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, 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 --- --- Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practicable date. 3,789,668 common shares, no par value, outstanding at October 20, 1997. PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 30, 1997 Dec. 31, 1996 (Unaudited) -------------- ------------- ASSETS: Current Assets: Cash and Cash Equivalents $ 159,449 $ 349,637 Trade Receivables 39,034,306 12,409,920 Other Receivables 985,780 678,293 Inventories 38,441,793 25,389,902 Other Current Assets 1,899,368 1,632,394 ----------- ----------- Total Current Assets 80,520,696 40,460,146 Fixed Assets - Net 16,693,974 15,508,597 Other Assets 1,950,767 2,121,428 ----------- ----------- Total Assets $99,165,437 $58,090,171 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Accounts Payable $14,012,444 $ 3,036,705 Current Maturities - Long-Term Debt 1,371,098 3,609,645 Accrued Liabilities 4,287,884 3,205,215 ----------- ----------- Total Current Liabilities 19,671,426 9,851,565 Long-Term Debt-less current maturities 46,879,079 19,520,029 Deferred Liabilities 2,473,861 2,343,488 ----------- ----------- Total Liabilities 69,024,366 31,715,082 Shareholders' Equity: Preferred Stock, Series A, no par value; $.06 stated value;125,000 shares authorized; 5,400 6,000 issued 1997-90,000 shares;1996-100,000 shares and outstanding 1997-82,857 shares; 1996-92,857 shares Common Stock, no par value; 10,000,000 shares authorized; issued 1997-3,873,730 shares; 15,330,841 14,543,947 1996-3,782,500 shares; and outstanding 1997-3,756,778 shares; 1996-3,665,548 shares Stock held in Treasury, at cost (1,226,059) (1,226,059) Retained Earnings 16,030,889 13,051,201 ----------- ----------- Total Shareholders' Equity 30,141,071 26,375,089 ----------- ----------- Total Liabilities and Shareholders' Equity $99,165,437 $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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net Sales $31,561,742 $23,897,568 $65,830,000 $49,347,778 Cost of Goods Sold 22,817,169 18,342,533 47,527,279 36,602,849 ----------- ----------- ----------- ----------- Gross Margin 8,744,573 5,555,035 18,302,721 12,744,929 Selling, General and Administrative 5,094,178 3,255,854 11,812,322 8,804,824 ----------- ----------- ----------- ----------- Expenses Income From Operations 3,650,395 2,299,181 6,490,399 3,940,105 Other Income And (Expenses): Interest Expense (889,979) (679,444) (1,996,277) (1,422,450) Other - net (69,510) 18,218 (78,645) (24,081) ----------- ----------- ----------- ----------- Total other - net (959,489) (661,226) (2,074,922) (1,446,531) ----------- ----------- ----------- ----------- Income Before Income Taxes 2,690,906 1,637,955 4,415,477 2,493,574 Income Taxes 917,287 268,767 1,435,789 465,560 ----------- ----------- ----------- ----------- Net Income $ 1,773,619 $ 1,369,188 $ 2,979,688 $ 2,028,014 =========== =========== =========== =========== Net Income Per Share $ 0.44 $ 0.36 $ 0.75 $ 0.54 =========== =========== =========== =========== Weighted Average Number of Common Shares and Equivalents Outstanding 4,045,637 3,781,284 3,975,444 3,770,692 =========== =========== =========== ===========
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, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,979,688 $ 2,028,014 Adjustments to Reconcile Net Income to Net Cash Used In Operating Activities: Depreciation and Amortization 2,139,592 1,745,930 Loss on Sale of Fixed Assets -- 94,614 Deferred Taxes and Other 130,373 (376,448) Change in Assets and Liabilities: Receivables (26,931,873) (15,362,507) Inventories (13,051,891) (13,065,891) Other Assets (96,313) (342,525) Accounts Payable 10,282,119 8,517,251 Accrued and Other Liabilities 1,082,669 2,063,011 ------------ ------------ Net Cash Used In Operating Activities (23,465,636) (14,698,551) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Fixed Assets (2,631,349) (2,027,854) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Long-Term Debt 34,287,911 26,014,718 Payments on Long-Term Debt (9,167,408) (9,906,844) Proceeds from exercise of stock options including related income tax effect 786,294 -- ------------ ------------ Net Cash Provided By Financing Activities 25,906,797 16,107,874 ------------ ------------ (DECREASE) IN CASH AND CASH EQUIVALENTS (190,188) (618,531) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 349,637 1,853,974 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 159,449 $ 1,235,443 ============ ============
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, 1997 Dec. 31, 1996 -------------- ------------- Raw Materials $ 9,702,250 $ 4,482,381 Work-in Process 5,359,276 5,192,326 Manufactured finished goods 20,956,823 13,891,772 Factory outlet finished goods 2,423,444 1,823,423 ----------- ----------- Total $38,441,793 $25,389,902 =========== ===========
3. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and Federal, state and local income taxes was as follows:
Nine Months Ended Sept. 30, 1997 1996 ---- ---- Interest $1,809,121 $1,494,895 ========== ========== Federal, state and local income taxes $ 735,284 $ 102,500 ========== ==========
