UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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31-1364046 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
39 E. Canal Street, Nelsonville, Ohio 45764
(Address of Principal Executive Offices, Including Zip Code)
(740) 753-1951
(Registrants Telephone Number, Including Area Code)
Not Applicable
(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 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to the filing requirements for at least the past
90 days. YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES þ NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 5,319,595 shares of Common Stock, no par value, were outstanding at
October 24, 2005.
FORM 10-Q
ROCKY SHOES & BOOTS, INC.
TABLE OF CONTENTS
2
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, 2005 |
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December 31, 2004 |
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September 30, 2004 |
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Unaudited |
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Unaudited |
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ASSETS: |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
2,050,120 |
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$ |
5,060,859 |
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$ |
780,739 |
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Trade receivables net |
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83,711,308 |
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27,182,198 |
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45,522,136 |
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Other receivables |
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1,629,606 |
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1,114,959 |
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782,285 |
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Inventories |
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77,322,005 |
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32,959,124 |
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38,738,153 |
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Deferred income taxes |
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1,297,850 |
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230,151 |
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959,810 |
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Income tax receivable |
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2,264,531 |
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Prepaid expenses |
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1,339,103 |
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588,618 |
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809,482 |
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Total current assets |
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167,349,992 |
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69,400,440 |
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87,592,605 |
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FIXED ASSETS net |
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23,690,488 |
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20,179,486 |
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20,091,910 |
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DEFERRED PENSION ASSET |
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1,347,824 |
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1,347,824 |
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2,499,524 |
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IDENTIFIED INTANGIBLES |
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47,116,646 |
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2,561,427 |
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2,708,179 |
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GOODWILL |
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20,620,543 |
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1,557,861 |
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1,557,861 |
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OTHER ASSETS |
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4,072,999 |
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1,658,616 |
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587,942 |
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TOTAL ASSETS |
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$ |
264,198,492 |
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$ |
96,705,654 |
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$ |
115,038,021 |
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LIABILITIES AND SHAREHOLDERS EQUITY: |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
13,242,936 |
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$ |
4,349,248 |
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$ |
6,704,676 |
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Current maturities long term debt |
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6,389,559 |
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6,492,020 |
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525,596 |
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Accrued expenses: |
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Income taxes |
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3,222,774 |
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2,354,207 |
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Taxes other |
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596,460 |
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422,692 |
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382,846 |
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Salaries and wages |
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2,656,279 |
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1,295,722 |
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2,270,769 |
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Other |
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2,717,026 |
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1,228,708 |
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1,328,492 |
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Total current liabilities |
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28,825,034 |
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13,788,390 |
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13,566,586 |
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LONG TERM DEBT less current maturities |
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121,111,944 |
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10,044,544 |
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32,388,913 |
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DEFERRED INCOME TAXES |
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18,527,196 |
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1,205,814 |
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262,907 |
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DEFERRED LIABILITIES |
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1,472,442 |
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296,108 |
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2,232,671 |
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TOTAL LIABILITIES |
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169,936,616 |
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25,334,856 |
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48,451,077 |
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SHAREHOLDERS EQUITY: |
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Common stock, no par value;
10,000,000 shares authorized; issued and
outstanding September 30, 2005 5,295,845;
December 31, 2004 4,694,670; September 30, 2004
4,620,170 |
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50,694,385 |
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38,399,114 |
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36,674,834 |
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Accumulated other comprehensive loss |
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(889,564 |
) |
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(1,077,586 |
) |
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(1,950,400 |
) |
Retained earnings |
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44,457,055 |
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34,049,270 |
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31,862,510 |
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Total shareholders equity |
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94,261,876 |
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71,370,798 |
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66,586,944 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
264,198,492 |
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$ |
96,705,654 |
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$ |
115,038,021 |
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See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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NET SALES |
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$ |
94,087,786 |
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$ |
50,052,894 |
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$ |
221,105,507 |
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$ |
99,368,970 |
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COST OF GOODS SOLD |
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60,014,309 |
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34,056,404 |
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137,100,919 |
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69,977,667 |
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GROSS MARGIN |
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34,073,477 |
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15,996,490 |
