FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number:
JUNE 30, 1996 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
(Address of principal executive offices)
(614) 753-1951
(Registrant's 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 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
--- ---
3,665,548 common shares, no par value, outstanding at July 31, 1996.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1996 Dec. 31, 1995
(Unaudited)
------------- -------------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 365,404 $ 1,853,974
Trade Receivables 14,690,905 9,842,909
Other Receivables 491,412 1,464,847
Inventories 30,600,366 18,336,892
Other Current Assets 917,802 876,569
----------- -----------
Total Current Assets 47,065,889 32,375,191
Fixed Assets - Net 14,818,793 14,534,176
Other Assets 2,091,612 2,171,207
----------- -----------
Total Assets $63,976,294 $49,080,574
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $12,043,931 $1,429,217
Current Maturities - Long Term Debt 9,617,926 4,392,341
Accrued Liabilities 1,842,730 1,099,539
----------- -----------
Total Current Liabilities 23,504,587 6,921,097
----------- -----------
Long-Term Debt-less current maturities 14,929,124 16,553,890
Deferred Liabilities 1,314,626 2,036,457
----------- -----------
Total Liabilities 39,748,337 25,511,444
Shareholders' Equity:
Preferred Stock, Series A, no par value;
100,000 shares issued and 92,857 6,000 6,000
shares outstanding
Common Stock, no par value;
10,000,000 shares authorized;
3,782,500 shares issued and
3,665,548 shares outstanding 14,543,947 14,543,947
Common Stock in Treasury, at cost (1,226,059) (1,226,059)
Retained Earnings 10,904,069 10,245,242
----------- -----------
Total Shareholders' Equity 24,227,957 23,569,130
----------- -----------
Total Liabilities and Shareholders' Equity $63,976,294 $49,080,574
=========== ===========
The accompanying notes are an integral part of the financial statements
2
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $15,189,545 $12,213,867 $25,450,210 $24,259,799
Cost of Goods Sold 10,826,244 11,032,973 18,260,316 20,448,268
----------- ----------- ----------- -----------
Gross Margin 4,363,301 1,180,894 7,189,894 3,811,531
Selling, General and Administrative
Expenses 2,932,855 1,735,303 5,548,970 3,706,201
----------- ----------- ----------- -----------
Income (Loss) From Operations 1,430,446 (554,409) 1,640,924 105,330
Other Income And (Expenses):
Interest Expense (397,489) (254,414) (743,006) (888,723)
Other - net 72,905 16,144 (42,299) 81,476
----------- ----------- ----------- -----------
Total other - net (324,584) (238,270) (785,305) (807,247)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 1,105,862 (792,679) 855,619 (701,917)
Income Taxes (Benefit) 246,840 (673,362) 196,792 (655,210)
----------- ----------- ----------- -----------
Net Income (Loss) $ 859,022 $ (119,317) $ 658,827 $ ($46,707)
=========== =========== =========== ===========
Net Income (Loss) Per Share $ 0.23 $ ( 0.03) $ 0.17 $ (0.01)
----------- ----------- ----------- -----------
Weighted Average Number of Common
Shares and Equivalents Outstanding 3,770,722 3,665,548 3,765,396 3,665,548
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1996 1995
---- ----
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) $ 658,827 $ (46,707)
Adjustments to Reconcile Net Income
(Loss) to Net Cash Used In
Operating Activities:
Depreciation and Amortization 1,136,937 1,013,509
Loss on Sale of Fixed Assets 92,456
Deferred Taxes and Other (479,147) (185,628)
Change in Assets and Liabilities:
Receivables (3,874,561) (5,202,378)
Inventories (12,263,474) (4,076,845)
Other Assets (204,322) (409,136)
Accounts Payable 10,614,714 3,869,481
Accrued and Other Liabilities 743,191 270,017
------------ -----------
Net Cash Used In
Operating Activities (3,575,379) (4,767,687)
------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of Fixed Assets (1,514,010) (2,012,190)
------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Long Term Debt 10,165,000 9,364,117
Payments on Long Term Debt (6,564,181) (4,035,407)
------------ -----------
Net Cash Provided By
Financing Activities 3,600,819 5,328,710
------------ -----------
(DECREASE) IN CASH AND CASH (1,488,570) (1,451,167)
EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,853,974 1,628,988
------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 365,404 $ 177,821
============ ===========
The accompanying notes are an integral part of the financial statements
4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the unaudited financial statements
include all normal recurring adjustments the Company considers
necessary for a fair presentation of such financial statements in
accordance with generally accepted accounting principles.
2. INVENTORIES
Inventories are comprised of the following:
June 30, 1996 Dec. 31, 1995
------------- -------------
Raw materials $ 7,894,947 $ 3,437,802
Work-in Process 6,362,094 2,359,778
Manufactured finished good 14,321,311 10,085,634
Factory outlet finished 2,022,014 2,453,678
goods ----------- -----------
Total $30,600,366 $18,336,892
=========== ===========
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Six Months Ended
June 30,
1996 1995
---- ----
Interest $857,812 $694,774
======== ========
Federal, state and local
income taxes $ 85,000 $ 12,000
======== ========
5
4. Effective July 1, 1995, the Company changed its Fiscal Year from June
30 to December 31.
