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, 1997 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 --- --- 3,754,028 common shares, no par value, outstanding at July 31, 1997. PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1997 Dec. 31,1996 (Unaudited) ----------- ------------ ASSETS: Current Assets: Cash and Cash Equivalents $ 802,127 $ 349,637 Trade Receivables 20,036,952 12,409,920 Other Receivables 1,074,716 678,293 Inventories 40,715,959 25,389,902 Other Current Assets 2,062,181 1,632,394 ------------ ------------ Total Current Assets 64,691,935 40,460,146 Fixed Assets - Net 16,304,167 15,508,597 Other Assets 2,156,011 2,121,428 ------------ ------------ Total Assets $ 83,152,113 $ 58,090,171 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Accounts Payable $ 13,193,473 $ 3,036,705 Current Maturities - Long Term Debt 12,770,312 3,609,645 Accrued Liabilities 2,821,874 3,205,215 ------------ ------------ Total Current Liabilities 28,785,659 9,851,565 Long-Term Debt-less current maturities 23,662,291 19,520,029 Deferred Liabilities 2,398,961 2,343,488 ------------ ------------ Total Liabilities 54,846,911 31,715,082 Shareholders' Equity: Preferred Stock, Series A, no par value; issued 1997 - 90,000 shares; 1996 - 100,000 shares; and outstanding 1997 - 82,857 shares; 1996 - 92,857 shares 5,400 6,000 Common Stock, no par value; 10,000,000 shares authorized; issued 1997 - 3,856,480 shares; 1996 - 3,782,500 shares; and outstanding 1997 - 3,749,528 shares; 1996 - 3,665,548 shares 15,268,591 14,543,947 Stock held in Treasury, at cost (1,226,059) (1,226,059) Retained Earnings 14,257,270 13,051,201 ------------ ------------ Total Shareholders' Equity 28,305,202 26,375,089 ------------ ------------ Total Liabilities and Shareholders' Equity $ 83,152,113 $ 58,090,171 ============ ============
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 Six Months Ended June 30, June 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net Sales $22,006,185 $15,189,545 $34,268,258 $25,450,210 Cost of Goods Sold 15,724,912 10,826,244 24,710,110 18,260,316 ----------- ----------- ----------- ----------- Gross Margin 6,281,273 4,363,301 9,558,148 7,189,894 Selling, General and Administrative Expenses 4,141,606 2,932,855 6,718,144 5,548,970 ----------- ----------- ----------- ----------- Income From Operations 2,139,667 1,430,446 2,840,004 1,640,924 Other Income (Expense): Interest Expense (641,031) (397,489) (1,106,298) (743,006) Other - net (23,566) 72,905 (9,135) (42,299) ----------- ----------- ----------- ----------- Total other - net (664,597) (324,584) (1,115,433) (785,305) ----------- ----------- ----------- ----------- Income Before Income Taxes 1,475,070 1,105,862 1,724,571 855,619 Income Taxes 457,980 246,840 518,502 196,792 ----------- ----------- ----------- ----------- Net Income $ 1,017,090 $ 859,022 $ 1,206,069 $ 658,827 =========== =========== =========== =========== Net Income Per Share $ 0.26 $ 0.23 $ 0.31 $ 0.17 ----------- ----------- ----------- ----------- Weighted Average Number of Common Shares and Equivalents Outstanding 3,972,315 3,770,772 3,940,347 3,765,396 =========== =========== =========== ===========
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, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,206,069 $ 658,827 ------------ ------------ Adjustments to Reconcile Net Income To Net Cash Used In Operating Activities: Depreciation and Amortization 1,362,973 1,136,937 Deferred taxes and other 55,473 (479,147) Loss on sale of fixed assets 92,456 Change in Assets and Liabilities: Receivables (8,023,455) (3,874,561) Inventories (15,326,057) (12,263,474) Other current assets (429,787) (41,233) Other Assets (34,583) (163,089) Accounts payable 9,452,128 10,614,714 Accrued and Other Liabilities (383,341) 743,191 ------------ ------------ Net Cash Used In Operating Activities: (12,120,580) (3,575,379) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Fixed Assets (1,453,902) (1,514,010) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long Term Debt 20,392,250 10,165,000 Payments on Long Term Debt (7,089,322) (6,564,181) Proceeds from exercise of stock options including related income tax effect 724,044 ------------ ------------ Net Cash Provided By Financing Activities 14,026,972 3,600,819 ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 452,490 (1,488,570) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 349,637 1,853,974 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 802,127 $ 365,404 ============ ============
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, 1997 December 31, 1996 Raw materials $ 9,748,794 $ 4,482,381 Work-in Process 4,533,457 5,192,326 Manufactured finished goods 24,182,440 13,891,772 Factory outlet finished goods 2,251,268 1,823,423 ----------- ----------- Total $40,715,959 $25,389,902 =========== ===========
3. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and Federal, state and local income taxes was as follows:
Six Months Ended June 30, 1997 1996 ---------- -------- Interest $1,067,151 $857,812 ========== ======== Federal, state and local income taxes $1,184,300 $ 85,000 ========== ========
Accounts payable at June 30, 1997 and December 31, 1996 includes a total of $747,634 and $42,994, respectively, relating to the purchase of fixed assets. 5 4. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" which is effective for periods ending after December 15, 1997. SFAS No. 128 establishes new standards for computing and presenting earnings per share. Under SFAS No. 128 basic and dilutive earnings per share, as defined therein, for the three month and six month periods ended June 30, 1997 and 1996 are as follows:
