact on the Company's results of operations or financial condition.
Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity", was issued in May 2003 and is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The requirements of SFAS 150
apply to issuers' classification and measurement of freestanding financial
instruments, including those that comprise more than one option or forward
contract. SFAS 150 does not apply to features that are embedded in a financial
instrument that is not a derivative in its entirety. This statement will not
have a material effect on the Company's consolidated financial statements.
6. ACQUISITION
On April 15, 2003, the Company completed the purchase of certain assets from
Gates-Mills, Inc. ("Gates"). Under the terms of the Purchase Agreement, Rocky
acquired all of the intellectual property of Gates, including ownership of the
Gates(R) trademark, selected raw material and finished goods inventory, and
certain records in connection with the Gates business in exchange for $3,510,070
plus a deferred purchase price if sales by the Company related to the Gates
product line from the date of purchase through December 31, 2003 reach certain
performance targets. The Company has filed the financial statements and the
pro-forma financial information required by the Regulation S-X Article 3.05 and
Article 11.01. Final allocation of the purchase price has yet to be determined;
however, it will be based on an independent appraisal of the fair value of the
assets acquired.
9
7. CAPITAL STOCK
The Company is authorized to repurchase up to 500,000 shares of our outstanding
common shares. The purchases may occur on the open market and/or in privately
negotiated transactions as market conditions warrant. During the three-month
period ended March 31, 2003, the Company repurchased 483,533 shares at an
average price of $6.42. As of June 30, 2003, the Company had purchased a total
of 499,933 shares at an average price of $6.38.
For the six months ended June 30, 2003, options for 92,398 of the Company's
common stock were exercised at an average price of $5.09.
10
PART 1 - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's Interim Unaudited Condensed Consolidated Financial
Statements, expressed as a percentage of net sales. The discussion that follows
the table should be read in conjunction with the Interim Unaudited Condensed
Consolidated Financial Statements of the Company.
PERCENTAGE OF NET SALES
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 69.2% 74.3% 71.4% 77.9%
----- ----- ----- -----
Gross Margin 30.8% 25.7% 28.6% 22.1%
Selling, General and
Administrative Expenses 22.6% 23.5% 25.8% 25.6%
----- ----- ----- -----
Income (Loss) from Operations 8.2% 2.2% 2.8% (3.5%)
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net Sales
Net sales increased $2,669,077, or 13.9%, to $21,863,148 for the quarter ended
June 30, 2003 compared to $19,194,071 for the same period a year ago. The
improvement was led by an increase of approximately 22% in ROCKY(R) branded
sales, representing the third consecutive quarter-over-quarter increase.
Double-digit sales increases were realized in the Company's occupational and
rugged outdoor categories. The Company recorded $2.1 million of Gates(R) branded
sales in the second quarter 2003. There were no sales to the U.S. military in
the second quarter 2003 compared with approximately $2.6 million of net sales in
the second quarter 2002.
Gross Margin
Gross margin increased $1,797,351, or 36.4%, to $6,734,984 for the quarter ended
June 30, 2003 compared to $4,937,633 for the same period in 2002. As a
percentage of net sales, gross margin was 30.8% this year compared to 25.7% a
year ago. This 510 basis point improvement particularly benefited from increased
sales of sourced footwear, which rose to 62% of net sales from 42% a year ago.
Additionally, gross margin in second quarter 2002 was negatively impacted by the
sale of low margin military footwear; there have been no corresponding sales in
2003.
11
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased $427,286, or
9.5%, to $4,944,319 for the quarter ended June 30, 2003 compared to $4,517,033
for the same period a year ago. The increase in SG&A expenses was primarily due
to sales commissions and distribution center wages related to the increase in
branded product sales, and salaries and wages in support of the Company's
developing initiatives, including the Gates(R) asset acquisition.
Interest Expense
Interest expense decreased $19,521, or 5.9%, to $313,438 in the quarter ended
June 30, 2003 compared to $332,959 the prior year. The Company benefited from
lower interest rates during second quarter 2003. The Company's funded debt
increased 25.5% to $25,718,807 at June 30, 2003 versus $20,485,201 a year ago
due to increases to inventories, accounts receivable and the acquisition of
selected Gates-Mills assets.