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84,004,588 |
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29,391,303 |
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SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES |
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21,820,251 |
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8,323,464 |
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61,966,723 |
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19,047,531 |
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INCOME FROM OPERATIONS |
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12,253,226 |
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7,673,026 |
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22,037,865 |
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10,343,772 |
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OTHER INCOME AND (EXPENSES): |
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Interest expense |
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(2,523,143 |
) |
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(422,120 |
) |
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(6,517,313 |
) |
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(955,561 |
) |
Other net |
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130,958 |
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(54,404 |
) |
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248,597 |
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43,984 |
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Total other net |
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(2,392,185 |
) |
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(476,524 |
) |
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(6,268,716 |
) |
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(911,577 |
) |
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INCOME BEFORE INCOME TAXES |
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9,861,041 |
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7,196,502 |
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15,769,149 |
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9,432,195 |
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INCOME TAX EXPENSE |
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3,352,605 |
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2,309,143 |
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5,361,364 |
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3,024,563 |
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NET INCOME |
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$ |
6,508,436 |
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$ |
4,887,359 |
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$ |
10,407,785 |
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$ |
6,407,632 |
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NET INCOME PER SHARE |
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Basic |
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$ |
1.23 |
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$ |
1.06 |
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$ |
1.99 |
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$ |
1.41 |
|
Diluted |
|
$ |
1.15 |
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$ |
0.98 |
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$ |
1.86 |
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$ |
1.30 |
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WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING |
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Basic |
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|
5,289,736 |
|
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|
4,605,800 |
|
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|
5,232,964 |
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|
4,530,867 |
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Diluted |
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|
5,646,161 |
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|
4,992,319 |
|
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|
5,585,224 |
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4,943,929 |
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|
|
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|
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended |
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September 30, |
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2005 |
|
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2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
10,407,785 |
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|
$ |
6,407,632 |
|
Adjustments to reconcile net income to net cash used
in operating activities: |
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|
|
|
|
|
|
Depreciation and amortization |
|
|
3,772,572 |
|
|
|
2,464,937 |
|
Deferred compensation and pension |
|
|
773,226 |
|
|
|
(394,922 |
) |
Deferred income taxes |
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|
(16,118 |
) |
|
|
|
|
Loss on disposal of fixed assets |
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|
16,790 |
|
|
|
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|
Stock issued as directors compensation |
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|
60,000 |
|
|
|
66,885 |
|
Change in assets and liabilities, (net of effect of acquisition): |
|
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|
|
|
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|
Receivables |
|
|
(27,611,537 |
) |
|
|
(25,942,003 |
) |
Inventories |
|
|
(9,689,337 |
) |
|
|
(669,966 |
) |
Other current assets |
|
|
2,239,986 |
|
|
|
235,756 |
|
Other assets |
|
|
142,171 |
|
|
|
(402,958 |
) |
Accounts payable |
|
|
3,337,976 |
|
|
|
3,940,097 |
|
Accrued and other liabilities |
|
|
1,325,009 |
|
|
|
760,740 |
|
|
|
|
|
|
|
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|
Net cash used in operating activities |
|
|
(15,241,477 |
) |
|
|
(13,533,802 |
) |
|
|
|
|
|
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|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
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|
|
|
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|
Purchase of fixed assets |
|
|
(4,268,847 |
) |
|
|
(4,467,840 |
) |
Acquisition of business |
|
|
(92,916,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(97,185,084 |
) |
|
|
(4,467,840 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
|
263,128,948 |
|
|
|
91,920,037 |
|
Repayment of revolving credit facility |
|
|
(194,567,038 |
) |
|
|
(76,772,448 |
) |
Proceeds from long-term debt |
|
|
48,000,000 |
|
|
|
|
|
Repayments of long-term debt |
|
|
(5,596,971 |
) |
|
|
(252,008 |
) |
Debt financing costs |
|
|
(2,310,550 |
) |
|
|
|
|
Proceeds from exercise of stock options |
|
|
761,433 |
|
|
|
1,727,750 |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
109,415,822 |
|
|
|
16,623,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(3,010,739 |
) |
|
|
(1,378,311 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD |
|
|
5,060,859 |
|
|
|
2,159,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
END OF PERIOD |
|
$ |
2,050,120 |
|
|
$ |
780,739 |
|
|
|
|
|
|
|
|
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 THREE MONTH AND
NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2005 AND 2004
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 periods and nine-month periods ended
September 30, 2005 and 2004 are not necessarily indicative of the results to be expected
for the whole year. Accordingly, these condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes thereto
contained in our Annual Report on Form 10-K for the year ended December 31, 2004.
We account for our 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 fair
value approach described in the SFAS No. 123, Accounting for Stock Based Compensation,
our net income and earnings per share would have resulted in the pro forma amounts as
reported below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income as reported |
|
$ |
6,508,436 |
|
|
$ |
4,887,359 |
|
|
$ |
10,407,785 |
|
|
$ |
6,407,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Stock based employee compensation expense determined under fair
value based method for all awards, net of tax |
|
|
273,930 |
|
|
|
205,125 |
|
|
|
821,792 |
|
|
|
634,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
6,234,506 |
|
|
$ |
4,682,234 |
|
|
$ |
9,585,993 |
|
|
$ |
5,772,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.23 |
|
|
$ |
1.06 |
|
|
$ |
1.99 |
|
|
$ |
1.41 |
|
Basic pro forma |
|
$ |
1.18 |
|
|
$ |
1.02 |
|
|
$ |
1.83 |
|
|
$ |
1.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
1.15 |
|
|
$ |
0.98 |
|
|
$ |
1.86 |
|
|
$ |
1.30 |
|
Diluted pro forma |
|
$ |
1.10 |
|
|
$ |
0.94 |
|
|
$ |
1.72 |
|
|
$ |
1.17 |
|
The pro forma amounts may not be representative of the effects on reported net income
for future years.
6
2. INVENTORIES
Inventories are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
December 31, 2004 |
|
|
September 30, 2004 |
|
|
Raw materials |
|
$ |
9,766,712 |
|
|
$ |
4,711,014 |
|
|
$ |
6,110,035 |
|
Work-in-process |
|
|
937,712 |
|
|
|
564,717 |
|
|
|
1,690,521 |
|
Finished goods |
|
|
65,635,079 |
|
|
|
26,565,240 |
|
|
|
29,166,558 |
|
Factory outlet finished goods |
|
|
1,697,725 |
|
|
|
1,268,153 |
|
|
|
1,996,039 |
|
|
Reserve for obsolescence or
lower of cost or market |
|
|
(715,223 |
) |
|
|
(150,000 |
) |
|
|
(225,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
77,322,005 |
|
|
$ |
32,959,124 |
|
|
$ |
38,738,153 |
|
|
|
|
|
|
|
|
|
|
|
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and federal, state and local income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
Interest |
|
$ |
6,034,000 |
|
|
$ |
877,000 |
|
|
|
|
|
|
|
|
|
Federal, state and local income taxes |
|
$ |
2,136,000 |
|
|
$ |
2,580,000 |
|
|
|
|
|
|
|
|
We issued 484,261 common shares valued at $11,473,838, as part of the purchase of the EJ
Footwear LLC, Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC (the EJ Footwear
Group) from SILLC Holdings LLC.
