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:
SEPTEMBER 30, 2002 0-21026
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ROCKY SHOES & BOOTS, INC.
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(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
----- -----
4,505,465 common shares, no par value, outstanding at November 13, 2002
1
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 and 2001 (Unaudited) and December 31, 2001 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 2002 and 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001 5
Notes to Interim Unaudited Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
CERTIFICATIONS 19 - 20
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 December 31, 2001 September 30, 2001
Unaudited Unaudited
------------------ ----------------- ------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,893,242 $ 2,954,935 $ 2,553,804
Trade receivables - net 29,104,380 15,091,100 34,716,895
Other receivables 1,747,279 2,225,498 2,351,058
Inventories 30,253,309 27,713,664 37,899,594
Deferred income taxes 615,609 615,609 502,722
Prepaid expenses 1,321,298 1,053,192 1,498,935
------------ ------------ -------------
Total current assets 64,935,117 49,653,998 79,523,008
FIXED ASSETS - net 19,212,820 20,766,094 21,541,734
DEFERRED PENSION ASSET 2,493,590 1,802,922 2,526,603
DEFERRED INCOME TAXES 295,784 295,784 -
OTHER ASSETS 2,230,565 2,141,016 2,075,593
------------ ------------ -------------
TOTAL ASSETS $ 89,167,876 $ 74,659,814 $ 105,666,938
============ ============ =============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 4,068,998 $ 1,559,444 $ 3,538,230
Current maturities - long term debt 484,200 469,143 17,845,423
Accrued taxes - other 457,225 991,295 683,637
Accrued salaries and wages 1,029,411 985,992 1,360,540
Accrued plant closing costs 270,499 903,291 1,300,000
Accrued other 1,257,086 477,938 1,481,547
------------ ------------ -------------
Total current liabilities 7,567,419 5,387,103 26,209,377
LONG TERM DEBT-less current maturities 29,055,129 16,976,023 26,095,736
DEFERRED LIABILITIES 152,500 1,253,355 1,760,214
------------ ------------ -------------
TOTAL LIABILITIES 36,775,048 23,616,481 54,065,327
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
September 30, 2002 - 4,505,465;
December 31, 2001- 4,492,215;
4,492,215; September 30, 2001 - 4,489,215 35,373,578 35,302,159 35,284,159
Accumulated other comprehensive loss (831,161) (831,161) -
Retained earnings 17,850,411 16,572,335 16,317,452
------------ ------------ -------------
Total shareholders' equity 52,392,828 51,043,333 51,601,611
------------ ------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 89,167,876 $ 74,659,814 $ 105,666,938
============ ============ =============
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ------------ ----------- -----------
NET SALES $ 30,453,543 $ 38,490,267 $ 63,397,202 $ 76,560,294
COST OF GOODS SOLD 21,601,185 28,685,843 47,266,558 57,436,667
------------ ------------ ------------ ------------
GROSS MARGIN 8,852,358 9,804,424 16,130,644 19,123,627
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,119,050 5,723,654 13,535,584 14,424,135
PLANT CLOSING COSTS -- 1,300,000 -- 1,300,000
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 3,733,308 2,780,770 2,595,060 3,399,492
OTHER INCOME AND (EXPENSES):
Interest expense (422,366) (764,539) (1,038,434) (1,976,321)
Other - net 102,168 50,097 269,197 330,124
------------ ------------ ------------ ------------
Total other - net (320,198) (714,442) (769,237) (1,646,197)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 3,413,110 2,066,328 1,825,823 1,753,295
INCOME TAX EXPENSE 1,024,933 586,634 547,747 477,356
------------ ------------ ------------ ------------
NET INCOME $ 2,388,177 $ 1,479,694 $ 1,278,076 $ 1,275,939
============ ============ ============ ============
NET INCOME PER SHARE
Basic $0.53 $0.33 $0.28 $0.28
============ ============ ============ ============
Diluted $0.52 $0.32 $0.28 $0.28
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 4,505,465 4,489,215 4,500,675 4,489,215
============ ============ ============ ============
Diluted 4,555,208 4,564,929 4,613,994 4,540,675
============ ============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,278,076 $ 1,275,939
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 3,073,782 3,381,738
Deferred income taxes and liabilities (1,791,524) (690,374)
Loss on sale of fixed assets 9,583 123,040
Change in assets and liabilities:
Receivables (13,535,061) (16,055,172)
Inventories (2,539,645) (5,864,357)
Prepaid expenses (268,106) (203,648)
Other assets (109,325) 90,972
Accounts payable 2,495,946 45,275
Accrued and other liabilities (344,295) 2,602,048
----------- -----------
Net cash used in operating activities (11,730,569) (15,294,539)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,509,457) (701,658)
Proceeds from sale of fixed assets 12,750 6,498
----------- -----------
Net cash used in investing activities (1,496,707) (695,160)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 64,882,869 76,046,760
Payments on long term debt (52,788,705) (59,621,251)
Proceeds from exercise of stock options 71,419
----------- -----------
Net cash provided by financing activities 12,165,583 16,425,509
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,061,693) 435,810
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,954,935 2,117,994
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,893,242 $ 2,553,804
=========== ===========
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 FOR THE PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
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 interim unaudited condensed
consolidated financial statements are considered to be of a normal and
recurring nature. The results of the operations for the nine-month
periods ended September 30, 2002 and 2001 are not necessarily
indicative of the results to be expected for the whole year.
