<PAGE> 1
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:
MARCH 31, 1999 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)
(740) 753-1951
--------------
(Registrant's telephone number, including area code)
(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
----- -----
4,865,415 common shares, no par value, outstanding at May 1, 1999
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, 1999 Dec. 31, 1998
(unaudited)
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,579,438 $ 7,232,876
Trade Receivables - net 12,836,183 15,595,483
Other Receivables 2,466,057 1,654,471
Inventories 51,232,320 47,110,011
Deferred Income Taxes 1,735,699 1,735,699
Prepaid Expenses 1,427,441 871,533
----------- -----------
Total Current Assets 71,277,138 74,200,073
Fixed Assets - Net 22,623,367 20,503,854
Other Assets 1,892,954 1,894,542
----------- -----------
Total Assets $95,793,459 $96,598,469
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 5,713,606 $ 2,194,026
Current Maturities - Long Term Debt 885,877 2,927,625
Accrued Taxes - Other 699,266 479,211
Accrued Salaries and Wages 715,608 511,916
Accrued Other 152,690 618,952
----------- -----------
Total Current Liabilities 8,167,047 6,731,730
Long Term Debt-less current maturities 26,665,339 26,877,509
Deferred Liabilities 3,372,456 3,354,159
----------- -----------
Total Liabilities 38,204,842 36,963,398
Shareholders' Equity:
Common Stock, no par value;
10,000,000 shares authorized;
issued and outstanding 1999 - 4,865,415
shares; 1998 -5,172,815 shares 37,835,862 39,560,343
Retained Earnings 19,752,755 20,074,728
----------- -----------
Total Shareholders' Equity 57,588,617 59,635,071
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $95,793,459 $96,598,469
=========== ===========
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE> 3
<TABLE>
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net Sales $13,622,730 $12,956,930
Cost of Goods Sold 10,444,060 9,375,903
----------- -----------
Gross Margin 3,178,670 3,581,027
Selling, General and Administrative
Expenses 3,344,511 3,071,607
----------- -----------
(Loss) Income from Operations (165,841) 509,420
Other Income and (Expenses):
Interest Expense (506,805) (192,492)
Other net 132,933 78,679
----------- -----------
Total Other - net (373,872) (113,813)
----------- -----------
(Loss) Income Before Income Taxes (539,713) 395,607
Income Tax (Benefit) Expense (217,740) 103,920
----------- -----------
Net (Loss) Income $ (321,973) $ 291,687
=========== ===========
Net (Loss) Income Per Share
Basic $ (0.06) $ 0.05
----------- -----------
Diluted $ (0.06) $ 0.05
----------- -----------
Weighted Average Number of Shares
Outstanding:
Basic 4,999,544 5,413,809
=========== ===========
Diluted 5,002,585 5,611,078
=========== ===========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
$ (321,973) $ 291,687
Net (Loss) Income
Adjustments to Reconcile Net (Loss) Income
to Net Cash Provided By (Used In)
Operating Activities:
Depreciation and Amortization 858,342 994,475
Deferred Taxes and Other 77,896
Deferred Compensation and
Pension - net 18,297
Change in Assets and Liabilities:
Receivables 1,947,714 5,418,372
Inventories (4,122,309) (8,707,321)
Prepaid Expenses (555,908) (697,737)
Other Assets 1,588 6,640
Accounts Payable 3,883,660 2,570,228
Accrued and Other Liabilities (42,515) (616,149)
----------- -----------
Net Cash Provided By (Used In) Operating
Activities 1,666,896 (661,909)
----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of Fixed Assets (3,341,935) (1,145,510)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from Long Term Debt 7,200,000
Payments on Long Term Debt (2,253,918) (12,760,665)
Purchase Treasury Stock (1,724,481)
Proceeds from Exercise of Stock Options
Including Related Tax Benefit 14,406
----------- -----------
Net Cash Used In Financing Activities (3,978,399) (5,546,259)
----------- -----------
DECREASE IN CASH AND CASH (5,653,438) (7,353,678)
EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,232,876 8,556,883
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,579,438 $ 1,203,205
=========== ===========
</TABLE>
See notes to the condensed consolidated financial statements.
4
<PAGE> 5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 three month periods ended March 31,
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 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:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
<S> <C> <C>
Raw materials $ 9,658,065 $ 7,917,557
Work-in Process 5,544,211 5,184,591
Manufactured finished good 33,220,506 31,532,217
Factory outlet finished goods 2,809,538 2,475,646
----------- -----------
Total $51,232,320 $47,110,011
=========== ===========
</TABLE>
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Interest $520,283 $224,923
======== ========
Federal, state and local
income taxes $235,000 $238,570
======== ========
</TABLE>
Accounts payable at March 31, 1999 and December 31, 1998 include a total of
$54,198 and $418,278, respectively relating to the purchase of fixed assets.
5
<PAGE> 6
4. PER SHARE INFORMATION
A reconciliation of the shares used in the basic and diluted (loss) income per
share computation for the three months ended March 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Basic-Weighted Average
Shares outstanding 4,999,544 5,413,809
Diluted securities;
Preferred Stock 29,460
Stock options 3,041 167,809
--------- ---------
Diluted-weighted average
Shares outstanding 5,002,585 5,611,078
--------- ---------
</TABLE>
6
<PAGE> 7
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 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.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
Three months
Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of Goods Sold 76.7% 72.4%
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Gross Margin 23.3% 27.6%
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Selling, General and
Administrative Expenses 24.5% 23.7%
----- -----
Income from Operations (1.2)% 3.9%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales
Net sales for three months ended March 31, 1999 increased $665,800, or 5.1%, to
$13,622,730 versus $12,956,930 for the same period a year ago. Sales of Rocky(R)
branded products benefited from growth in rugged outdoor footwear, while the
duty and casual footwear categories were below the same period in 1998. Prices
were approximately 2% higher than the previous year.