4. PER SHARE INFORMATION
Basic earnings per share (EPS) is computed by dividing net income 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.
7
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, 2005 and 2004 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic weighted average
shares outstanding |
|
|
5,289,736 |
|
|
|
4,605,800 |
|
|
|
5,232,964 |
|
|
|
4,530,867 |
|
|
Diluted stock options |
|
|
356,425 |
|
|
|
386,519 |
|
|
|
352,260 |
|
|
|
413,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
shares outstanding |
|
|
5,646,161 |
|
|
|
4,992,319 |
|
|
|
5,585,224 |
|
|
|
4,943,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-diluted weighted average
shares outstanding |
|
|
0 |
|
|
|
84,141 |
|
|
|
0 |
|
|
|
84,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. RECENT FINANCIAL ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)), which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. The statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure an amendment of FASB Statement No. 123. The
statement requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. SFAS 123(R) establishes fair value as the
measurement objective in accounting for share-based payment arrangements and requires all
entities to apply a fair value based measurement method in accounting for share-based
payment transactions with employees, except for equity instruments held by employee share
ownership plans. SFAS 123(R) applies to all awards granted after the required effective date
(the beginning of the first annual reporting period that begins after June 15, 2005 in
accordance with the Securities and Exchange Commissions delay of the original effective
date of SFAS 123(R)) and to awards modified, repurchased or canceled after that date. As a
result, beginning January 1, 2006, we will adopt SFAS 123(R) and begin reflecting the stock
option expense determined under fair value based methods in our consolidated statement of
operations rather than as pro forma disclosure in the notes to the financial statements.
In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
Number 107 (SAB 107) that provided additional guidance to public companies relating to
share-based payment transactions and the implementation of SFAS 123(R), including guidance
regarding valuation methods and related assumptions, classification of compensation expense
and income tax effects of share-based payment arrangements.
We have not completed our assessment of the impact or method of adoption of SFAS 123(R) and
SAB 107.
8
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, which changes the requirements for the
accounting and reporting of a change in accounting principle. SFAS No. 154 applies to all
voluntary changes in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS No. 154 will be
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company is currently evaluating the impact of adopting this
standard in its financial statements.
6. ACQUISITION
On January 6, 2005, we completed the purchase of 100% of the issued and outstanding voting
limited interests of the EJ Footwear Group from SILLC Holdings LLC.
The EJ Footwear Group was acquired to expand the Companys branded product lines,
principally occupational products, and provide new channels for our existing product lines.
The aggregate purchase price for the interests of EJ Footwear Group, including closing date
working capital adjustments, was $91.3 million in cash plus 484,261 shares of our common
stock valued at $11,473,838. Common stock value was based on the average closing share
price during the three days preceding and three days subsequent to the date of the
acquisition agreement.
On January 6, 2005, to fund the acquisition of EJ Footwear Group, we entered into a loan and
security agreement with GMAC Commercial Finance LLC, refinancing our former $45,000,000
revolving line of credit, for certain extensions of credit (the Credit Facility). The
Credit Facility is comprised of (i) a five-year revolving credit facility up to a principal
amount of $100,000,000 with an interest rate of LIBOR plus two and a half percent (2.5%) or
prime plus one percent (1.0%) and (ii) a three-year term loan in the principal amount of
$18,000,000 with an interest rate of LIBOR plus three and a quarter percent (3.25%) or prime
plus one and three quarters percent (1.75%). The Credit Facility is secured by a first
priority perfected security interest in all presently owned and hereafter acquired domestic
personal property, subject to specified exceptions. Also, on January 6, 2005, we entered
into a note agreement (the Note Purchase Agreement) with American Capital Financial
Services, Inc., as agent, and American Capital Strategies, Ltd., as lender (collectively,
ACAS), regarding $30,000,000 in six-year Senior Secured Term B Notes with an interest rate
of LIBOR plus eight percent (8.0%). The Note Purchase Agreement provides, among other
terms, that (i) the ACAS Senior Secured Term B Notes will be senior indebtedness, secured by
essentially the same collateral as the Credit Facility, (ii) such note facility will be
last out in the event of liquidation of us and our subsidiaries, and (iii) principal
payments on such note facility will begin in the fourth year of such note facility.
9
We have allocated the purchase price to the tangible and intangible assets and liabilities
acquired based upon the fair values and income tax basis determined with the assistance of
independent appraisals. Goodwill resulting from the transaction can not practicably be
allocated between business segments and will not be tax deductible. The purchase price has
been allocated as follows:
Purchase price allocation:
|
|
|
|
|
Cash |
|
$ |
91,298,435 |
|
Common
shares 484,261 shares |
|
|
11,473,838 |
|
Transaction costs |
|
|
1,617,802 |
|
|
|
|
|
|
|
$ |
104,390,075 |
|
|
|
|
|
Allocated to: |
|
|
|
|
Current assets |
|
$ |
65,899,403 |
|
Fixed assets and other assets |
|
|
3,032,740 |
|
Identified intangibles |
|
|
44,800,000 |
|
Goodwill |
|
|
19,062,682 |
|
Liabilities |
|
|
(11,067,250 |
) |
Deferred
taxes long term |
|
|
(17,337,500 |
) |
|
|
|
|
|
|
$ |
104,390,075 |
|
|
|
|
|
Estimated amounts of identified intangibles and goodwill and the related allocation by
segment are subject to final allocation based on independent appraisals of fair value of
assets acquired and final determination of income tax basis of assets and liabilities.
During the second quarter of 2005, the Company paid the final adjustment of purchase price
of $1,795,435.
