FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number:
SEPTEMBER 30, 1996 0-21026
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ROCKY SHOES & BOOTS, INC.
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(Exact name of registrant as specified in its charter)
OHIO 31-1364046
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(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
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(Address of principal executive offices)
(614) 753-1951
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(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 October 20, 1996.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 30, 1996 Dec. 31, 1995
(Unaudited)
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ASSETS:
Current Assets:
Cash and Cash Equivalents $ 1,235,443 $ 1,853,974
Trade Receivables 26,215,261 9,842,909
Other Receivables 455,002 1,464,847
Inventories 31,402,783 18,336,892
Other Current Assets 1,333,989 876,569
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Total Current Assets 60,642,478 32,375,191
Fixed Assets - Net 14,721,486 14,534,176
Other Assets 1,813,628 2,171,207
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Total Assets $ 77,177,592 $ 49,080,574
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 9,946,468 $ 1,429,217
Current Maturities - Long Term Debt 22,201,494 4,392,341
Accrued Liabilities 3,162,550 1,099,539
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Total Current Liabilities 35,310,512 6,921,097
Long-Term Debt-less current maturities 14,852,611 16,553,890
Deferred Liabilities 1,417,325 2,036,457
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Total Liabilities 51,580,448 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 and Preferred Stock in Treasury, at cost (1,226,059) (1,226,059)
Retained Earnings 12,273,256 10,245,242
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Total Shareholders' Equity 25,597,144 23,569,130
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Total Liabilities and Shareholders' Equity $ 77,177,592 $ 49,080,574
============== ==============
The accompanying notes are an integral part of the financial statements
2
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $ 23,897,568 $ 19,669,443 $ 49,347,778 $ 43,929,242
Cost of Goods Sold 18,342,533 14,588,970 36,602,849 35,037,238
---------- ---------- ---------- ----------
Gross Margin 5,555,035 5,080,473 12,744,929 8,892,004
Selling, General and Administrative 3,255,854 3,281,651 8,804,824 6,987,852
Expenses --------- --------- --------- ---------
Income From Operations 2,299,181 1,798,822 3,940,105 1,904,152
Other Income And (Expenses):
Interest Expense (679,444) (591,328) (1,422,450) (1,480,051)
Other - net 18,218 (41,997) (24,081) 39,479
------ -------- -------- ------
Total other - net (661,226) (633,325) (1,446,531) (1,440,572)
--------- --------- ----------- -----------
Income Before Income Taxes 1,637,955 1,165,497 2,493,574 463,580
Income Taxes (Benefit) 268,767 268,065 465,560 (387,145)
------- ------- ------- ---------
Net Income $ 1,369,188 $ 897,432 $ 2,028,014 $ 850,725
============ ============ ============ ============
Net Income Per Share $ 0.36 $ 0.24 $ 0.54 $ 0.23
==== ==== ==== ====
Weighted Average Number of Common
Shares and Equivalents Outstanding 3,781,284 3,758,405 3,770,692 3,758,405
========= ========= ========= =========
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)
Nine Months Ended
Sept. 30,
1996 1995
---- ----
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 2,028,014 $ 850,725
Adjustments to Reconcile Net Income
to Net Cash Used In
Operating Activities:
Depreciation and Amortization 1,745,930 1,533,214
Loss on Sale of Fixed Assets 94,614
Deferred Taxes and Other (376,448) (1,260,946)
Change in Assets and Liabilities:
Receivables (15,362,507) (11,816,553)
Inventories (13,065,891) (255,640)
Other Assets (342,525) (600,504)
Accounts Payable 8,517,251 3,665,516
Accrued and Other Liabilities 2,063,011 423,904
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Net Cash Used In
Operating Activities (14,698,551) (7,460,284)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of Fixed Assets (2,027,854) (2,334,746)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Long Term Debt 26,014,718 13,304,832
Payments on Long Term Debt (9,906,844) (4,241,238)
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Net Cash Provided By
Financing Activities 16,107,874 9,063,594
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(DECREASE) IN CASH AND CASH
EQUIVALENTS (618,531) (731,436)
CASH AND CASH EQUIVALENTS, 1,853,974 1,628,988
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BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,235,443 $ 897,552
============ ============
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:
Sept. 30, 1996 Dec. 31, 1995
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Raw materials $ 9,022,763 $ 3,437,802
Work-in Process 8,753,892 2,359,778
Manufactured finished goods 11,376,487 10,085,634
Factory outlet finished goods 2,249,641 2,453,678
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Total $ 31,402,783 $ 18,336,892
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3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Nine Months Ended
Sept. 30,
1996 1995
---- ----
Interest $ 1,494,895 $1,286,102
============= ==========
Federal, state and local
$ 102,500 $ 71,300
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income taxes
4. Effective July 1, 1995, the Company changed its Fiscal Year from June
30 to December 31.
