UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 28, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 0-238001
LaCrosse Footwear, Inc.
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(Exact name of Registrant as specified in its charter)
Wisconsin 39-1446816
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18550 NE Riverside Parkway
Portland, Oregon 97230
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(Address, zip code of principal executive offices)
(503) 766-1010
(Registrant's telephone number, including area code)
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 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 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ____ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, outstanding as of July 31, 2003: 5,874,449 shares
- -------------------------------------------------------------------------------
LaCrosse Footwear, Inc.
Form 10-Q Index
For the Quarter Ended June 28, 2003
Page
PART I. Financial Information
Item 1. Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20
Exhibit Index 22
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
LACROSSE FOOTWEAR, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) June 28, December 31,
2003 2002
----------------------------------------
Assets (Unaudited)
Current Assets:
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net 12,463 15,302
Inventories (2) 25,033 23,460
Refundable income taxes (3) -- 2,888
Prepaid expenses, deferred tax assets and other 1,645 1,519
----------------------------------------
Total current assets 39,141 43,169
Property and equipment, net 4,807 4,979
Goodwill (6) 10,753 10,753
Deferred income tax assets and other 1,102 1,944
----------------------------------------
Total assets $ 55,803 $ 60,845
========================================
Liabilities and Shareholders' Equity
Current Liabilities:
Current maturities of long-term obligations $ 3,026 $ 1,611
Notes payable, bank 8,311 8,378
Accounts payable 3,257 4,667
Accrued expenses 2,466 2,906
----------------------------------------
Total current liabilities 17,060 17,562
Long-term obligations -- 2,821
Compensation and benefits (7) 3,649 4,711
Deferred income tax liability 650 662
----------------------------------------
Total liabilities 21,359 25,756
Shareholders' Equity:
Common stock, par value $.01 per share,
authorized 50,000,000 shares; issued
6,717,627 shares 67 67
Additional paid-in capital 26,434 26,434
Accumulated other comprehensive loss (1,370) (1,370)
Retained earnings 14,126 14,771
Less cost of 843,178 shares of treasury stock (4,813) (4,813)
----------------------------------------
Total shareholders' equity 34,444 35,089
----------------------------------------
Total liabilities and shareholders' equity $ 55,803 $ 60,845
========================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
LACROSSE FOOTWEAR, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) Quarter Ended First Half Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
----------------------------- -----------------------------
Net sales $ 18,588 $ 19,975 $ 38,462 $ 42,796
Cost of goods sold 12,981 15,849 26,869 32,764
----------------------------- -----------------------------
Gross profit 5,607 4,126 11,593 10,032
Selling and administrative expenses 5,410 7,436 11,739 16,019
----------------------------- -----------------------------
Operating income (loss) 197 (3,310) (146) (5,987)
Non-operating income (expense):
Interest expense (229) (512) (520) (870)
Miscellaneous 36 45 21 97
----------------------------- -----------------------------
(193) (467) (499) (773)
----------------------------- -----------------------------
Income (loss) before income tax benefit 4 (3,777) (645) (6,760)
Provision for income tax benefit (3) -- -- -- (1,000)
----------------------------- -----------------------------
Net income (loss) before cumulative effect
of change in accounting principle 4 (3,777) (645) (5,760)
Cumulative effect of change in accounting
principle (6) -- -- -- (1,028)
----------------------------- -----------------------------
Net income (loss) $ 4 $ (3,777) $ (645) $ (6,788)
============================= =============================
Net income (loss) per common share before
cumulative effect of change in accounting
principle:
Basic and diluted $ -- $ (0.64) $ (0.11) $ (0.98)
Cumulative effect of change in accounting
principle:
Basic and diluted $ -- $ -- $ -- $ (0.18)
Net loss per common share:
Basic and diluted $ -- $ (0.64) $ (0.11) $ (1.16)
Weighted average shares outstanding:
Basic 5,874 5,874 5,874 5,874
Diluted 5,892 5,874 5,874 5,874
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
LACROSSE FOOTWEAR, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) First Half Ended
(Unaudited) June 28, June 29,
2003 2002
----------------------------------
Cash flows from operating activities
Net loss $ (645) $ (6,788)
Adjustments to reconcile net loss to net cash provided in
operating activities:
Depreciation and amortization 855 1,838
Loss on disposal and impairment charge for plant and equipment -- 624
Deferred income taxes -- 1,472
Goodwill impairment charge -- 1,028
Other 117 --
Changes in assets and liabilities:
Trade accounts receivable 2,839 4,168
Inventories (1,573) 5,198
Refundable income taxes 2,888 --
Accounts payable (1,410) (2,489)
Accrued expenses and other (1,033) (1,202)
----------------------------------
Net cash provided by operating activities 2,038 3,849
----------------------------------
Cash flows from investing activities
Capital expenditures (589) (341)
Proceeds from sale of property and equipment 23 --
Other 1 --
----------------------------------
Net cash used in investing activities (565) (341)
----------------------------------
Cash flows from financing activities