10
A schedule of intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Accumulated |
|
|
Carrying |
|
September 30, 2005 (Unaudited) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Trademarks: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
28,702,080 |
|
|
|
|
|
|
$ |
28,702,080 |
|
Retail |
|
|
15,100,000 |
|
|
|
|
|
|
|
15,100,000 |
|
Patents |
|
|
2,962,460 |
|
|
$ |
497,894 |
|
|
|
2,464,566 |
|
Customer Relationships |
|
|
1,000,000 |
|
|
|
150,000 |
|
|
|
850,000 |
|
Goodwill |
|
|
20,712,414 |
|
|
|
91,871 |
|
|
|
20,620,543 |
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles |
|
$ |
68,476,954 |
|
|
$ |
739,765 |
|
|
$ |
67,737,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Accumulated |
|
|
Carrying |
|
December 31, 2004 |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Trademarks (Wholesale) |
|
$ |
2,225,887 |
|
|
|
|
|
|
$ |
2,225,887 |
|
Patents |
|
|
467,336 |
|
|
$ |
131,796 |
|
|
|
335,540 |
|
Goodwill |
|
|
1,649,732 |
|
|
|
91,871 |
|
|
|
1,557,861 |
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles |
|
$ |
4,342,955 |
|
|
$ |
223,667 |
|
|
$ |
4,119,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Accumulated |
|
|
Carrying |
|
September 30, 2004 (unaudited) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Trademarks (Wholesale) |
|
$ |
2,225,887 |
|
|
|
|
|
|
$ |
2,225,887 |
|
Patents |
|
|
607,224 |
|
|
$ |
124,932 |
|
|
|
482,292 |
|
Goodwill |
|
|
1,649,732 |
|
|
|
91,871 |
|
|
|
1,557,861 |
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles |
|
$ |
4,482,843 |
|
|
$ |
216,803 |
|
|
$ |
4,266,040 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $172,230 and $6,711 for the three months ended
September 30, 2005 and 2004, respectively, and $516,098 and $19,350 for the nine months ended
September 30, 2005 and 2004, respectively. The weighted average amortization period for patents is
six years and for customer relationships is five years.
|
|
|
|
|
Estimate of Aggregate Amortization Expense: |
|
|
|
|
Year ending December 31, 2005 |
|
$ |
688,000 |
|
Year ending December 31, 2006 |
|
|
688,000 |
|
Year ending December 31, 2007 |
|
|
688,000 |
|
Year ending December 31, 2008 |
|
|
688,000 |
|
Year ending December 31, 2009 |
|
|
688,000 |
|
The results of operations of EJ Footwear Group are included in the results of
operations of the Company effective January 1, 2005, as management determined that results
of operations were not significant and no material transactions occurred during the period
from January 1, 2005 to January 6, 2005.
11
The following table reflects the unaudited consolidated results of operations on a pro forma
basis had EJ Footwear been included in operating results from January 1, 2004. There are no
material non-recurring items in the pro forma results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
|
|
Ended |
|
Ended |
|
|
|
|
September 30, 2004 |
|
September 30, 2004 |
|
|
Net Sales |
|
$ |
96,203,339 |
|
|
$ |
215,881,072 |
|
|
Net Income |
|
$ |
7,732,632 |
|
|
$ |
10,631,959 |
|
|
Net Income Per Share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.52 |
|
|
$ |
2.11 |
|
Diluted |
|
$ |
1.41 |
|
|
$ |
1.96 |
|
7. CAPITAL STOCK
On May 11, 2004, the Companys shareholders approved the 2004 Stock Incentive Plan. This
Stock Incentive Plan includes 750,000 of the Companys common shares that may be granted for
stock options and restricted stock awards. As of September 30, 2005, the Company was
authorized to issue 565,655 shares under its existing plans.
For the nine months ended September 30, 2005, options for 114,449 shares of the Companys
common stock were exercised at an average price of $6.65. For the nine months ended
September 30, 2004, options for 256,200 shares of the Companys common stock were exercised
at an average price of $6.68.
8. RETIREMENT PLANS
Net pension cost of the Companys plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Service cost |
|
$ |
130,966 |
|
|
$ |
128,080 |
|
|
$ |
392,898 |
|
|
$ |
384,238 |
|
Interest |
|
|
132,265 |
|
|
|
90,758 |
|
|
|
396,795 |
|
|
|
378,406 |
|
Expected return on assets |
|
|
(170,931 |
) |
|
|
(86,391 |
) |
|
|
(512,793 |
) |
|
|
(386,198 |
) |
Amortization of unrecognized net loss |
|
|
21,404 |
|
|
|
32,141 |
|
|
|
64,212 |
|
|
|
101,327 |
|
Amortization of unrecognized transition obligation |
|
|
4,077 |
|
|
|
4,076 |
|
|
|
12,231 |
|
|
|
12,230 |
|
Amortization of unrecognized prior service cost |
|
|
33,848 |
|
|
|
33,849 |
|
|
|
101,544 |
|
|
|
101,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
151,629 |
|
|
$ |
202,513 |
|
|
$ |
454,887 |
|
|
$ |
591,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The Companys unrecognized benefit obligations existing at the date of transition for
the non-union plan is being amortized over 21 years. Actuarial assumptions used in the
accounting for the plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2005 |
|
2004 |
|
Discount rate |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
Average rate of increase in compensation levels |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
Expected long-term rate of return on plan assets |
|
|
8.0 |
% |
|
|
8.0 |
% |
The Companys desired investment result is a long-term rate of return on assets that is
at least 8%. The target rate of return for the plans have been based upon the assumption
that returns will approximate the long-term rates of return experienced for each asset class
in the Companys investment policy. The Companys investment guidelines are based upon an
investment horizon of greater than five years, so that interim fluctuations should be viewed
with appropriate perspective. Similarly, the Plans strategic asset allocation is based on
this long-term perspective.