Accounts payable at September 30, 1997 and December 31, 1996 includes a total of $736,614 and $42,994, respectively, relating to the purchase of fixed assets. 4. SUBSEQUENT EVENTS In October and November of 1997, the Company issued 1,570,000 common shares for $18.50 per share resulting in net proceeds to the Company after estimated expenses of aproximately $26,949,000, all of which were used to retire long-term debt outstanding. 5 Accordingly, certain long-term debt outstanding at September 30, 1997, that was due currently has been classified as noncurrent in accordance with Statement of Financial Accounting Standards (SFAS) No. 6, "Classification of Short-Term Obligations Expected To Be Refinanced." Supplemental net income per share assuming the shares were issued at the beginning of such periods and the proceeds used to retire long-term debt are $0.38 and $0.32 for the three months ended September 30, 1997 and 1996, respectively, and $0.70 and $0.52 for the nine months ended September 30, 1997 and 1996, respectively. 5. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued 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 diluted earnings per share, as defined therein, for the three month and nine month periods ended September 30, 1997 and 1996 are as follows:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, 1997 1996 1997 1996 ---- ---- ---- ---- Basic $0.47 $0.37 $0.80 $0.55 ===== ===== ===== ===== Diluted $0.44 $0.36 $0.75 $0.54 ===== ===== ===== =====
In June 1997, the 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, the 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 Nine months Ended Ended Sept. 30, Sept. 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold 72.3% 76.8% 72.2% 74.2% ----- ----- ----- ----- Gross Margin 27.7% 23.2% 27.8% 25.8% Selling, General and Administrative Expenses 16.1% 13.6% 17.9% 17.8% ----- ----- ----- ----- Income from Operations 11.6% 9.6% 9.9% 8.0% ===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 Net Sales Net Sales increased $7,664,174, or 32.1%, to $31,561,742 for the quarter ended September 30, 1997, versus $23,897,568 for the same period in 1996. The increase was a result of increased shipments of rugged outdoor footwear, handsewn casual footwear, and to a lesser degree occupational footwear. The Company's customer base continues to become more diversified with additional new accounts being opened. Average selling prices were approximately 3% higher in the quarter ended September 30, 1997, versus the same period a year ago. 7 Gross Margin Gross margin increased $3,189,538, or 57.4%, to $8,744,573 for the quarter ended September 30, 1997, versus $5,555,035 for the same period a year ago. As a percentage of net sales, gross margin was 27.7% for the quarter ended September 30, 1997 versus 23.2% for the same period a year ago. The increase in gross margin as a percentage of net sales is primarily the result of higher production levels in all of the Company's manufacturing plants and increased sales of new products with higher gross margins. The gross margin for the 1996 period was adversely impacted by a one-time sale of discounted product to a large customer at a substantially reduced margin. Selling, General and Administrative Expenses Selling, general and administrative (S,G&A) expenses increased $1,838,324, or 56.5%, to $5,094,178 for the quarter ended September 30, 1997, versus $3,255,854 for the same period a year ago. As a percentage of net sales, S,G&A expenses were 16.1% for the quarter ended September 30, 1997 versus 13.6% for the same period a year ago. The increase was primarily the result of increased sales commissions, advertising, and professional expenses. Interest Expense Interest expense increased $210,535, or 31.0%, to $889,979 for the quarter ended September 30, 1997, versus $679,444 for the same period a year ago. The increase is a result of additional borrowings and higher rates on the Company's revolving line of credit, which is used to finance working capital needs to support increased sales. Income Taxes Income taxes increased $648,520 to $917,287 for the quarter ended September 30, 1997, versus $268,767 for the same period a year ago. The Company's effective tax rate was 34.1% for the quarter ended September 30, 1997, versus 16.4% for the same period in 1996. Historically, the Company's relatively low effective tax rates resulted from favorable tax treatment afforded from income earned by the Company's subsidiary in Puerto Rico and local tax abatements available to such subsidiary. 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, in part, for the higher effective tax rate for the quarter ended September 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. The increase in the effective rate from the prior year was also due to a higher portion of the Company's income in 1996 being earned in Puerto Rico. 8 NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996. Net Sales Net sales increased $16,482,222, or 33.4%, to $65,830,000 for the nine months ended September 30, 1997, versus $49,347,778 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 extent occupational footwear. The company's customer base continues to become more diversified with additional new accounts being opened. Average selling prices were approximately 3% higher for the nine months ended September 30, 1997, compared to the same period a year ago. Gross Margin Gross