Net payments on short-term borrowings (67) (2,948)
Principal payments on long-term obligations (1,406) (798)
----------------------------------
Net cash used in financing activities (1,473) (3,746)
----------------------------------
Net increase (decrease) in cash and cash equivalents -- (238)
Cash and cash equivalents:
Beginning -- 271
----------------------------------
Ending $ -- $ 33
==================================
Supplemental information Cash payments (refunds) of:
Interest $ 726 $ 932
Income taxes $ (2,888) $ (2,340)
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
LACROSSE FOOTWEAR, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation and Use of Estimates
LaCrosse Footwear, Inc. is referred to as "we", "us" or "our" in this
report. We have prepared these unaudited condensed consolidated financial
statements in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we
have condensed or omitted certain information and footnote disclosures. In
our opinion, these financial statements include all normal recurring
adjustments necessary to present fairly the results for the interim periods
shown.
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions which affect the amounts of assets, liabilities,
revenue and expenses we have reported and our disclosure of contingent
assets and liabilities at the date of the financial statements. The results
of the interim periods are not necessarily indicative of the results for
the full year. You should read these condensed consolidated financial
statements in conjunction with the audited consolidated financial
statements and the related notes included in our Annual Report on Form 10-K
for the year ended December 31, 2002.
We report our quarterly interim financial information based on 13-week
periods.
b. Principles of Consolidation
The consolidated financial statements include the accounts of LaCrosse
Footwear, Inc. and our wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
c. Revenue Recognition
Revenue is recognized at the time products are shipped to customers.
Revenue is recorded net of freight, estimated discounts and returns.
Amounts billed to customers relating to shipping and handling are
classified as revenue. Costs incurred for shipping and handling are
classified as cost of goods sold.
d. Product Warranties
Our standard warranties require us to repair or replace defective products
at no cost to the consumer. We estimate the costs that may be incurred
under our basic limited warranty and record a liability in the amount of
such costs at the time product revenue is recognized. Factors that affect
our warranty liability include the number of units sold, historical and
anticipated rates of warranty claims, and cost per claim. We periodically
assess the adequacy of the recorded warranty liabilities and adjust the
amounts as necessary. We utilize historical trends and information received
from customers to assist in determining the appropriate loss reserve
levels.
6
Changes in our warranty liability during the quarters ended June 28, 2003
and June 29, 2002 are as follows:
For the Quarter Ended For the First Half Ended
(In thousands) June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
-----------------------------------------------------------------
Balance, beginning $ 996 $ 1,112 $ 999 $ 1,112
Accruals for products sold 464 790 1,124 1,604
Costs incurred (464) (790) (1,127) (1,604)
-----------------------------------------------------------------
Balance, ending $ 996 $ 1,112 $ 996 $ 1,112
=================================================================
e. Net Income (Loss) Per Share
Basic EPS excludes all dilution and is computed using the weighted average
number of common shares outstanding during the period. The diluted EPS
calculation assumes that all stock options or other arrangements to issue
common stock (common stock equivalents) were exercised or converted into
common stock at the beginning of the period, unless their effect would be
anti-dilutive.
f. Stock-Based Compensation
At June 28, 2003, we had stock-based employee compensation plans, which are
described in more detail in Note 4 to these condensed consolidated
financial statements. We account for those plans under the recognition and
measurement principles of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and have adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, " Accounting for Stock-Based Compensation -
Transition and Disclosure." No stock-based employee compensation cost is
reflected in the condensed consolidated statements of operations, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the grant date. The following table
illustrates the effect on net loss and net loss per share if we had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
For the Quarter Ended For the First Half Ended
(In Thousands, except for per share data) June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
-------------------------------------------------------------------------------------------------------------
Net income (loss) - as reported $ 4 $ (3,777) $ (645) $ (6,788)
Deduct: Total stock-based employee compensation
expense determined under the fair value based
method for all awards (43) (23) (84) (49)
------------ ------------ ------------ ------------
Pro forma net loss $ (39) $ (3,800) $ (729) $ (6,837)
Income (loss) per share:
Basic and diluted - as reported $ 0.00 $ (0.64) $ (0.11) $ (1.16)
Basic and diluted - pro forma $ (0.01) $ (0.65) $ (0.12) $ (1.16)
The above pro forma effects on net income (loss) and net income (loss) per
share are not likely to be representative of the effects on reported net
income (loss) for future years because options vest over several years and
additional awards generally are made each year.