Accordingly, these interim unaudited condensed 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 the year ended
December 31, 2001.
Certain reclassifications have been made to the prior year amounts in
order to conform to the current year presentation.
2. CLOSURE OF MANUFACTURING OPERATIONS
In September 2001, the Board of Directors approved a restructuring plan
to consolidate and realign the Company's footwear manufacturing
operations. Under this plan, the Company moved the footwear
manufacturing operations at its Nelsonville, Ohio factory to the
Company's factory in Puerto Rico. The restructuring plan was
principally completed in fourth quarter 2001.
The execution of this plan, which started in September 2001, resulted
in the elimination of 67 employees at the Nelsonville, Ohio facility,
and transfer of a significant amount of machinery and equipment to the
Company's Moca, Puerto Rico facility.
A reconciliation of the plant closing costs and accrual for the quarter
ended September 30, 2002 is as follows:
Accured Accrued
2001 Total Balance First Quarter Second Quarter Third Quarter Balance
Expense Dec. 31, 2001 2002 Payments 2002 Payments 2002 Pyaments Sept. 30, 2002
---------- ------------- ------------- ------------- ------------- --------------
Severance
Non-union $ 71,668 $ 71,668 $ 20,483 $ 5,091 $ 46,094
Union 292,653
Curtailment of pension
plan benefits 690,000 690,000 500,000 190,000
Employee benefits 34,223 33,000 6,808 22,739 1,000 2,453
Factory lease 90,000 85,000 13,000 9,000 9,000 54,000
Equipment and relocation
costs 260,626 5,000 5,000
Legal and other costs 60,830 18,623 11,825 33,846 (27,048)
----------- --------- -------- -------- --------- --------
Total $ 1,500,000 $ 903,291 $ 52,116 $ 70,676 $ 510,000 $270,499
=========== ========= ======== ======== ========= ========
6
3. INVENTORIES
Inventories are comprised of the following:
September 30, December 31, September 30,
2002 2001 2001
---------- ------------ ------------
Raw materials 4,855,657 $ 4,537,865 $ 5,504,761
Work-in Process 2,299,573 1,578,107 2,335,945
Finished goods 21,527,293 20,077,999 27,640,253
Factory outlet finished goods 1,731,786 1,680,693 2,579,635
Reserve for obsolescence or
lower of cost or market (161,000) (161,000) (161,000)
---------- ------------ ------------
Total 30,253,309 $ 27,713,664 $ 37,899,594
========== ============ ============
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Nine Months Ended
September 30,
2002 2001
---- ----
Interest $ 1,015,141 $ 2,001,117
=========== ===========
Federal, state and local
income taxes $ 75,000 $ 77,348
=========== ===========
Accounts payable at September 30, 2002 and December 31, 2001 include a
total of $18,918 and $5,310, respectively, relating to the purchase of
fixed assets.
5. PER SHARE INFORMATION
Basic earnings 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 nine months ended
September 30, 2002 and 2001 is as follows:
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Basic Weighted average
shares outstanding 4,505,465 4,489,215 4,500,675 4,489,215
Diluted securities:
Stock options 49,743 75,714 113,319 51,460
--------- --------- --------- ---------
Diluted Weighted average
shares outstanding 4,555,208 4,564,929 4,613,994 4,540,675
========= ========= ========= =========
7
6. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The adoption of
this statement did not have a material impact on its consolidated
financial statements. SFAS No. 142 changes the accounting for goodwill
and certain other intangible assets from an amortization method to an
impairment only approach. The Company has no goodwill recorded.