5
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 Nine months
Ended Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 76.8% 74.2% 74.2% 79.8%
------- ----- ------- -------
Gross Margin 23.2% 25.8% 25.8% 20.2%
Selling, General and
Administrative Expenses 13.6% 16.7% 17.8% 15.9%
----- ----- ----- -----
Income from Operations 9.6% 9.1% 8.0% 4.3%
==== ==== ==== ====
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Net Sales
Net Sales increased $4,228,125, or 21.5%, to $23,897,568 for the quarter ended
September 30, 1996, from $19,669,443 for the same period a year ago. The
increase was a result of increased shipments of rugged outdoor footwear,
handsewn casual footwear, and to a lesser degree occupational footwear.
Sales prices were approximately 3% higher than a year ago.
7
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 (by
product line and geography), no single customer is expected to account for more
than 10% of the Company's net sales in 1996, and therefore the Company's net
sales are less susceptible to volatility due to the buying decisions of a small
number of customers. There can be no assurance, however, that these trends will
continue, and the Company will remain subject to traditional seasonal
fluctuations. Net sales for the most recent quarter included initial orders to
department stores and specialty retailers, which are part of the Company's
strategy to continue diversifying its customer base with branded products.
Gross Margin
Gross margin increased $474,562, or 9.3%, to $5,555,035 for the quarter ended
September 30, 1996, versus $5,080,473 for the same period a year ago. As a
percentage of net sales, gross margin was 23.2% for the quarter ended September
30, 1996, versus 25.8% for the same quarter a year ago. The decrease in gross
margin as a percentage of net sales was primarily the result of a one-time sale
of discounted product to a large customer, at a substantially reduced margin.
The Company anticipates no large sales of discounted product in the fourth
quarter of 1996. Gross margin was also impacted to a lesser degree by a higher
than normal concentration of sales to large customers who receive certain volume
discounts.
The Company's manufacturing facilities have been operating at substantially
higher production levels throughout most of 1996, compared to comparable periods
in 1995. It is currently anticipated that the Company will continue to operate
its manufacturing facilities at these higher production levels to meet
anticipated re-orders on fall merchandise through the remainder of 1996.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses decreased $25,797, or
0.8%, to $3,255,854 for the quarter ended September 30, 1996, versus $3,281,651
for the same period a year ago. The lower S,G&A expenses were attributable to a
substantial reduction in advertising expense, which more than offset increased
sales commission expense.
Interest Expense
Interest expense increased $88,116, or 14.9%, to $679,444 for the quarter ended
September 30, 1996, versus $591,328 from the same period a year ago. The
increase in interest expense was due to higher outstanding balances on the
Company's revolving credit facility used to finance increases in the Company's
accounts receivable and inventory to support higher levels of current and
expected net sales. Interest rates remained relatively stable compared with the
same period last year.
Income Taxes
For the three months ended September 30, 1996, income taxes were $268,767 versus
$268,065 for the same period a year ago. The Company's relatively low effective
tax rate for the third quarter of
8
1996 resulted from a large part of its income being earned in Puerto Rico for
which a favorable income tax treatment is 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
1995.
