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, 1999 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)
(740) 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____
4,554,415 common shares, no par value, outstanding at August 11, 1999.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
[CAPTION]
June 30, 1999 December 31,
(Unaudited) 1998
------------ -----------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 930,576 $ 7,232,876
Trade Receivables - Net 21,684,808 15,595,483
Other Receivables 2,429,443 1,654,471
Inventories 55,410,080 47,110,011
Deferred Income Taxes 1,735,699 1,735,699
Prepaid Assets 1,080,915 871,533
------------ -----------
Total Current Assets 83,271,521 74,200,073
Fixed Assets - Net 24,371,519 20,503,854
Other Assets 1,876,059 1,894,542
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Total Assets $109,519,099 $96,598,469
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 7,276,436 $ 2,194,026
Current Maturities - Long Term Debt 15,944,005 2,927,625
Accrued Liabilities 582,552 479,211
Accrued Salaries and Wages 835,884 511,916
Accrued Other 349,798 618,952
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Total Current Liabilities 24,988,675 6,731,730
Long-Term Debt-less current maturities 25,303,186 26,877,509
Deferred Liabilities 3,133,790 3,354,159
------------ -----------
Total Liabilities 53,425,651 36,963,398
Shareholders' Equity:
Common Stock, no par value;
10,000,000 shares authorized;
issued and outstanding 1999 - 4,552,915 shares;
1998 - 5,172,815 shares 35,753,043 39,560,343
Retained Earnings 20,340,405 20,074,728
------------ -----------
Total Shareholders' Equity 56,093,448 59,635,071
============ ===========
Total Liabilities and Shareholders' Equity $109,519,099 $96,598,469
============ ===========
See notes to the condensed consolidated financial statements
2
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net $ 23,200,428 $ 21,487,803 $ 36,823,158 $ 34,444,733
Sales
Cost of Goods Sold 17,237,006 15,588,467 27,681,066 25,047,865
------------ ------------ ------------ ------------
Gross Margin 5,963,422 5,899,336 9,142,092 9,396,868
Selling, General and Administrative
Expenses 4,605,435 4,161,856 7,949,946 7,233,463
------------ ------------ ------------ ------------
Income From Operations 1,357,987 1,737,480 1,192,146 2,163,405
Other Income (Expense):
Interest Expense (543,875) (331,044) (1,050,680) (523,536)
Other - net 108,426 114,850 241,359 277,024
------------ ------------ ------------ ------------
Total other - net (435,449) (216,194) (809,321) (246,512)
------------ ------------ ------------ ------------
Income Before Income Taxes 922,538 1,521,286 382,825 1,916,893
Income Tax Expense 334,888 413,654 117,148 517,574
------------ ------------ ------------ ------------
Net Income $ 587,650 $ 1,107,632 $ 265,677 $ 1,399,319
============ ============ ============ ============
Net Income Per Common Share
Basic $ .12 $ .20 $ .05 $ .26
------------ ------------ ------------ ------------
Diluted $ .12 $ .20 $ .05 $ .25
------------ ------------ ------------ ------------
Weighted Average Number of Common Shares
Outstanding
Basic 4,747,558 5,450,414 4,872,855 5,432,112
============ ============ ============ ============
Diluted 4,763,049 5,602,723 4,882,817 5,606,901
============ ============ ============ ============
3
See notes to the condensed consolidated financial statements
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1999 1998
---- ----
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Income $ 265,677 $ 1,399,319
Adjustments to Reconcile Net Income
to Net Cash Used In
Operating Activities:
Depreciation and Amortization 1,770,658 2,033,080
Deferred taxes - net (50,000) 0
Deferred compensation & pension - net (170,369) 130,732
Change in Assets and Liabilities:
Receivables (6,864,297) (4,076,856)
Inventories (8,300,069) (11,721,656)
Other current assets (209,382) (1,076,890)
Other Assets 5,314 (45,023)
Accounts payable 5,284,346 (50,375)
Accrued and Other Liabilities 158,155 (98,051)
------------ ------------
Net Cash Used In Operating Activities (8,109,967) (13,505,720)
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CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of Fixed Assets (5,827,090) (3,167,823)
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CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Long Term Debt 18,252,000 24,205,000
Payments on Long Term Debt (6,809,943) (14,904,060)
Purchase Treasury Stock (3,807,300)
Proceeds from exercise of stock
options including
related tax benefit -- 183,362
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Net Cash Provided By Financing
Activities 7,634,757 9,484,302
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DECREASE IN CASH AND CASH EQUIVALENTS (6,302,300) (7,189,241)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,232,876 8,556,883
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 930,576 $ 1,367,642
============ ============
See notes to the condensed consolidated financial statements
4
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 1999 AND 1998
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the accompanying 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 interim consolidated financial statements
are considered to be of a normal and recurring nature. The results of
the operations for the six month periods ended June 30, 1999 and 1998
are not necessarily indicative of the results to be expected for the
whole year. Accordingly, these financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for year
ended December 31, 1998.