9. SEGMENT INFORMATION
The Company has identified three reportable segments: Wholesale, Retail and Military.
Wholesale includes sales of footwear and accessories to several classifications of retailers
including sporting goods stores, outdoor specialty stores, mail order catalogs, independent
retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Retail
includes all sales from the Companys stores and all sales in the Companys Lehigh division,
which includes sales via shoemobiles to individual customers. Military includes sales to
the U.S. Military. The following is a summary of segment results for the Wholesale, Retail,
and Military segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
NET SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
70,679,750 |
|
|
$ |
44,185,949 |
|
|
$ |
158,062,947 |
|
|
$ |
84,275,091 |
|
Retail |
|
|
14,016,971 |
|
|
|
772,215 |
|
|
|
44,128,066 |
|
|
|
2,271,546 |
|
Military |
|
|
9,391,065 |
|
|
|
5,094,730 |
|
|
|
18,914,494 |
|
|
|
12,822,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
94,087,786 |
|
|
$ |
50,052,894 |
|
|
$ |
221,105,507 |
|
|
$ |
99,368,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
25,214,666 |
|
|
$ |
14,610,198 |
|
|
$ |
57,894,147 |
|
|
$ |
26,766,095 |
|
Retail |
|
|
7,288,246 |
|
|
|
243,306 |
|
|
|
23,314,518 |
|
|
|
660,019 |
|
Military |
|
|
1,570,565 |
|
|
|
1,142,986 |
|
|
|
2,795,923 |
|
|
|
1,965,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Margin |
|
$ |
34,073,477 |
|
|
$ |
15,996,490 |
|
|
$ |
84,004,588 |
|
|
$ |
29,391,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment asset information is not prepared or used to assess segment performance.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a summary of segment operating results for the Wholesale, Retail, and Military
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
NET SALES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
70,679,750 |
|
|
$ |
44,185,949 |
|
|
$ |
158,062,947 |
|
|
$ |
84,275,091 |
|
Retail |
|
|
14,016,971 |
|
|
|
772,215 |
|
|
|
44,128,066 |
|
|
|
2,271,546 |
|
Military |
|
|
9,391,065 |
|
|
|
5,094,730 |
|
|
|
18,914,494 |
|
|
|
12,822,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
94,087,786 |
|
|
$ |
50,052,894 |
|
|
$ |
221,105,507 |
|
|
$ |
99,368,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
25,214,666 |
|
|
$ |
14,610,198 |
|
|
$ |
57,894,147 |
|
|
$ |
26,766,095 |
|
Retail |
|
|
7,288,246 |
|
|
|
243,306 |
|
|
|
23,314,518 |
|
|
|
660,019 |
|
Military |
|
|
1,570,565 |
|
|
|
1,142,986 |
|
|
|
2,795,923 |
|
|
|
1,965,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Margin |
|
$ |
34,073,477 |
|
|
$ |
15,996,490 |
|
|
$ |
84,004,588 |
|
|
$ |
29,391,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, information derived from our
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 our Interim
Unaudited Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost Of Goods Sold |
|
|
63.8 |
% |
|
|
68.0 |
% |
|
|
62.0 |
% |
|
|
70.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
36.2 |
% |
|
|
32.0 |
% |
|
|
38.0 |
% |
|
|
29.6 |
% |
|
Selling, General and
Administrative Expenses |
|
|
23.2 |
% |
|
|
16.6 |
% |
|
|
28.0 |
% |
|
|
19.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Operations |
|
|
13.0 |
% |
|
|
15.4 |
% |
|
|
10.0 |
% |
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Three Months Ended September 30, 2005 Compared To Three Months Ended September 30, 2004
Net sales. Net sales for the three months ended September 30, 2005 were $94.1 million compared to
$50.1 million for the same period in 2004. The current year results reflect our acquisition of EJ
Footwear in January 2005, which contributed $43.8 million in sales during the three month period
ended September 30, 2005. Wholesale sales for the three months ended September 30, 2005 were $70.7
million compared to $44.2 million for the same period in 2004. The increase was primarily due to
our acquisition of EJ Footwear, which contributed $30.6 million in sales during the period. A $4.1
million decrease in Rocky Outdoor Gear branded wholesale sales was primarily due to lower sales of
our outdoor products, which were impacted by unseasonably warm and dry weather. Retail sales for
the three months ended September 30, 2005 were $14.0 million compared to $0.8 million for the same
period in 2004. The increase of $13.2 million was due to our acquisition of EJ Footwear,
specifically its Lehigh division, in 2005. Military segment sales, which occur from time to time,
for the three months ended September 30, 2005 were $9.4 million, compared to $5.1 million in the
same period in 2004. Average list prices for our footwear, apparel and accessories were similar in
the 2005 period, compared to the 2004 period.
Gross margin. Gross margin in the three months ended September 30, 2005 increased to $34.1
million, or 36.2% of net sales, from $16.0 million, or 32.0% of net sales, in the same period last
year. The basis point increase is primarily attributable to higher sales of EJ Footwear work and
western products and a higher percentage of our net sales derived from our retail sales, which
carry higher gross margins than our wholesale and military sales. Wholesale gross margin for the
three months ended September 30, 2005 was $25.2 million, or 35.7% of net sales, compared to $14.6
million, or 33.1% of net sales, in the same period last year. The increase reflects sales in 2005
of EJ Footwear products, which carry higher gross margins than Rocky products due to a higher
percentage of their sales in the work and western markets. Gross margins in the work and western
markets are generally higher than the outdoor and duty markets. Retail gross margin for the three
months ended September 30, 2005 was $7.3 million, or 52.0% of net sales, compared to $0.2 million,
or 31.5% of net sales, for the same period in 2004. The increase in gross margin reflects sales by
Lehigh, which carry higher gross margins than our outlet store sales. Military gross margin for the
three months ended September 30, 2005 was $1.6 million, or 16.7% of net sales, compared to $1.1
million, or 22.4% of net sales, for the same period in 2004.