Gross Margin
Gross margin decreased $402,357, or 11.2%, to $3,178,670 for the three months
ended March 31, 1999 versus $3,581,027 for the same period a year ago. As a
percentage of net sales, gross margin was 23.3%, versus 27.6% for the same
period a year ago. The lower gross margin resulted from higher production costs
per unit sold, as the Company sought to balance higher than planned year-end
1998 inventory with production needs for the 1999 Fall and Winter seasons. The
Company's facilities are expected to remain at lower production levels until
sometime in the third quarter when inventory is expected at appropriate levels
with the Company's sales plan.
7
<PAGE> 8
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") increased $272,904, or 8.9%, to
$3,344,511 for the three months ended March 31, 1999, versus $3,071,607 for the
same period a year ago. As a percentage of net sales, SG&A was 24.5%, versus
23.7% for the same period a year ago. The increase was a result of higher trade
advertising expenses in conjunction with the company's introduction of FORMZ
custom fitting footwear. The Company also incurred increased salaries and
catalog expense in separating Marketing & Sales into three distinct product
areas: Casual, Work/Occupational, and Outdoor Rugged Footwear.
Interest Expense
Interest expense increased $314,313, or 163.3% to $506,805 for the three months
ended March 31, 1999, versus $192,492 for the same period in 1998. The increase
is a result of higher outstanding balances on the Company's revolving line of
credit which is being used to support increased inventory, construction costs of
the Company's new distribution warehouse that is scheduled for completion in
June 1999, and additions to other fixed assets.
Income Taxes
Income taxes decreased to a benefit of ($217,740) for the three months ended
March 31, 1999 versus income tax expense of $103,920 for the same period a year
ago. The Company's effective tax rate varies based on the levels of profit
(loss) in each of its tax jurisdictions. The income tax benefit for the
three-month period is primarily generated from the Company's domestic
operations.
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 March 31, 1999, the Company had working capital of $63,110,091 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 March 31,1999, the Company had borrowed $25,000,000
against its available line of credit of $25,000,000.
The Company reacquired and retired 307,400 common shares for $1,724,481 under
its share repurchase program during the three-month period ended March 31, 1999.
8
<PAGE> 9
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 is being 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 that need to be assessed for compliance.
It is expected that the assessment of the impact of the Company's vendors'
systems and the Company's non-information technology system and its hardware
will be complete by June 1999. The Company will initiate testing of its internal
hardware and software and upgrade or replace mission critical equipment as
necessary to achieve compliance by June 1999. Currently, the Company is
replacing its manufacturing and financial application software that is critical
to the orderly conduct of the business. The software upgrade is expected to be
completed during the second quarter of 1999. Management believes the Company has
completed an adequate assessment of Y2K dependencies relating to critical data
processing. 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:
The Company currently estimates that additional expenditures of approximately
$0.2 million, including hardware and software, will be made during Fiscal 1999
to upgrade and enhance the Company's systems. As of March 31, 1999 the Company's
aggregate costs to date are approximately $2.3 million related to computer
hardware and software upgrades which were funded from current operations. The
anticipated impact and costs of the project, as well as the date, on which the
Company expects to complete the project, are 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.
9
<PAGE> 10
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 is reviewing and plans to test all mission critical systems and
major system components for Y2K compliance. It is anticipated that these efforts
will be completed by June 1999. The Company plans to incorporate Y2K issues into
its business contingency plans within this same timeframe. 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. Specific
timetables and phases will be established for these contingency plans. The
company cannot currently estimate the cost, if any, associated with contingency
planning efforts that may be necessary to complete the Y2K efforts.
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. Investors are cautioned that such statements involve risks and
uncertainties, including, but not limited to, the 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. 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.
10
<PAGE> 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
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
Item 7. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
11
<PAGE> 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.
/s/ David Fraedrich
Date: May 17, 1999 --------------------------------------------
David Fraedrich, Executive Vice President,
Treasurer, and Chief Financial Officer*
(Principal Financial and Accounting Officer)
* In his capacity as Executive Vice President, Treasurer, and Chief
Financial Officer, Mr. Fraedrich is duly authorized to sign this report
on behalf of the Registrant.
12
<PAGE> 13
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
FORM 10-Q
EXHIBIT INDEX
Exhibit Exhibit
Number Description
27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000895456
<NAME> ROCKY SHOES & BOOTS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,579,438
<SECURITIES> 0
<RECEIVABLES> 16,600,344
<ALLOWANCES> 1,298,104
<INVENTORY> 51,232,320
<CURRENT-ASSETS> 71,277,138
<PP&E> 40,324,155
<DEPRECIATION> 17,700,788
<TOTAL-ASSETS> 95,793,459
<CURRENT-LIABILITIES> 8,167,047
<BONDS> 0
0
0
<COMMON> 37,835,862
<OTHER-SE> 19,752,755
<TOTAL-LIABILITY-AND-EQUITY> 95,793,459
<SALES> 13,622,730
<TOTAL-REVENUES> 13,755,663
<CGS> 10,444,060
<TOTAL-COSTS> 13,818,565
<OTHER-EXPENSES> 29,994
<LOSS-PROVISION> 66,905
<INTEREST-EXPENSE> 506,805
<INCOME-PRETAX> (593,713)
<INCOME-TAX> (217,740)
<INCOME-CONTINUING> (321,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (321,973)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