2. INVENTORIES
Inventories are comprised of the following:
June 30, 1999 December 31, 1998
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Raw materials $ 7,912,874 $ 7,917,557
Work-in Process 9,025,453 5,184,591
Manufactured finished goods 35,731,300 31,532,217
Factory outlet finished goods 2,740,453 2,475,646
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Total $55,410,080 $47,110,011
=========== ===========
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Six Months Ended
June 30,
1999 1998
---- ----
Interest $1,001,663 $ 573,478
========== ==========
Federal, state and local
income taxes $ 91,000 $1,009,570
========== ==========
Accounts payable at June 30, 1999 and December 31, 1998 included a
total of $216,342 and $418,278, respectively, relating to the purchase of fixed
assets.
5
4. PER SHARE INFORMATION
A reconciliation of the shares used in the basic and diluted income per
common share computation for the three months and six months ended June 30, 1999
and 1998 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Basic-Weighted average
shares outstanding 4,747,558 5,450,414 4,872,855 5,432,112
Diluted securities:
Preferred Stock 0 0 0 14,730
Stock options 15,491 152,309 9,962 160,059
--------- --------- --------- ---------
Diluted-weighted
average shares outstanding 4,763,049 5,602,723 4,882,817 5,606,901
========= ========= ========= =========
5. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." In June 1999 FASB issued Statement of
Financial Accounting Standards No. 137 (SFAS 137) "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 deferred the adoption of SFAS 133 for the Company
until January 1, 2001. The Company has not yet determined what, if any, impact
the adoption of this standard will have in its financial statements.
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 Condensed Consolidated Financial Statements, expressed as a
percentage of net sales. The discussion that follows the table should be read in
conjunction with the Condensed Consolidated Financial Statements of the Company.
PERCENTAGE OF NET SALES
Three months Six months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 74.3% 72.5% 75.2% 72.7%
---- ---- ---- ----
Gross Margin 25.7% 27.5% 24.8% 27.3%
Selling, General and
Administrative Expenses 19.8% 19.4% 21.6% 21.0%
---- ---- ---- ----
Income from Operations 5.9% 8.1% 3.2% 6.3%
==== ==== ==== ====
6
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales
Net sales for the quarter ended June 30, 1999, increased $1,712,625, or 8.0% to
$23,200,428 from $21,487,803 for the same period a year ago. Net sales increased
primarily as a result of increased shipments of casual and work/occupational
footwear. The Company continues to diversify its customer base and achieved
increased sales in all of its product lines.
Gross Margin
Gross margin for the quarter ended June 30, 1999 increased $64,086 to $5,963,422
from $5,899,336 for the same period a year ago. As a percentage of net sales,
gross margin was 25.7% in the second quarter of 1999 versus 27.5% for the same
period in 1998. The decrease in gross margin was primarily due to lower
absorption of manufacturing overhead as a result of lower production schedules
in all of the Company's manufacturing facilities. The Company reduced its
production schedules to bring the quantity of finished goods inventory in line
with sales.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) for the quarter ended June 30, 1999
increased $443,579, or 10.7% to $4,605,435 compared to $4,161,856 for the same
period a year ago. As a percentage of net sales SG&A was 19.8% in the second
quarter of 1999 versus 19.4% in the second quarter of 1998. SG&A increased as a
result of increased distribution costs of multiple warehouses and increased
professional expense as a result of costs associated with legal action regarding
a former employee and a former consultant.
Interest Expense
Interest expense for the quarter ended June 30, 1999 increased $212,831 or
64.3%, to $543,875 versus $331,044 for the same period a year ago. The increase
in interest expense is a result of increased levels of borrowing and higher
rates of interest. The higher level of borrowings are used to support increases
in the Company's inventory and fixed assets, including the Company's new
distribution center.