Income Taxes
Income taxes for the three months ended June 30, 2003 increased to $469,638
compared to $48,752 for the same period a year ago. The Company's effective tax
rate of 30.0% for the three months ended June 30, 2003 compares with an
effective tax rate of 29.4% for the same period last year.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
Net Sales
Net sales for the six months ended June 30, 2003 increased $2,674,430 or 8.1% to
$35,618,089 versus $32,943,659 for the same period a year ago. The improvement
was led by an increase of approximately 27% in ROCKY(R) branded sales.
Double-digit sales increases were realized in the Company's occupational and
rugged outdoor categories. The Company recorded $2.1 million of Gates(R) branded
sales in the second quarter 2003. There were no sales to the U.S. military
through the first half of 2003 compared to approximately $6.4 million of net
sales through the first half of 2002.
Gross Margin
Gross margin for the six months ended June 30, 2003 increased $2,922,226, to
$10,200,512 versus $7,278,286 for the same period a year ago. As a percentage of
net sales, gross margin was 28.6% in the first half of 2003 versus 22.1% for the
same period a year ago. Increased sales of sourced footwear, which rose to 57%
of net sales from 37% a year ago, were a significant factor in the gross margin
improvement. Additionally, gross margin in 2002 was negatively impacted by the
sale of low margin military footwear; there have been no corresponding sales in
2003.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses for the six months ended June 30,
2003 were $9,194,925 compared with $8,416,534 for the same period a year ago. As
a percentage of net
12
sales, SG&A was 25.8% in the first half of 2003 versus 25.5% for the same period
in 2002. The increase in SG&A expenses was primarily due to sales commissions
and distribution center wages related to the increase in branded product sales,
and salaries and wages in support of the Company's developing initiatives,
including the Gates(R) asset acquisition.
Interest Expense
Interest expense for the six months ended June 30, 2003 decreased $106,450 or
17.3% to $509,618 versus $616,068 for the same period a year ago. The Company
benefited from lower interest rates during the first six months of 2003. The
Company's funded debt increased 25.5% to $25,718,807 at June 30, 2003 versus
$20,485,201 a year ago due to increases to inventories, accounts receivable and
the acquisition of selected Gates-Mills assets.
Income Taxes
Income taxes for the six months ended June 30, 2003 increased to $202,822 from a
tax benefit of $477,186 for the comparable period last year. The Company's
effective tax rate of 30.0% for the first half of 2003 compares with an
effective tax benefit rate 30.1% for the same period a year ago.
Liquidity and Capital Resources
The Company has principally funded working capital requirements, capital
expenditures and acquisitions through borrowings under its line of credit and
other indebtedness. Working capital is primarily used to support changes in
accounts receivable and inventory as a result of the Company's seasonal business
cycle and business expansion. These requirements are generally lowest in the
months of January through March of each year and highest during the months of
May through October. In addition, the Company requires financing to support
additions to machinery, equipment and facilities as well as the introduction of
new styles of footwear. At June 30, 2003, the Company had working capital of
$54,018,356 versus $41,751,287 at December 31, 2002.
The Company's line of credit provides for advances based on a percentage of
eligible accounts receivable and inventory with maximum borrowings under the
line of credit of $45,000,000. As a result of the limitations on its maximum
borrowing amount at June 30, 2003, the Company had borrowed $20,358,657 against
its currently available line of credit of $26,768,616 as of June 30, 2003.
The Company's cash flow used in operations increased to $10,414,002 in first
half of 2003 from $3,296,656 for the same period in the prior year. The
period-over-period comparison reflects larger increases in accounts receivable
and inventories which was partially offset by the increase in net income and
accounts payable. All of the responsible balance sheet fluctuations reflect the
seasonal nature of the Company's business, the increased sales and bookings for
the current year, and the increase in sales of sourced product and the Gates(R)
asset acquisition.