5. Recently Issued Accounting Standards - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which was effective
for the Company beginning January 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages, but does not require, compensation costs to be measured based on the
fair value of the equity instrument awarded. Companies are permitted, however,
to continue to apply Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," which recognizes compensation costs
based on the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based compensation awards to
employees and will disclose annually the required pro forma effect on net
earnings and earnings per share in a note to the financial statements.
In addition, the Company adopted SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of" beginning January 1, 1996.
The adoption of this statement had no impact on the consolidated financial
statements.
6
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 Consolidated Financial Statements, expressed as a percentage
of net sales. The discussion that follows the table should be read in
conjunction with the Consolidated Financial Statements of the Company.
PERCENTAGE OF NET SALES
Three months Six months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 71.3% 90.3% 71.7% 84.3%
----- ----- ----- -----
Gross Margin 28.7% 9.7% 28.3% 15.7%
Selling, General and
Administrative Expenses 19.3% 14.2% 21.8% 15.3%
----- ----- ----- -----
Income from Operations 9.4% (4.5)% 6.5% .4%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1995
Net Sales
Net sales increased $2,975,678, or 24.4%, to $15,189,545 for the quarter ended
June 30, 1996, from $12,213,867 for the same period a year ago. The increase was
a result of increased shipments of rugged outdoor and occupational footwear, as
well as increased sales prices which were approximately 3% higher than a year
ago. This increase was partially offset by a decrease in shipments to two of
the Company's larger customers.
The Company has substantially increased the number of customers during the past
year through targeted efforts to open new accounts in both existing and new
markets. As a result, the Company's customer base is more diversified and
somewhat less susceptible to a change in net sales from time to time due to the
reduced concentration in sales to a relatively small number of customers. There
can be no assurance, however, that this trend will continue. Sales for the
second quarter of 1996 benefited from new product introductions during the past
year in conjunction with the Company's strategy to expand its line of footwear
styles.
7
Gross Margin
Gross margin increased $3,182,407, or 269.5%, to $4,363,301 for the quarter
ended June 30, 1996 versus $1,180,894 for the same period a year ago. As a
percentage of net sales, gross margin was 28.7% for the quarter ended June 30,
1996 versus 9.7% in 1995. The increase in gross margin was primarily due to
higher factory utilization in all of the Company's manufacturing facilities,
and, in part, due to a decrease in sales to two large customers that are
generally at lower margins. The Company's gross margin in the second quarter of
1996 also increased due to favorable product mix which included the introduction
of new Gore-Tex handsewn casual and outdoor rugged footwear.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,197,552, or 69.0%, to
$2,932,855 for the three months ended June 30, 1996, versus $1,735,303 for the
same period a year ago. As a percentage of net sales, selling, general and
administrative expense was 19.3% for the three months ended June 30, 1996,
versus 14.2% for the same period a year ago. The increase in selling, general
and administrative expenses as a percentage of net sales was primarily due to
increased sales and administrative management salaries and professional expenses
attributable to the change in the Company's fiscal year.
Interest Expense
Interest expense increased $143,075, or 56.2%, to $397,489 for the quarter ended
June 30, 1996, versus $254,414 for the same period a year ago. The increase in
interest expense in the current quarter versus the prior period is due to
interest capitalized in the prior year associated with the Company's new
administrative office and retail facility. There was no similar activity in the
current quarter.
Income Taxes
For the three months ended June 30, 1996, income taxes were $246,840, compared
with a tax benefit of $673,362 for the same period last year. The Company's
relatively low effective tax rate for the second quarter of 1996
resulted from no foreign income taxes assessed on the income of its subsidiary
in the Dominican Republic; to the favorable income tax treatment afforded under
the Internal Revenue Code for income earned by the Company's subsidiary in
Puerto Rico; and local tax abatements available to the Company's subsidiary in
Puerto Rico. For the three months ended June 30, 1995, a significant income tax
benefit was recorded, primarily as a result of a year end adjustment for actual
losses incurred versus amounts estimated in the prior quarters.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995.
Net Sales
Net Sales increased $1,190,411, or 4.9%, to $25,450,210 for the six months ended
June 30, 1996, versus $24,259,799 for the same period a year ago. The increase
in net sales was due to higher shipments of rugged outdoor and occupational
footwear, as well as increased sales prices which were approximately 3% higher
than a year ago. This increase was partially offset by a decrease in shipments
resulting
8
from the termination of a contract in June 1995 to manufacture handsewn casual
footwear for a private label customer and a decrease in sales to two of the
Company's larger customers.
The Company has substantially increased the number of customers during the past
year through targeted efforts to open new accounts in both existing and new
markets. As a result, the Company's customer base is more diversified and less
susceptible to a change in net sales from time to time due to the reduced
concentration in sales to a relatively small number of customers. There can be
no assurance, however, that this trend will continue. Sales for the second
quarter of 1996 benefited from new product introductions during the past year in
conjunction with the Company's strategy to expand its line of footwear styles.