Net Sales
Net sales increased $5,418,536, or 12.3%, to $49,347,778 for the nine months
ended September 30, 1996, versus $43,929,242 for the same period a year ago. The
increase was a result of increased shipments of rugged outdoor footwear,
handsewn casual footwear, and to a lesser degree occupational footwear, versus
last year. Sales prices are approximately 3% higher than a year ago.
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 (by
product line and geography), no single customer is expected to account for more
than 10% of the Company's net sales in 1996, and therefore the Company's net
sales are less susceptible to volatility due to the buying decisions of a small
number of customers. There can be no assurance, however, that these trends will
continue, and the Company will remain subject to traditional seasonal
fluctuations. Net sales for the most recent quarter included initial orders to
department stores and specialty retailers, which are part of the Company's
strategy to continue diversifying its customer base with branded products.
Gross Margin
Gross margin increased $3,852,925, or 43.3%, to $12,744,929 for the nine months
ended September 30, 1996, versus $8,892,004 for the same period a year ago. As a
percentage of net sales, gross margin was 25.8% for the nine months ended
September 30, 1996, versus 20.2% for the same period a year ago. The increase in
gross margin is primarily attributable to higher utilization of the Company's
manufacturing facilities and, in part, due to the termination in June of 1995 of
a private label manufacturing contract at relatively low gross margins.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses increased $1,816,972, or
26.0%, to $8,804,824 for the nine months ended September 30, 1996 versus
$6,987,852 for the same period a year ago. As a percentage of net sales, S,G&A
was 17.8% for the nine months ended September 30, 1996, versus 15.9% for the
same period a year ago. S,G&A expense as a percent of net sales increased as a
result of increased sales management salaries and to a lesser extent due to
professional and other expenses related to the change in the fiscal year. Also,
during the first six months of 1995, the Company experienced relatively little
selling expense on the sale of a private label manufacturing contract. The
reduction in advertising expense in the third quarter was offset by an increase
in the first six months of the year.
9
Interest Expense
Interest expense decreased $57,601, or 3.9%, to $1,422,450 for the nine months
ended September 30, 1996, versus $1,480,051 for the same period a year ago. The
decrease in interest expense for the nine months ended September 30, 1996 is due
to generally lower interest rates and lower outstanding balances, particularly
during the first six months of 1996, compared with the same period in 1995.
Income Taxes
Income taxes increased $852,705 to $465,560 in the nine months ended September
30, 1996, versus an income tax benefit of $387,145 for the same period a year
ago. The Company's tax rate is affected by minimal foreign taxes assessed on the
income of its subsidiary in the Dominican Republic; 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. In addition, the prior year amount was
affected by year end adjustments at June 30, 1995, resulting from income being
earned in tax jurisdictions with favorable tax treatment different than
anticipated during the prior quarters.
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 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 September 30, 1996, the Company had working capital of $25,331,966, 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
September 30, 1996, the Company had borrowed $33,435,000 against its available
line of credit of $34,574,551 (based upon the level of eligible accounts
receivable and inventory).
Cash paid for capital expenditures during the nine months ended September 30,
1996 was $2,027,854 which expenditures were funded through operating cash flows
and through long-term debt financing. The Company believes it has sufficient
manufacturing capacity to handle increased production needs for the next year.
The Company anticipates capital expenditures for 1997 will be primarily for
lasts, dies, and patterns for new styles of footwear, retail in-store displays,
and replacement machinery and equipment; and generally will be consistent with
capital expenditures in 1996. The Company believes it will be able to finance
such additions through additional long-term borrowing or through operating cash
flows as appropriate.
10
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, this report 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.
11
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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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: 11/8/96 By: /s/ David Fraedrich
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David Fraedrich, Executive Vice President,
Treasurer and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
DESCRIPTION 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