However, the total net book value of indefinite-lived intangible assets
at September 30, 2002 was $413,869. Indefinite-lived intangible assets
represent the cost of acquiring the licensing rights to ROCKY(R) Kids
from Philip's Kids, LLC. These rights have previously been determined
to have an indefinite useful life and accordingly are not subject to
amortization. In addition, the Company has intangible assets consisting
of patents and trademarks totaling approximately $500,000 at September
30, 2002 that are being amortized over 15 years. Amortization expense
related to these intangible assets in the first nine months of fiscal
2002 and 2001 was $23,569 and $30,374 respectively.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supercedes FASB Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". The adoption of this statement, as of January 1, 2002,
did not have an impact on the Company's Consolidated Financial
Statements.
As previously reported, FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" in April 2002. It is effective for the first
quarter in the year ended December 31, 2003. The Company does not
believe the adoption of SFAS No. 145 will have a significant impact on
its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities included in restructurings. This Statement
eliminates the definition and requirements for recognition of exit
costs as defined in EITF Issue 94-3, and requires that liabilities for
exit activities be recognized when incurred instead of at the exit
activity commitment date. This Statement is effective for exit or
disposal activities initiated after December 31, 2002.
7. NEW CREDIT FACILITY
The Company announced a two-year extension to its credit facility on
October 23, 2002. This new agreement replaced the previous $50 million
credit facility and includes terms more favorable to the Company, lower
interest rates, and, to a lesser extent, reduced administrative fees.
It expires on September 30, 2005. The Company's new line of credit
provides for advances based on a percentage of eligible accounts
receivable and
8
inventory with maximum borrowings under the line of credit of
$45,000,000. As of September 30, 2002, the Company had borrowed
$23,445,043 against its currently available line of credit of
$32,693,673.
8. SHARE REPURCHASE PROGRAM
On September 30, 2002, the Company announced that its Board of
Directors had authorized the repurchase of up to 500,000 common shares
outstanding in open market or privately negotiated transactions through
December 31, 2003. Purchases of stock under this program will be funded
from the Company's operating cash flow.
9
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 70.9% 74.5% 74.6% 75.0%
-------- -------- -------- --------
Gross Margin 29.1% 25.5% 25.4% 25.0%
SG&A expenses (including
plant closing costs in 2001) 16.8% 18.2% 21.4% 20.5%
-------- -------- -------- --------
Income from Operations 12.3% 7.3% 4.0% 4.5%
======== ======== ======== ========
Reported SG&A expenses were 18.2% and 20.5% of net sales, respectively, for the
three months and nine months ended September 30, 2001. Excluding the $1,300,000
third quarter 2001 plant closing costs, SG&A expenses were 14.9% and 18.8% of
net sales, respectively, for the same periods last year. Reported income from
operations for the third quarter 2001 year-to-date periods were 7.3% and 4.5%,
respectively. Excluding the third quarter 2001 plant closing costs, income from
operations was 10.6% and 6.2%, respectively, for three months and nine months
ended September 30, 2001.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net Sales
Net Sales decreased $8,036,724, or 20.9%, to $30,453,543 for the quarter ended
September 30, 2002 compared to $38,490,267 for the same period a year ago. The
decline was due to lower sales of rugged outdoor footwear and no military boot
sales. This shortfall was partially offset by increased sales of occupational
footwear and other sales, which includes ROCKY(R) Gear clothing and accessories.
The Company's prices are slightly higher than the previous year. This was due
principally to the growing strength of the ROCKY brand and raw material price
increases.
10
Gross Margin
Gross margin improved to 29.1% of net sales, or $8,852,358, for third quarter
2002 compared with 25.5%, or $9,804,424, for the same period last year. This was
primarily due to no shipments of military footwear in third quarter 2002, which
were produced during third quarter 2001 at substantially lower margins than the
Company's overall gross margin under a previous contract with the U.S.
government. Results for the most recent quarter also benefited from the
restructuring of manufacturing operations announced during third quarter 2001,
and an increase in sourced products that represented 57.8% of net sales for
third quarter 2002 versus 46.9% the prior year. To date, the Company has not
been affected materially by the recent West Coast port shutdown or the impact of
any alleged slowdowns.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased $604,604, or
10.6%, to $5,119,050 for the quarter ended September 30, 2002 compared to
$5,723,654 for the same period a year ago. Cost reduction programs implemented
during 2001 continue to favorably impact SG&A expenses in terms of absolute
dollars savings. As a percentage of net sales, SG&A expenses increased to 16.8%
for third quarter 2002 from 14.9% a year ago. This is primarily the result of
reduced net sales and the fixed charges associated with SG&A expenses.