Gross Margin
Gross margin increased $3,378,363, or 88.6%, to $7,189,894 for the six months
ended June 30, 1996, versus $3,811,531 for the same period a year ago. As a
percentage of net sales gross margin was 28.3% for the six months ended June 30,
1996, versus 15.7% for the same period a year ago. The increase in gross margin
was primarily attributable to higher utilization of the Company's manufacturing
facilities and, in part, due to the termination in June 1995 of the Company's
contract to manufacture casual handsewn footwear, a product with a low margin
for a private label customer. To a lesser degree, gross margin was favorably
impacted due to a decrease in sales to two large customers which are generally
at low margins.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased $1,842,769, or 49.7%, to
$5,548,970 for the six months ended June 30, 1996, versus $3,706,201 for the
same period a year ago. As a percentage of net sales, selling, general and
administrative expense was 21.8% for the six months ended June 30, 1996, versus
15.3% for the same period a year ago. Selling, general and administrative
expense as a percentage of net sales increased primarily as a result of
increased sales management salaries and to a lesser extent professional expense
related to the changed fiscal year also, during the same period a year ago the
Company experienced relatively little selling expense on the sale of handsewn
casual footwear to a private label customer.
Interest Expense
Interest expense decreased $145,717, or 16.4%, to $743,006 for the six months
ended June 30, 1996, versus $888,723 for the same period a year ago. The
decrease in interest expense was primarily a result of lower rates and
outstanding balances on the Company's revolving credit facility. In addition,
certain interest costs were capitalized in the prior year. There was no similar
activity in the current year.
Income Taxes
Income taxes increased $852,202 to $196,792 for the six months ended June 30,
1996, versus an income tax benefit of $655,210 due to a loss for the six months
ended June 30, 1995. The effective tax rate differs from the statutory rate in
both periods for the same factors as discussed above regarding the quarterly
periods.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily funded its working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness.
Working capital is used primarily to support changes in accounts receivable and
inventory as a result of the Company's seasonal business cycle and business
expansion. These requirements are generally lowest in January through March of
each year and highest in April through September of each year. In addition, the
Company requires financing to support additions to machinery, equipment, and
facilities, as well as the introduction of new styles of footwear.
At June 30, 1996, the Company had working capital of $23,561,302, versus
$25,454,094, at December 31, 1995. The Company has a revolving line of credit
with its bank which provides for advances based on a percentage of eligible
accounts receivable and inventory with maximum borrowings of $35,000,000 until
January 1, 1997, when the line decreases to $25,000,000. The changes in the line
of credit match the Company's seasonal requirements for working capital. As of
June 30, 1996, the Company had borrowed $20,800,000 against its available line
of credit of $22,292,844 (based upon the level of eligible accounts receivable
and inventory).
Cash paid for capital expenditures during the six months ended June 30, 1996 was
$1,514,010 which expenditures were funded through operating cash flows and
through long-term debt financing. The Company believes it has sufficient
manufacturing capacity to handle additional production needs for the next year.
The Company anticipates that capital expenditures for the next year will be
primarily for lasts, dies, and patterns for new styles of footwear, retail
in-store displays, and replacement machinery and equipment. The Company believes
it will be able to finance such additions through additional long-term borrowing
or through operating cash flows as appropriate.
Except for the historical information in this report , it includes
forward-looking statements that involve risks and uncertainties, including, but
not limited to, quarterly fluctuations in results, the management of growth, and
other risks detailed from time to time in the Company's Securities and Exchange
Commission filings, including the Company's Form 10-K for the Transition Period
ended December 31,1995. Actual results may differ materially from management
expectations.
10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on May 14, 1996 for
the purpose of electing Class II Directors of the Company, to serve until the
1998 Annual Meeting of Shareholders or until their successors are elected and
qualified and to ratify the appointment of Deloitte & Touche LLP to serve as the
Company's independent public accountants for the fiscal year ending December 31,
1996.
All of management's nominees for directors as listed in the proxy
statement were elected with the following vote:
NUMBER OF SHARES VOTED
----------------------------------
FOR AGAINST ABSTAIN
--------- ------- -------
Leonard L. Brown 3,355,496 0 44,248
--------- - ------
David Fraedrich 3,355,496 0 44,248
--------- - ------
Barbara Brooks Fuller 3,355,496 0 44,248
--------- - ------
Curtis A. Loveland 3,355,496 0 45,148
--------- - ------
The appointment of Deloitte & Touche LLP as independent accountants was
approved by the following vote:
NUMBER OF SHARES VOTED
-------------------------------------------------
FOR AGAINST ABSTAINED TOTAL
--------- ------- --------- ---------
3,386,544 5,550 7,650 3,399,744
--------- ----- ----- ---------
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11
The exhibits to this report begin at page ___.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: August 13, 1996 By: /s/ David Fraedrich
--------------- -------------------
David Fraedrich, Executive Vice President,
Treasurer and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
12
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
10.1 Schedule identifying material details of stock option agreements substantially
identical to Exhibit 10.28 of the Registrant's Annual Report on Form 10-K for
the Transition Period ended December 31, 1995. -
27 Financial Data Schedule
- - Compensatory Contract or Plan