SG&A expenses. SG&A expenses were $21.8 million, or 23.2% of net sales, for the three months ended
September 30, 2005, compared to $8.3 million, or 16.6% of net sales, for the same period in 2004.
The increase was primarily a result of higher SG&A expenses associated with the EJ Footwear
business, particularly higher expenses associated with our Lehigh retail operations.
Interest expense. Interest expense was $2.6 million in the three months ended September 30, 2005,
compared to $0.4 million for the same period in the prior year. The increase was primarily due to
interest on borrowings to finance the EJ Footwear acquisition.
Income taxes. Income tax expense for the three months ended September 30, 2005 was $3.4 million,
compared to $2.3 million for the same period a year ago. Our effective tax rate was 34.0% for the
three months ended September 30, 2005, versus 32.1% for the same period in 2004. The increase in
our effective tax rate in 2005 was due primarily to income from EJ Footwear, which is subject to
the U.S. effective tax rate. A portion of our income is subject to lower taxes in foreign
countries.
15
Nine Months Ended September 30, 2005 Compared to Nine Months Ended
September 30, 2004
Net sales. Net sales for the nine months ended September 30, 2005 were $221.1 million compared to
$99.4 million for the same period in 2004. The current year results reflect our acquisition of EJ
Footwear in January 2005, which contributed $121.6 million in sales during the nine month period
ended September 30, 2005. Wholesale sales for the first nine months of 2005 were $158.1 million
compared to $84.3 million for the same period in 2004. The increase was primarily due to our
acquisition of EJ Footwear, which contributed $79.7 million in sales during the period. A $5.9
million decrease in Rocky Outdoor Gear branded wholesale sales was primarily due to lower sales of
our outdoor products, which were impacted by unseasonably warm and dry weather. Retail sales for
the first nine months of 2005 were $44.1 million compared to $2.3 million for the same period in
2004. The increase of $41.9 million was due to our acquisition of EJ Footwear, specifically its
Lehigh division, in 2005. Military segment sales, which occur from time to time, for the first nine
months of 2005, were $18.9 million, compared to $12.8 million in the same period in 2004. Average
list prices for our footwear, apparel and accessories were similar in the 2005 period, compared to
the 2004 period.
Gross margin. Gross margin in the first nine months of 2005 increased to $84.0 million, or 38.0%
of net sales, from $29.4 million, or 29.6% of net sales, in the same period last year. The basis
point increase is primarily attributable to higher sales of EJ Footwear work and western products
and a higher percentage of our net sales derived from our retail sales, which carry higher gross
margins than our wholesale and military sales. Wholesale gross margin for the first nine months of
2005 was $57.9 million, or 36.6% of net sales, compared to $26.8 million, or 31.8% of net sales, in
the same period last year. The increase reflects sales in 2005 of EJ Footwear products, which carry
higher gross margins than Rocky products due to a higher percentage of their sales in the work and
western markets. Gross margins in the work and western markets are generally higher than the
outdoor and duty markets. Retail gross margin for the first nine months of 2005 was $23.3 million,
or 52.8% of net sales, compared to $0.7 million, or 29.1% of net sales, for the same period in
2004. The increase in gross margin reflects sales by Lehigh, which carry higher gross margins than
our outlet store sales. Military gross margin for the first nine months of 2005 was $2.8 million,
or 14.8% of net sales, compared to $2.0 million, or 15.3% of net sales, for the same period in
2004.
SG&A expenses. SG&A expenses were $62.0 million, or 28.0% of net sales, for the first nine months
of 2005, compared to $19.0 million, or 19.2% of net sales, for the same period in 2004. The
increase was primarily a result of higher SG&A expenses associated with the EJ Footwear business,
particularly higher expenses associated with our Lehigh retail operations.
Interest expense. Interest expense was $6.5 million in the nine months ended September 30, 2005,
compared to $1.0 million for the same period in the prior year. The increase was primarily due to
interest on borrowings to finance the EJ Footwear acquisition.
Income taxes. Income tax expense for the nine months ended September 30, 2005 was $5.4 million,
compared to $3.0 million for the same period a year ago. Our effective tax rate was 34.0% for the
nine months ended September 30, 2005, versus 32.1% for the same period in 2004. The increase in our
effective tax rate in 2005 was due primarily to income from EJ Footwear, which is subject to the
U.S. effective tax rate. A portion of our income is subject to lower taxes in foreign countries.
16
Liquidity and Capital Resources
Our principal sources of liquidity have been our income from operations, borrowings under our
credit facility and other indebtedness. In January 2005, we incurred additional indebtedness to
fund our acquisition of EJ Footwear as described below. During 2004, we relied primarily on cash
provided from operating activities to fund our operations.
Over the last several years our principal uses of cash have been for our acquisitions of EJ
Footwear and certain assets of Gates-Mills, as well for working capital and capital expenditures to
support our growth. Our working capital consists primarily of trade receivables and inventory,
offset by accounts payable and accrued expenses. Our working capital fluctuates throughout the year
as a result of our seasonal business cycle and business expansion and is generally lowest in the
months of January through March of each year and highest during the months of May through October
of each year. We typically utilize our revolving credit facility to fund our seasonal working
capital requirements. As a result, balances on our revolving credit facility will fluctuate
significantly throughout the year. Our capital expenditures relate primarily to projects relating
to our property, merchandising fixtures, molds and equipment associated with our manufacturing
operations and for information technology. Capital expenditures were $4.3 million for the first
nine months of 2005, compared to $4.5 million for the same period in 2004. Capital expenditures for
all of 2005 are anticipated to be approximately $6.0 million.