Interest Expense
Interest expense decreased $342,173, or 44.8%, to $422,366 in the quarter ended
September 30, 2002 compared to $764,539 the prior year. The Company benefited
from both lower outstanding balances and interest rates during third quarter
2002.
Funded debt was $29,539,329 at September 30, 2002 versus $43,941,159 on the same
date in 2001. The $14,401,830 or 32.8% reduction in funded debt was primarily
due to substantially lower inventory during third quarter 2002 compared to last
year.
Income Taxes
Income taxes increased to $1,024,933 for the three months ended September 30,
2002 compared to $586,634 for the same period a year ago. The Company's
effective tax rate of 30.0% for the three months ended September 30, 2002
compares with an effective tax rate of 28.3% for the same period last year,
which reflected lower tax rates for the Company's operations in Puerto Rico.
11
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2001
Net Sales
Net sales for the nine months ended September 30, 2002 decreased $13,163,092 or
17.2% to $63,397,202 versus $76,560,294 for the same period a year ago.
Generally weak retail conditions in the Company's markets especially impacted
initial orders of rugged outdoor footwear. Higher sales of military boots as
well as other sales, which include ROCKY(R) Gear clothing and accessories
partially offset the decline. The Company's prices are slightly higher than the
previous year. This is due principally to the growing strength of the ROCKY
brand and raw material price increases.
Gross Margin
Gross margin for the nine months ended September 30, 2002 decreased $2,992,983
to $16,130,644 versus $19,123,627 for the same period last year. As a percentage
of net sales, gross margin was 25.4% for the first nine months of 2002 versus
25.0% for the same period a year ago. Among the factors contributing to the
increase in gross margin as a percentage of net sales were generally higher
selling prices and additional sales of higher margin sourced footwear. Sourced
footwear sales increased to 47.0% of net sales for the first nine months of 2002
from 40.9% last year. Additionally, positive contributions are being realized
from the manufacturing realignment announced during third quarter 2001 and
incremental benefits are expected in future periods. The change in product mix,
with military boots representing a higher percentage of net sales in the first
nine months of 2002, negatively impacted gross margin in 2002. Military boots
are produced at lower gross margin than footwear in the Company's other
categories.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses for the nine months ended
September 30, 2002 were $13,535,584 compared with $14,424,135 for the same
period a year ago. As a percentage of net sales, SG&A expenses were 21.4% for
the first nine months of September 30, 2002 versus 18.8% for the same period in
2001. Cost reduction programs implemented during 2001 continue to favorably
impact SG&A expenses in terms of absolute dollars savings.
Interest Expense
Interest expense for the nine months ended September 30, 2002 decreased $937,887
or 47.5% to $1,038,434 versus $1,976,321 for the same period a year ago. The
significant reduction is principally due to lower borrowings, and, to a lesser
extent, the decline in interest rates compared with the prior year.
Income Taxes
Income taxes for the nine months ended September 30, 2002 increased $70,391 to
$547,747 compared to of $477,356 for the same period a year ago. The Company's
effective tax rate of 30.0% for the nine months ended September 30, 2002
compared with an effective tax rate of 27.2% in 2001, which reflected lower tax
rates for the Company's operations in Puerto Rico.
12
Liquidity and Capital Resources
The Company has principally funded working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness.
Working capital is primarily used to support changes in accounts receivable and
inventory because 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 September 30, 2002, the Company had working capital of $57,367,698 versus
$53,313,631 on the same date last year and $44,266,895, at December 31, 2001.
The Company announced a two-year extension to its credit facility on October 23,
2002. The new agreement replaced the previous $50 million credit facility and
includes terms more favorable to the Company, lower interest rates, and, to a
lesser extent, reduced administrative fees. It expires on September 30, 2005.
The Company's new 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 of September 30, 2002, the Company had
borrowed $23,445,043 against its currently available line of credit of
$32,693,673.