g. Recently Issued Accounting Standards
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. We adopted
SFAS 143 in the first quarter of 2003 and the adoption did not impact our
financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires the recognition of a liability for a cost associated with an exit
or disposal activity when the liability is incurred versus the date the
Company commits to an exit plan. In addition, SFAS 146 specifies that the
liability should be initially measured at fair value. SFAS 146 is
7
effective for exit or disposal activities that are initiated after December
31, 2002. The initial adoption of this pronouncement did not have a
material impact on our results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". FIN 46 establishes standards
for identifying a variable interest entity and for determining under what
circumstances a variable interest entity should be consolidated with its
primary beneficiary. Until now, a company generally has included another
entity in its consolidated financial statements only if it controlled the
entity through voting interests. FIN 46 changes that by requiring a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. The requirements of FIN 46 will apply to us
beginning in the third quarter of 2003. We do not believe that the adoption
of FIN 46 will have a material effect on our consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"), which requires the issuer to classify certain freestanding
financial instruments as liabilities. Under the provisions of SFAS 150,
common stock issued with mandatory redemption features that require the
Company to repurchase the shares upon an event that is certain to occur,
such as termination of employment or death of the stockholder, is no longer
classified as equity; instead, these shares will be reported as shares
subject to mandatory redemption and classified as a liability in the
balance sheet. In such circumstances, disclosure of the components of this
liability will be included in the notes to the financial statements. The
requirements of SFAS 150 will apply to the Company for its quarter ending
September 27, 2003. We do not believe that the adoption of this
pronouncement will have a material effect on the financial statements.
2. INVENTORIES
Inventories are comprised of the following:
(In thousands) June 28, December 31,
2003 2002
-------------------------------
Raw materials $ 1,763 $ 1,604
Work in process 162 183
Finished goods 23,108 21,673
-------------------------------
Total $ 25,033 $ 23,460
===============================
Inventories are valued at the lower of cost or market. Rubber boot products
are valued using the last-in, first-out (LIFO) method. All other inventory
items are valued using the first-in, first-out (FIFO) method. The inventory
values at June 28, 2003 and December 31, 2002 are net of reserves of $1.5
million to cover losses incurred in the disposition of slow moving and
obsolete inventories. If the FIFO method had been used to value all
inventories, inventories would have been approximately $0.2 million lower
than reported at June 28, 2003 and December 31, 2002.
3. INCOME TAXES
We recorded an income tax benefit in the fourth quarter of 2002 due to tax
provisions enacted as part of the Job Creation and Worker Assistance Act of
2002. The law extended the loss carryback period for certain losses from
two to five years. In June 2003, we received an income tax refund of $2.9
million relating to the carryback of tax losses incurred in 2002. Deferred
tax assets are described in detail in our Annual Report on Form 10-K for
the year ended December 31, 2002.
During the first half of 2003, we generated a deferred tax asset related to
net operating losses, but this was offset by a corresponding increase in
the deferred tax valuation allowance. During the first quarter of 2002,
8
we recorded an income tax refund receivable for $2.3 million and as a
result we also recorded a tax benefit of $1.0 million and reduced our
deferred income tax assets by $1.3 million.
4. STOCK OPTIONS
We have granted stock options to officers, directors and key employees
under our 1993, 1997 and 2001 stock option plans pursuant to which options
for up to an aggregate of 950,000 shares of common stock may be granted.
The option price per share shall not be less than 100% of the fair market
value at the date of grant and the options expire 10 years after grant or
such shorter period as the compensation committee of the Board of Directors
so determines. Substantially all of the options vest in equal increments
over a five-year period.
During 2003, the Board of Directors granted options to purchase
approximately 190,000 shares of common stock to certain officers, key
employees and non-employee directors under the stock option plans. The
average exercise price for these options is $2.58 per share. The exercise
price is calculated as the mean between the highest and lowest reported
selling prices of the common stock on the day before the options were
granted. The options generally vest in equal increments over a five-year
period.