In conjunction with the completion of our acquisition of EJ Footwear, we entered into agreements
with GMAC Commercial Finance and American Capital Strategies for credit facilities totaling $148
million. The credit facilities were used to fund the acquisition of EJ Footwear and replace our
prior $45 million revolving credit facility. Under the terms of the agreements, the interest rates
and repayment terms are: (1) a five year $100 million revolving credit facility with an interest
rate of LIBOR plus 2.5% or prime plus 1.0%; (2) an $18 million term loan with an interest rate of
LIBOR plus 3.25% or prime plus 1.75%, payable in equal quarterly installments over three years
beginning in 2005; and (3) a $30 million term loan with an interest rate of LIBOR plus 8.0%,
payable in equal installments from 2008 through 2011. The total amount available on our revolving
credit facility is subject to a borrowing base calculation based on various percentages of accounts
receivable and inventory. As of September 30, 2005, we had $80.1 million in borrowings under this
facility and total capacity of $93.8 million. Our credit facilities contain certain restrictive
covenants, which among other things, require us to maintain certain minimum EBITDA and certain
leverage and fixed charge coverage ratios. As of September 30, 2005, we were in compliance with
these loan covenants. Our previous credit facility contained certain restrictive covenants, which,
among other things, required us to maintain a certain level of net worth and fixed charge coverage.
As of December 31, 2004, we were in compliance with these loan covenants. We believe that our
existing credit facilities coupled with cash generated from operations will provide sufficient
liquidity to fund our operations for at least the next 12 months. Our continued liquidity, however,
is contingent upon future operating performance, cash flows and our ability to meet financial
covenants under our credit facilities.
17
Operating Activities. Cash used in operating activities totaled $15.2 million in the first nine
months of 2005, compared to $13.5 million in the same period of 2004. Cash used in operating
activities was impacted by an increase in accounts receivable due to large seasonal shipments in
the third quarter, and higher finished goods inventory to support the fourth quarter seasonal
shipments. This was partially offset by increases in accounts payable and accrued liabilities
reflecting the higher inventory purchases.
Investing Activities. Cash used in investing activities was $97.2 million for the first nine
months of 2005, compared to $4.5 million in 2004. Cash used in investing activities was impacted by
our acquisition of EJ Footwear in 2005, and also included investment in property, plant and
equipment. In the first nine months of 2005, property, plant and equipment expenditures were $4.3
million versus $4.5 million in the same period of 2004. Our 2005 expenditures primarily relate to
investments in production equipment and expansion of workspace at our main office building and
factory store to accommodate the relocation of the EJ Footwear operations.
Financing Activities. Cash provided by financing activities for the nine months ended September
30, 2005 was $109.4 million, compared to $16.6 million in 2004. Cash provided by financing
activities for the nine months ended September 30, 2005 was comprised of the cash proceeds from
debt financing of $111.0 million and proceeds from the exercise of stock options of $0.8 million,
offset by debt financing costs of $2.3 million. The proceeds of the borrowings were primarily used
to fund our acquisition of EJ Footwear, and to fund our working capital. Cash provided by financing
activities for the nine months ended September 30, 2004 was comprised of the cash proceeds from
debt financing of $15.1 million borrowed under our revolving credit facility and proceeds from the
exercise of stock options of $1.7 million, less repayments of long-term debt of $0.3 million.
Inflation
We cannot determine the precise effects of inflation; however, inflation continues to have an
influence on the cost of materials, salaries, and employee benefits. We attempt to offset the
effects of inflation through increased selling prices, productivity improvements, and reduction of
costs.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses
our interim condensed consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these interim condensed consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the interim condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. A summary
of our significant accounting policies is included in the Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year ended December 31, 2004.
Our management regularly reviews our accounting policies to make certain they are current and also
provide readers of the interim condensed consolidated financial statements with useful and reliable
information about our operating results and financial condition. These include, but are not limited
to, matters related to accounts receivable, inventories, pension benefits and income
18
taxes. Implementation of these accounting policies includes estimates and judgments by management
based on historical experience and other factors believed to be reasonable. This may include
judgments about the carrying value of assets and liabilities based on considerations that are not
readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Our management believes the following critical accounting policies are most important to the
portrayal of our financial condition and results of operations and require more significant
judgments and estimates in the preparation of our interim condensed consolidated financial
statements.
Revenue recognition
Revenue principally consists of sales to customers, and, to a lesser extent, license fees. Revenue
is recognized when the risk and title passes to the customer, while license fees are recognized
when earned. Customer sales are recorded net of allowances for estimated returns, trade promotions
and other discounts, which are recognized as a deduction from sales at the time of sale.
Accounts receivable allowances
Management maintains allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our 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 us, additional allowances may be required.
Sales returns and allowances
We record a reduction to gross sales based on estimated customer returns and allowances. These
reductions are influenced by historical experience, based on customer returns and allowances. The
actual amount of sales returns and allowances realized may differ from our estimates. If we
determine that sales returns or allowances should be either increased or decreased, then the
adjustment would be made to net sales in the period in which such a determination is made. Sales
returns and allowances for sales returns were approximately 3.5% of sales for 2005 and 2004.
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 our inventories are considered saleable and we have been able to liquidate slow
moving or obsolete inventories through our factory outlet stores or through various discounts to
customers. Should management encounter difficulties liquidating slow moving or obsolete
inventories, additional provisions may be necessary. Management regularly reviews the adequacy of
our inventory reserves and makes adjustments to them as required.