Three Months Ended June 30 Six Months Ended June 30 1997 1996 1997 1996 ----- ----- ----- ------ Basic $0.27 $0.23 $0.33 $0.18 ===== ===== ===== ===== Diluted $0.27 $0.23 $0.33 $0.18 ===== ===== ===== =====
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which will require adoption no later than the Company's fiscal quarter ending March 31, 1998. This new statement defines comprehensive income as "all changes in equity during a period, with the exception of stock issuances and dividends." The new pronouncement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. In June 1997, FASB also issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which will require adoption no later than 1998. SFAS No. 131 requires companies to report financial and descriptive information about its reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Based on current operations the Company does not believe the Statement will be applicable. 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, 1997 1996 1997 1996 ----- ----- ----- ----- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold 71.5% 71.3% 72.1% 71.7% ----- ----- ----- ----- Gross Margin 28.5% 28.7% 27.9% 28.3% Selling, General and Administrative Expenses 18.8% 19.3% 19.6% 21.8% ----- ----- ----- ----- Income from Operations 9.7% 9.4% 8.3% 6.5% ===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 Net Sales Net sales increased $6,816,640, or 44.9%, to $22,006,185 for the quarter ended June 30, 1997, versus $15,189,545 for the same period in 1996. The increase was primarily due to higher shipments of rugged outdoor and handsewn casual footwear. The Company continues to diversify its customer base through targeted marketing and advertising strategies. As of June 30, 1997, the Company added approximately 270 new accounts, which represents a 20% annualized increase. Backlog at June 30, 1997 was $32.3 million, an increase of 28% over the same date the prior year. Additionally, net sales increased because the Company's prices for its products were approximately 4% higher in the quarter ended June 30, 1997 compared to the same period in 1996. 7 Gross Margin Gross margin increased $1,917,972, or 43.9%, to $6,281,273 for the quarter ended June 30, 1997 versus $4,363,301 for the same period in 1996. As a percentage of net sales, gross margin was 28.5% for the three months ended June 30, 1997, versus 28.7% for the same period in 1996. The Company benefited from increased selling prices and lower manufacturing overhead from increased production in all three of the Company's manufacturing facilities. However, this increase was offset by increased sales to customers who received volume discounts during the quarter. Selling, General and Administrative Expenses Selling, general and administrative ("S,G&A") expenses increased $1,208,751, or 41.2%, to $4,141,606 for the quarter ended June 30, 1997, versus $2,932,855 for the same period a year ago. The majority of the increase in S,G&A was attributable to increased sales commissions and selling and administrative salaries. As a percentage of net sales, S,G&A expenses decreased to 18.8% for the quarter ended June 30, 1997, compared with 19.3% last year. The Company plans to increase its advertising expenses during the remainder of 1997 to support new product introductions, and increased market penetration of its ROCKY(R) branded products. In July 1997, the Company began advertising on selected cable television shows which emphasize outdoorsmen. While S,G&A expenses may increase in absolute dollars during the remainder of this year, the Company does not anticipate that S,G&A expenses will increase as a percentage of net sales for 1997 compared with 1996. Interest Expense Interest expense increased $243,542, or 61.3%, to $641,031 for the quarter ended June 30, 1997, from $397,489 for the same period a year ago. Interest expense increased due to additional borrowings and higher rates on the Company's revolving line of credit, which is used to fund additional working capital needs to support increased sales. Income Taxes Income taxes increased $211,140, or 85.5%, to $457,980 for the quarter ended June 30, 1997, versus $246,840 for the same period a year ago. The Company's effective tax rate was 31.0% for the quarter ended June 30, 1997, versus 22.3% for the same period in 1996. The Company's relatively low effective tax rates results from favorable tax treatment afforded from income earned by the Company's subsidiary in Puerto Rico and local tax abatements available to the Company's subsidiary in Puerto Rico. The Company began to provide for income taxes on earnings from its subsidiary in the Dominican Republic during the fourth quarter of 1996. This accounts for the higher effective tax rate for the quarter ended June 30, 1997, versus the same period a year ago. The Company's earnings in the Dominican Republic are subject to federal income tax, but are exempt from state and local taxation. 