5. FACILITY SHUTDOWN CHARGE
In the second quarter of 2002, we announced a strategic decision to
relocate our Racine, Wisconsin administrative and distribution functions as
well as close the manufacturing facility at that location. At December 31,
2002, we had a reserve of $0.4 million. A summary of the activity for the
first half of 2003 related to this reserve is as follows (in thousands):
Balance Payments or Balance
December 31, New Charges Reserves Used June 28,
2002 2003
--------------------------------------------------------------------
Facility shutdown reserves $ 367 $ -- $ 72 $ 295
====================================================================
6. GOODWILL
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets ("SFAS 142") which
established a new method of testing goodwill and other intangible assets
for impairment using a fair-value based approach. Under SFAS 142, goodwill
is no longer amortized as was previously required. Upon adoption,
amortization of goodwill ceased. We completed the transitional impairment
test during 2002 for the Safety and Industrial and Danner division's
goodwill. The impairment test, which was conducted using information that
included a valuation performed by an independent appraiser, indicated that
the Safety and Industrial division goodwill was impaired. Accordingly, we
recorded a $1.0 million charge as a cumulative effect of change in
accounting principle in the first quarter of 2002. During the first quarter
of 2003, we completed the annual impairment test using an independent
appraiser, noting no further impairment.
The changes in the carrying amount of goodwill for the year ended December
31, 2002 and the first half ended June 28, 2003 are as follows (in
thousands):
Safety and
Industrial Danner Total
---------------------------------------
Balance as of January 1, 2002 $ 1,028 $ 10,753 $ 11,781
Impairment loss (1,028) -- (1,028)
---------------------------------------
Balance as of December 31, 2002 $ -- $ 10,753 $ 10,753
=======================================
Balance as of June 28, 2003 $ -- $ 10,753 $ 10,753
=======================================
9
7. COMPENSATION AND BENEFITS
Deferred Compensation:
At the request of a related party, the Company paid deferred compensation
in the amount of $0.4 million during the second quarter of 2003.
Postretirement Benefit Plan:
As a result of the elimination of its postretirement medical plan, the
Company incurred a curtailment gain of $0.3 million in the second quarter
of 2003. As of June 28, 2003, the Company's remaining postretirement
benefit obligation of approximately $0.3 million is comprised solely of
postretirement life insurance benefits.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth selected financial information derived from our
condensed consolidated financial statements. The discussion that follows the
table should be read in conjunction with the condensed consolidated financial
statements. In addition, please see Management's Discussion and Analysis of
Financial Condition and Results of Operations, audited financial statements and
related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2002.
(In thousands) For the Quarter Ended For the First Half Ended
June 28, June 29, % Change June 28, June 29, % Change
2003 2002 2003 2002
------------- ------------- ---------- ------------- ------------ -----------
Net Sales $ 18,588 $ 19,975 (6.9) $ 38,462 $ 42,796 (10.1)
Gross Profit 5,607 4,126 35.9 11,593 10,032 15.6
Selling and Administrative Expenses 5,410 7,436 (27.2) 11,739 16,019 (26.7)
Non-Operating Expenses 193 467 (58.7) 499 773 (35.4)
Income Tax Benefit -- -- -- -- (1,000) (100.0)
Cumulative Effect of Change in
Accounting Principle -- -- -- -- 1,028 (100.0)
Our business is seasonal with lower revenues historically being generated during
the first two quarters of the year. As a result, revenue for the first half
ended June 28, 2003 should not be considered indicative of results to be
reported for the balance of the fiscal year.
Net Sales
Net sales for the quarter ended June 28, 2003 decreased $1.4 million, or 6.9%,
to $18.6 million from $20.0 million from the same period in 2002. The decrease
in net sales was due to a 37.0% decrease in the Safety and Industrial channel of
LaCrosse(R) and Rainfair(R) brand products, largely offset by a 7.7% increase in
the Retail channel of LaCrosse brand products, and an increase of 13.4% in
Danner (R) brand products over the same period last year. Net sales in the
Safety and Industrial channel of distribution declined from the second quarter
of 2002 as a result of a continued soft economy and a reduction in the number of
products being offered for sale particularly in the private label and mass
merchant markets. The LaCrosse Retail channel experienced an increase in net
sales from the second quarter of 2002 due to strong sales in the recreational
hunting and rubber boot categories. The net sales increase for the Danner brand
was primarily increased volume related to improved product offerings for niche
hunting, occupational and uniform markets.
Net sales for the first half ended June 28, 2003 decreased $4.3 million, or
10.1%, to $38.5 million from $42.8 million from the respective period in 2002.