19
Intangible assets
Intangible assets, including goodwill, trademarks and patents are reviewed for impairment at least
at each reporting date. Based upon our review, none of our intangibles were impaired as of
September 30, 2005.
Pension benefits
Accounting for pensions involves estimating the cost of benefits to be provided well into the
future and attributing that cost over the time period each employee works. To accomplish this,
extensive use is made of assumptions about inflation, investment returns, mortality, turnover,
medical costs and discount rates. These assumptions are reviewed annually.
Pension expenses are determined by actuaries using assumptions concerning the discount rate,
expected return on plan assets and rate of compensation increase. An actuarial analysis of benefit
obligations and plan assets is determined as of September 30 each year. The funded status of our
plans and reconciliation of accrued pension cost is determined annually as of December 31. Further
discussion of our pension plan and related assumptions is included in Note 8, Retirement Plans,
to the consolidated financial statements. Actual results would be different using other
assumptions. Management records an accrual for pension costs associated with our sponsored
noncontributory defined benefit pension plan covering our non-union workers. Future adverse
changes in market conditions or poor operating results of underlying plan assets could result in
losses or a higher accrual. A union plan, which was frozen in 2001, was settled in April 2004.
Income taxes
Currently, management believes that deferred tax assets will, more likely than not, be realized. We
have considered future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, however, in the event we were to determine that we
would not be able to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period such determination
is made. Finally, at December 31, 2004, a provision of $157,000 has been made for U.S. taxes on the
repatriation of $3.0 million of accumulated undistributed earnings of Five Star through December
31, 2004. At December 31, 2004, after the planned repatriation above, approximately $6.8 million is
remaining that would become taxable upon repatriation to the U.S. During 2005, we will complete our
evaluation of foreign earnings and may repatriate up to an additional $5.0 million of accumulated
undistributed earnings, which could result in up to $260,000 of additional tax.
20
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Except for the historical information contained herein, the matters discussed in this Quarterly
Report on Form 10-Q include certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, 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 our and managements intent, belief,
expectations, such as statements concerning our future profitability and our operating and growth
strategy. Words such as believe, anticipate, expect, will, may, should, intend,
plan, estimate, predict, potential, continue, likely and similar expressions are
intended to identify forward-looking statements. Investors are cautioned that all forward-looking
statements contained in this Quarterly Report on Form 10-Q and in other statements we make involve
risks and uncertainties including, without limitation, the factors set forth under the caption
Business Business Risks included in our Annual Report on Form 10-K for the year ended December
31, 2004, and other factors detailed from time to time in our other filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the future could affect
our businesses and financial results in the future and could cause actual results to differ
materially from plans and projections. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the forward-looking statements
included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included herein, the inclusion
of such information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in this Quarterly
Report on Form 10-Q are based on information presently available to our management. We assume no
obligation to update any forward-looking statements.
21
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2004.
ITEM 4 CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange
Act) is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information we are required to disclose in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our management as
appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, our management, with the participation of our
chief executive officer and chief financial officer, carried out an evaluation of the effectiveness
of our disclosure controls and procedures pursuant to Rules 13a-15 promulgated under the Exchange
Act. Based upon this evaluation, our chief executive officer and our chief financial officer
concluded that our disclosure controls and procedures were (1) designed to ensure that material
information relating to our company is accumulated and made known to our management, including our
chief executive officer and chief financial officer, in a timely manner, particularly during the
period in which this report was being prepared and (2) effective, in that they provide reasonable
assurance that information we are required to disclose in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.
Management believes, however, that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
Internal Controls. There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal
quarter ended September 30, 2005, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The offering of certain units in the Companys Stock Fund (the Stock Fund) of the
Companys 401(k) Plan (the Retirement Plan) representing approximately 60 shares of the
Companys common stock purchased by the trustee of the Retirement Plan on the open market
from time to time have not been registered under the Securities Act of 1933, as amended (the
Act). Participants in the Retirement Plan had the option to invest defined contributions
into the Stock Fund. The Company received no consideration for units purchased by
participants in the Stock Fund of the Retirement Plan. While the Company cannot predict the
possible effect of federal or state regulatory action, the Company does not believe that the
failure to register the offering and sale of these units and the shares will have a material
adverse effect on the Companys financial position or results of operation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
23
ITEM 6. EXHIBITS
|
|
|
EXHIBIT |
|
EXHIBIT |
NUMBER |
|
DESCRIPTION |
|
10(a)*
|
|
Amendment No. 2 to Loan and Security Agreement and Consent, dated as of
September 12, 2005, by and among Rocky Shoes & Boots, Inc., Lifestyle Footwear,
Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot LLC, Durango
Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety Shoe Co. LLC,
Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as
Borrowers, GMAC Commercial Finance LLC, as administrative agent and sole lead
arranger for the Lenders, Bank of America, N.A., as syndication agent. |
|
|
|
31 (a)*
|
|
Certification pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a) of the Chief Executive Officer. |
|
|
|
31 (b)*
|
|
Certification pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a) of the Chief Financial Officer. |
|
|
|
32 (a)+
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Executive Officer. |
|
|
|
32 (b)+
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Financial Officer. |
|
|
|
* |
|
Filed with this report. |
|
+ |
|
Furnished with this report. |
24
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.
|
|
|
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ROCKY SHOES & BOOTS, INC.
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Date: November 1, 2005 |
/s/ James E. McDonald
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James E. McDonald, Executive Vice President and |
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Chief Financial Officer* |
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* |
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In his capacity as Executive Vice President and Chief Financial Officer, Mr. McDonald is duly
authorized to sign this report on behalf of the Registrant. |
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