margin increased $5,557,792, or 43.6%, to $18,302,721 for the nine months ended September 30, 1997, versus $12,744,929 for the same period a year ago. As a percentage of net sales, gross margin was 27.8% for the nine months ended September 30, 1997, versus 25.8% for the same period a year ago. The increase in gross margin as a percentage of net sales is primarily the result of higher production levels in all of the Company's manufacturing plants and increased sales of new products with higher gross margins. The gross margin for the 1996 period was adversely impacted by a one-time sale of discounted product to a large customer, at a substantially reduced margin. Selling, General and Administrative Expenses S,G&A expenses increased $3,007,498, or 34.2%, to $11,812,322 for the nine months ended September 30, 1997, versus $8,804,824 for the same period a year ago. The increase was a result of increased sales commissions, professional services and advertising expenses. As a percentage of net sales, S,G&A expenses were 17.9% for the nine months ended September 30, 1997, versus 17.8% for the same period a year ago. Interest Expense Interest expense increased $573,827, or 40.3%, to $1,996,277 for the nine months ended September 30, 1997, versus $1,422,450 for the same period a year ago. The increase is a result of additional borrowings and higher rates on the Company's revolving line of credit, which is used to finance working capital needs to support increased sales. Income Taxes Income tax expense increased $970,229 to $1,435,789 for the nine months ended September 30, 1997, versus $465,560 for the same period a year ago. The Company's effective tax rate was 32.5% for the nine months ended September 30, 1997, versus 18.7% for the same period in 1996. Historically, the Company's relatively low effective tax rates resulted from favorable tax treatment afforded from income earned by the Company's subsidiary in Puerto Rico and local tax abatements available to such subsidiary. 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, in part, for 9 the higher effective tax rate for the nine months ended September 30, 1997 versus the same period a year ago. The increase in the effective tax rate from the prior year was also due to a higher portion of the Company's income in 1996 being earned in Puerto Rico. 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 for machinery, equipment, and facility additions, as well as the introduction of new styles of footwear. At September 30, 1997, the Company had working capital of $60,849,270, versus $30,608,581 at December 31, 1996. The Company's line of credit provides for advances based on a percentage of eligible accounts receivable and inventory with maximum borrowings. The maximum dollar amount available under the line of credit was $45,000,000 until November 1, 1997, when it decreased to $42,000,000 until January 1, 1998, when it decreases to $25,000,000. The maximum available under the line of credit increases to $42,000,000 in April 1998. The line of credit changes to match the Company's seasonal requirements for working capital. As of September 30, 1997, the Company had borrowed $42,546,828 against its available line of credit of $45,000,000, (based upon the level of eligible accounts receivable and inventory). Amounts outstanding under the line of credit bear interest at the lender's prime rate. The line of credit terminates on April 30, 1999. In October and November of 1997, the Company issued 1,570,000 common shares for $18.50 per share resulting in net proceeds to the Company after estimated expenses of aproximately $26,949,000, all of which were used to retire long-term debt outstanding. Cash paid for capital expenditures during the nine months ended September 30, 1997 was $2,631,349. 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 anticipates capital expenditures for the year ended December 31, 1997 will be approximately $3,700,000. The Company believes it will be able to finance such additions and meet operating expenditure requirements through December 31, 1998, 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 This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding the intent, belief and expectations of the Company and its management, such as statements concerning the Company's customer base (paragraph 2), capital expenditures (paragraph 15), manufacturing capacity (paragraph 15), and financing (paragraph 15). Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, the factors set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-2 (file no. 333-35391), the caption " and other factors detailed from time to time in the Company's filings with the Securities and Exchange Commission. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this quarterly report 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 the Company or any other person that the objectives and plans of the Company will be achieved. PART 1 - FINANCIAL INFORMATION ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 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. 12 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: 11/12/97 By: /s/ David Fraedrich ---------- -------------------------------------------- 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 27 Financial Data Schedule