The Company's cash flow used in operations decreased to $11,730,569 in the first
nine months of 2002 from $15,294,539 for the same period in the prior year. The
period over period comparison reflects a larger increase in accounts payable
offsetting reduced increases in accounts receivable and inventories. All of the
responsible balance sheet fluctuations reflect the seasonal nature of the
Company's business and are normal when consideration is given to the reduction
in net sales and the intent of the Company to reduce its investment in
inventory.
Inventory declined 20.2% to $30,253,309 at September 30, 2002 versus $37,899,594
as of the same date last year and $27,713,664 at December 31, 2001. Controlled
production schedules during the past year combined with improved inventory
management contributed to the favorable comparison. The current level of
inventory combined with scheduled imports and anticipated production during the
fourth quarter is considered sufficient to meet anticipated demand for the
remainder of this year.
The principal use of cash flows in investing activities for the first nine
months of 2002 and 2001 has been for investment in property, plant, and
equipment. In the first nine months of 2002, property, plant, and equipment
expenditures were approximately $1,509,000 versus $702,000 for the same period
in 2001. The increase resulted from investments the Company made in its Puerto
Rico factory that enhanced manufacturing capabilities. In addition, projects
have been initiated to upgrade sales and customer support capabilities,
consolidate domestic operations into 2 locations, and prepare underutilized
facilities for lease or sale.
The Company's cash flows from financing activities reflect scheduled repayments
of its long-term mortgage facility and increases and decreases in borrowings
under its revolving credit facility to finance working capital requirements and
other operating capital expenditures.
13
On September 30, 2002, the Company announced its Board of Directors authorized
the repurchase of up to 500,000 common shares outstanding in open market or
privately negotiated transactions through December 31, 2003. Purchases of stock
under this program will be funded from the Company's operating cash flow.
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including those
related to accounts receivable, inventories, pension benefits, income taxes, and
restructuring costs. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Accounts receivable allowances
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Management also records estimates for customer returns and discounts
offered to customers. Should a greater proportion of customers return goods and
take advantage of discounts than estimated by the Company, additional allowances
may be required.
14
Inventories
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
any slow moving or obsolete inventories through the Company's factory clearance
center or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional
provisions may be required.
Pension benefits
Management records an accrual for pension costs associated with the Company
sponsored noncontributory defined benefit pension plans covering the union and
non-union workers of the Company's operations. Future adverse changes in market
conditions or poor operating results of underlying plan assets could result in
losses or a higher accrual.
Income taxes
Currently, management has not recorded a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. The Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, however in the event the Company were to determine that it would not
be able to realize all or part of its net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Likewise, should the Company determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Plant Closing Costs
As disclosed in Note 2 of Notes to the Interim Unaudited Condensed Consolidated
Financial Statements, in third quarter 2001 management established an accrual
for estimated restructuring and realignment costs associated with the closing of
its Nelsonville manufacturing facility. The Company expects no additional
restructuring and realignment costs associated with this plan, however should
the Company incur additional costs related to the closing of the manufacturing
facility, additional accruals may be required.
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, and include any
statements regarding the sufficiency of inventory to meet anticipated demand
(paragraph
15
17). Investors are cautioned that such statements involve risks and
uncertainties, including, but not limited to, changes in consumer demand,
seasonal fluctuations, impact of weather, competition, reliance on suppliers,
changing retailing trends, reliance on foreign manufacturing, changes in tax
rates, capital expenditures, 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 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, 2001.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation, our
Chief Executive Officer along with our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC reports. 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.
Since the date of our evaluation to the filing date of this Quarterly
Report on Form 10-Q, there have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.1 Sixth Amendment to Loan and Security
Agreement, dated as of August 6, 2002,
among Rocky Shoes & Boots, Inc., Lifestyle
Footwear, Inc., and GMAC Business Credit,
LLC.
Exhibit 10.2 Seventh Amendment to Loan and Security
Agreement, dated as of September 30, 2002,
among Rocky Shoes & Boots, Inc., Lifestyle
Footwear, Inc., and GMAC Business Credit,
LLC.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
17
SIGNATURE
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: November 14, 2002 /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
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, Mike Brooks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rocky
Shoes & Boots, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Mike Brooks
- ------------------------
Mike Brooks
Chief Executive Officer
19
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, James E. McDonald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rocky
Shoes & Boots, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ James E. McDonald
- -------------------------
James E. McDonald
Chief Financial Officer
20