Income Taxes
Income taxes decreased $78,766, or 19.0%, to $334,888 for the three months ended
June 30, 1999, versus $413,654 for the same period a year ago. The Company's
effective tax rate increased to 36.3% for second quarter 1999 from 27.2% in
1998. The increase in the Company's effective tax rate is due to more income
being earned in taxing locations with higher effective tax rates than in prior
periods.
7
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Net Sales
Net sales for the six months ended June 30, 1999 increased $2,378,425 or 6.9% to
$36,823,158 versus $34,444,733 for the same period a year ago. The increase in
net sales is due in part to higher shipments of casual and work/occupational
footwear during the second quarter 1999. Prices were approximately 2% higher for
the first half of 1999 than the prior year.
Gross Margin
Gross margin for the six months ended June 30, 1999 decreased $254,776, or 2.7%,
to $9,142,092 versus $9,396,868 for the same period a year ago. As a percentage
of net sales gross margin was 24.8% in the first half of 1999 versus 27.3% for
the same period a year ago. The decrease in gross margin was primarily due to
lower absorption of manufacturing overhead as a result of lower production
schedules in all of the Company's manufacturing facilities. The Company reduced
its production schedules to bring the quantity of finished goods inventory in
line with sales.
Selling, General and Administrative Expenses
SG&A for the six months ended June 30, 1999 increased $716,483, or 9.9%, to
$7,949,946 versus $7,233,463 for the same period a year ago. As a percentage of
net sales, SG&A was 21.6% in the first half of 1999 versus 21.0% for the same
period in 1998. SG&A expense increased as a result of increased distribution
costs of multiple warehouses and increased professional expense as a result of
costs associated with legal action regarding a former sales manager and product
development manager in the Company's rubber footwear division.
Interest Expense
Interest expense for the first six months ended June 30, 1999 increased $527,144
or 100.7% to $1,050,680 versus $523,536 for the same period a year ago. The
increase in interest expense was the result of increased borrowings on the
Company's revolving credit facility to support increased inventory and fixed
assets, including the Company's new distribution center.
Income Taxes
Income taxes decreased $400,426 or 77.4% to $117,148 for the six months ended
June 30, 1999 versus $517,574 for 1998. The Company's effective tax rate was
30.6% for the first half of 1999 compared with 27.0% for the same period last
year. The relatively low effective tax rate is due to favorable tax treatment
afforded income earned by the Company's subsidiary in Puerto Rico.
8
Liquidity and Capital Resources
The Company has principally funded its working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness.
Working capital is primarily 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 the months of January
through March of each year and highest during the months of May through October
of each year. In addition, the Company requires financing to support additions
to machinery, equipment and facilities as well as the introduction of footwear
styles.
At June 30, 1999, the Company had working capital of $58,282,846 versus
$67,468,343, at December 31, 1998. The Company has a revolving line of credit
with maximum borrowing limits of $25,000,000 during the period of January 28th
through May 15th of each year, after which the line increases to $42,000,000 for
the remainder of the year. The line of credit expires May 31, 2003. Changes in
the line of credit during the year match the Company's seasonal requirements for
working capital. As of June 30,1999, the Company had borrowed $38,950,000
against its available line of credit of $42,000,000.
The Company reacquired and retired 619,900 common shares for $3,807,301 under
its share repurchase program during the six-month period ended June 30, 1999.
Capital expenditures for 1999 are expected to be approximately $7,500,000 for
machinery and equipment to support increased production and for lasts, dies, and
patterns for new footwear styles and completion of the Company's new finished
goods distribution center. The Company believes it will be able to finance such
additions and meet operating expenditure requirements in 1999 through available
cash on hand, additional long-term borrowings and operating cash flows.
Year 2000
Company's State of Readiness:
The Year 2000 ("Y2K") issue refers to a condition in computer software where a
two-digit field instead of a four-digit field is used to distinguish a calendar
year. Unless corrected, date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in system failures
or miscalculations causing disruptions to various activities and operations.
Such uncorrected conditions could significantly interfere with the conduct of
the Company's business, could result in disruption of its operations and could
subject it to potentially significant legal liabilities.
The Company, utilizing both internal and external resources, is preparing for
the consequences that Y2K may have on its ability to rely on data processing and
other automated operational functions which are date dependent. In addition, a
questionnaire has been distributed to the Company's vendors to obtain pertinent
information and assurances that their systems and products are Y2K compliant.