8 SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996. Net Sales Net Sales increased $8,818,048, or 34.6%, to $34,268,258 for the six months ended June 30, 1997, from $25,450,210 for the same period a year ago. The increase in net sales was primarily attributable to increased sales of rugged outdoor and handsewn casual footwear. The Company continues to benefit from broader markets. The Company continues to diversify its customer base with sales to additional new accounts. Sales prices were approximately 3.5% higher for the six months ended June 30, 1997 compared to the same period in 1996. Gross Margin Gross margin increased $2,368,254, or 32.9%, to $9,558,148 for the six months ended June 30, 1997, compared to $7,189,894 for the same period a year ago. As a percentage of net sales gross margin was 27.9% for the six months ended June 30, 1997, versus 28.3% for the same period a year ago. The Company benefited from increased selling prices and lower manufacturing overhead from increased production in all three of the Company's manufacturing facilities. However, this increase was offset by increased sales to customers who received volume discounts during the first half of 1997. Selling, General and Administrative Expenses Selling, general and administrative ("S,G&A") expenses increased $1,169,174, or 21.1%, to $6,718,144 for the six months ended June 30, 1997, compared to $5,548,970 for the same period a year ago. The increase in S,G&A expenses was primarily due to increased sales commissions and selling and administrative salaries. As a percentage of net sales S,G&A expense was 19.6% for the six months ended June 30, 1997 versus 21.9% for the same period a year ago. The decrease as a percentage of net sales was due to higher net sales without a corresponding increase in S,G&A expenses. Interest Expense Interest expense increased $363,292, or 48.9% to $1,106,298 for the six months ended June 30, 1997, versus $743,006 for the same period a year ago. Interest expense increased due to additional borrowings and higher rates on the Company's revolving line of credit, which is used to fund additional working capital needs to support increased sales. Income Taxes Income taxes increased $321,710, or 163.5%, to $518,502 for the six months ended June 30, 1997, versus $196,792 for the same period a year ago. The Company's effective tax rate was 30.1% for the six months ended June 30, 1997, versus 23.0% for the same period in 1996. The Company's relatively low effective tax rates result from favorable tax treatment afforded from income earned by the Company's subsidiary in Puerto Rico and local tax abatements available to the Company's subsidiary in Puerto Rico. The Company began to provide for income taxes on earnings from its 9 subsidiary in the Dominican Republic during the fourth quarter of 1996. This accounts for the higher effective tax rate for the six months ended June 30, 1997 versus the same period a year ago. 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, 1997, the Company had working capital of $35,906,276, versus $30,608,581, at December 31, 1996. 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 $42,000,000 until January 1, 1998, 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, 1997, the Company had borrowed $30,465,000 against its available line of credit of $34,418,344 (based upon the level of eligible accounts receivable and inventory). Cash paid for capital expenditures during the six months ended June 30, 1997 was $1,453,902 which expenditures were funded through operating cash flows and through long-term debt financing. The Company anticipates 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 has begun an approximate $750,000 expansion of its manufacturing facility in the Dominican Republic and, after the expansion is complete, believes it will have sufficient manufacturing capacity to handle additional production needs for the next year. The Company believes it will be able to finance such additions through additional long-term borrowing or through operating cash flows as appropriate. SAFE HARBOR STATEMENT UNDER THE PRIVATE LITIGATION REFORM ACT OF 1995 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, 1996. 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 20, 1997 for the purpose of electing Class I Directors of the Company, to serve until the 1999 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, 1997. All of management's nominees for directors as listed in the proxy statement were elected with the following vote:
NUMBER OF SHARES VOTED ------------------------------------------------------------ WITHHOLD FOR AUTHORITY TOTAL --------------- --------------- --------------- Mike Brooks 3,369,323 23,175 3,392,498 --------------- --------------- --------------- Stanley I. Kravetz 3,362,423 30,075 3,392,498 --------------- --------------- --------------- Robert D. Stix 3,354,873 37,625 3,392,498 --------------- --------------- --------------- James L. Stewart 3,364,173 28,325 3,392,498 --------------- ---------------- ---------------
The appointment of Deloitte & Touche LLP as independent accountants was approved by the following vote:
NUMBER OF SHARES VOTED - ------------------------------------------------------------------------------- FOR AGAINST ABSTAINED TOTAL - --------------- --------------- ----------------- --------------- 3,373,323 15,375 3,800 3,392,498 - --------------- --------------- ----------------- ---------------
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: 8/12/97 /s/ Mike Brooks ------------------ ---------------------------------------- Mike Brooks, President and Chief Executive Officer (Principal Executive Officer) Date: 8/12/97 /s/ David Fraedrich ------------------ ---------------------------------------- David Fraedrich, Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES FORM 10-Q EXHIBIT INDEX
EXHIBIT EXHIBIT NUMBER DESCRIPTION PAGE NUMBER 27 Financial Data Schedule