The principal use of cash flows in investing activities for the first six months
of 2003 and 2002 has been for business acquisition and investment in property,
plant, and equipment. In the first half of 2003 the Company invested $3,510,070
to acquire certain assets of Gates-Mills, Inc.; there were no comparable
investments for the same period in 2002. In the first half of 2003,
13
property, plant, and equipment expenditures were $1,039,201 versus $1,267,649
for the same period in 2002. The current year expenditures primarily represent
investments in injection molding equipment to improve the capabilities of the
Company's Puerto Rico subsidiary and investments in molds used in the production
of new products sourced in the Far East. During the first half of 2002, the
Company made investments in its Puerto Rico factory that enhanced manufacturing
capabilities.
The Company's cash flows from financing activities for the six months ended June
30, 2003 reflect the repurchase of common shares as treasury stock for
$3,106,156, proceeds from employee stock option exercises, and increases and
decreases in borrowings under its revolving credit facility and long-term
mortgage facility to finance working capital requirements and other operating
capital expenditures.
Inflation
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of materials, salaries, and
employee benefits. The Company attempts to offset the effects of inflation
through increased selling prices, productivity improvements, and reduction of
costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes in critical accounting policies from
those disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, which are intended to be covered by
the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding intent, beliefs, expectations, projections,
forecasts, and plans of the Company and its management. Investors are cautioned
that such statements involve risks and uncertainties, including, but not limited
to, changes in consumer demand, seasonality, impact of weather, competition,
reliance on suppliers, changing retailing trends, reliance on foreign
manufacturing, changes in tax rates, limited protection of proprietary
technology, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. One or more of these factors
have affected, and in the future could affect the Company's business and
financial results and cause actual results to differ materially from plans and
projections. Although the Company and its management believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate. Therefore, there can be
no assurance that the forward-looking statements included herein will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements contained herein, the inclusion of such information
should not be regarded as a representation by the Company, its management or any
other person that the Company's objectives and plans will be achieved. All
forward-looking statements made herein are based on information presently
available to the management of the
14
Company. The Company undertakes no obligation to publicly update or revise any
forward-looking statements.
PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's management
carried out an evaluation, with the participation of the Company's principal
executive officer and principal financial officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon
that evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is, from time to time, a party to litigation which arises
in the normal course of its business. Although the ultimate
resolution of pending proceedings cannot be determined, in the
opinion of management, the resolution of such proceedings in the
aggregate will not have a material adverse effect on the Company's
financial position, results of operations, or liquidity.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The 2003 Annual Meeting of Shareholders was held on May 20, 2003, and
the following proposal was acted upon:
Proposal: To elect three Class I Directors of the Company, each to
serve for a two-year term expiring at the 2005 Annual Meeting of
Shareholders
Number of Shares Voted
---------------------------------------------------
WITHHELD
FOR AUTHORITY TOTAL
Mike Brooks 3,272,332 532,850 3,805,182
Glenn E. Corlett 3,804,092 1,090 3,805,182
James L. Stewart 3,574,257 230,925 3,805,182
Item 5. Other Information.
None
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
1) Form 8-K dated April 15, 2003, filed with the Securities and Exchange Commission
on April 30, 2003 pursuant to Items 2 and 7, concerning the Company's purchase of
certain assets from Gates-Mills, Inc.
2) Form 8-K dated April 23, 2003, filed with the Securities and Exchange Commission
on April 24, 2003 pursuant to Item 12 (under Item 9), regarding the Company's
financial results for the first quarter ended March 31, 2003.
3) Form 8-K/A filed with the Securities and Exchange Commission on June 27, 2003
which amended Item 7 of the Current Report on Form 8-K dated April 15, 2003 to
include financial statements that were not available at the time of filing the
Form 8-K.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: August 14, 2003 /s/ James E. McDonald
---------------------------------------------
James E. McDonald, Vice President and
Chief Financial Officer*
In his capacity as Vice President and Chief Financial Officer, Mr. McDonald is
duly authorized to sign this report on behalf of the Registrant.
18