Finally, the Company has internal non-information technology systems comprised
primarily of building security systems which are date dependent. The
9
Company has performed an assessment of the impact of the Company's vendors'
systems and the Company's non-information technology systems and hardware and
will continue to assess the impact of non-compliance. The Company has tested its
internal hardware and software and has upgraded or replaced mission critical
equipment as necessary. The Company has replaced its manufacturing and financial
application software that is critical to the orderly conduct of the business.
Management believes the Company has completed an adequate assessment of Y2K
dependencies relating to critical data processing and that no significant
expenditures are necessary to complete this assessment phase. However, there can
be no assurance that the Company's plan functions and assessments have
identified all existing Y2K expenses. Failure to identify all Y2K expenses could
result in a materially adverse impact to the Company, although the extent of
this impact is not believed to be reasonably estimable.
Costs to Address Year 2000 Issues:
As of June 30, 1999 the Company's aggregate costs to date to complete its Y2K
compliance were approximately $2.3 million related to computer hardware and
software upgrades which was funded from current operations. The impact and costs
of the project were based on management's best estimates using information
currently available and numerous assumptions about future events. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans.
Risks of the Company's Year 2000 Issues:
There can be no guarantee that the Company's efforts will prevent a material
adverse impact on its results of operations, financial conditions and cash
flows, since the Company's Y2K compliance is dependent upon key third party
vendors also being Y2K compliant on a timely basis. The possible consequences to
the Company not being fully Y2K compliant include temporary plant closings,
delays in the delivery of finished products, delays in the receipt of key
materials and supplies, invoice and collection errors, and financing issues,
including payroll. These consequences could have a material adverse impact on
the Company's results of operations, financial condition and cash flows if the
Company is unable to conduct its business in the ordinary course.
The Company's Contingency Plans:
The Company continues to review and has tested all mission critical systems and
major system components for Y2K compliance. Except for ongoing monitoring of
systems, these efforts have been substantially completed. Worst case scenarios
are being evaluated in relation to the Company's key business needs. The Company
has not yet adopted a formal contingency plan to address the possibility that
internal, customer, or supplier systems may not become Y2K compliant, but
management will develop such plans which may be required as Fiscal 1999 evolves
and the risk of such exposure, if any, becomes better clarified. The company
cannot currently estimate the cost, if any, associated with contingency planning
efforts that may be necessary to complete the Y2K efforts.
10
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, 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 the intent, belief and expectations of the Company and
its management, and include statements regarding capital expenditures (paragraph
14), sufficiency of capital resources (paragraph 14) and preparedness and
compliance with year 2000 issues (paragraphs 15-19). Investors are cautioned
that such statements involve risks and uncertainties, including, but not limited
to, changes in consumer demand, seasonality, impact of weather, competition,
reliance on suppliers, changing retailing trends, reliance on foreign
manufacturing, changes in tax rates, limited protection of proprietary
technology, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. There can be no assurance that
the forward-looking statements included herein will prove to be accurate, and
the inclusion of such statements herein should not be regarded as a
representation by the Company, its management or any other person that the
objectives and plans of the Company will be achieved. All forward looking
statements made herein are based on information presently available to the
management of the Company. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 1998.
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.
Proposal 1: The election of Class I Directors of the Company, to serve
until the 2001 Annual Meeting of Shareholders or until their
successors are elected and qualified:
Number of Shares Voted
-----------------------------------------------
FOR WITHHOLD TOTAL
AUTHORITY
Mike Brooks 4,428,710 73,990 4,502,700
Stanley I. Kravetz 4,429,760 72,940 4,502,700
Robert D. Stix 4,429,160 73,540 4,502,700
James L. Stewart 4,429,960 72,740 4,502,700
Proposal 2: To ratify the appointment of Deloitte & Touche LLP to serve
as the Company's independent public accountants for the fiscal
year ending December 31, 1999.
Number of Shares Voted
FOR AGAINST ABSTAINED TOTAL
4,497,415 3,300 1,985 4,502,700
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
12
(a) Exhibits
The exhibits to this report begin at page 15.
(b) Reports on Form 8-K.
Form 8-K, dated May 18, 1999, announcing the authorization of
a 400,000 share increase in the Company's share repurchase
program.
13
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, 1999 By: /s/ David Fraedrich
-------------------
David Fraedrich, Executive Vice President,
Treasurer and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
14
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
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27 Financial Data Schedule