The decrease in net sales was due to an 11.5% decrease in the Retail channel of
LaCrosse brand products and a 29.7% decrease in the Safety and Industrial
channel of LaCrosse and Rainfair brand products, partially offset by a 11.1%
increase in Danner brand products over the same period of last year. These
decreases were the result of a continued soft economy and a reduction in the
number of products being offered for sale, particularly in the private label and
mass merchant markets in the Safety and Industrial channel of distribution.
Gross Profit
Gross profit for the quarter ended June 28, 2003 increased to $5.6 million, or
30.2% of net sales, from $4.1 million, or 20.7% of net sales, for the second
quarter of 2002. Gross margins as a percent of net sales have improved due to a
reduction in sales of discontinued products, eliminating lower-margin products,
and the introduction of new, higher- margin products.
11
Gross profit for the first half ended June 28, 2003 increased to $11.6 million,
or 30.1% of net sales, from $10.0 million, or 23.4% of net sales, for the first
half of 2002. Gross margins as a percent of net sales have improved due to a
reduction in sales of discontinued products, eliminating lower-margin products,
and the introduction of new, higher-margin products.
Selling and Administrative Expenses
Selling and administrative expenses decreased $2.0 million, or 27.2%, to $5.4
million for the quarter ended June 28, 2003 compared to $7.4 million for the
same period a year ago. The decrease is management's focus on transforming the
Company from a fixed-cast manufacturing model to a brand-driven, variable
expense model. Specifically, the decrease is a result of the absence of one-time
charges from the prior year ($1.3 million), a one-time credit of $0.3 million to
reduce our postretirement benefit obligation, reductions in sales commissions
and distribution costs associated with the reduced sales volume, and
consolidation of the Retail and Safety and Industrial operations in Portland,
Oregon. In the second quarter of 2002, we recorded a $1.0 million charge related
to relocating the Safety and Industrial division as well as a final charge of
$0.3 million related to the change in the estimated life of our former
enterprise software package.
Selling and administrative expenses decreased $4.3 million, or 26.7%, to $11.7
million for the first half ended June 28, 2003 compared to $16.0 million for the
same period a year ago. The decrease is management's focus on transforming the
Company from a fixed-cast manufacturing model to a brand-driven, variable
expense model. Specifically, the decrease is a result of one-time charges from
the prior year ($2.9 million), a one-time credit due to the elimination of the
retiree health care liability ($0.3 million), reductions in sales commissions
and distribution costs associated with the reduced sales volume, and
consolidation of the Retail and Safety and Industrial operations in Portland,
Oregon. In the first half of 2002, we recorded $2.9 million of charges
associated with the move of the corporate headquarters to Portland, Oregon from
La Crosse, Wisconsin ($1.9 million) and the move of the Safety and Industrial
division to Portland, Oregon from Racine, Wisconsin ($1.0 million). This
includes one-time charges of $1.1 million of depreciation expense related to a
change in the estimated life of our former enterprise software package and a
non-cash property and equipment impairment charge of $0.6 million.
Non-Operating Expenses
Non-operating expenses of $0.2 million decreased by 58.7% to 1.0% of net sales
for the quarter ended June 28, 2003, from 2.3% of net sales, or $0.5 million for
the quarter ended June 29, 2002. In the second quarter of 2003 as compared to
the same period of 2002, interest expense has decreased due to lower interest
rates and lower average borrowings.
Non-operating expenses of $0.5 million decreased by 35.4% to 1.3% of net sales
for the first half ended June 28, 2003, from 1.8% of net sales, or $0.8 million
for the six months ended June 29, 2002. In the first half of 2003 as compared to
the same period of 2002, interest expense has decreased due to lower interest
rates and lower average borrowings.
Income Tax Benefit
We recorded an income tax benefit of $2.9 million in the fourth quarter of 2002
due to tax provisions enacted as part of the Job Creation and Worker Assistance
Act of 2002. The law extended the loss carryback period for certain losses from
two to five years. In June 2003, we received an income tax refund of $2.9
million relating to the carryback of tax losses incurred in 2002. Deferred tax
assets are described in detail in our Annual Report on Form 10-K for the year
ended December 31, 2002.
During the first half of 2003, we generated a deferred tax asset related to net
operating losses, but this was offset by a corresponding increase in the
deferred tax valuation allowance. During the first quarter of 2002, we recorded
an income tax refund receivable for $2.3 million and as a result we also
recorded a tax benefit of $1.0 million and reduced our deferred income tax
assets by $1.3 million.
12
Liquidity and Capital Resources
We have historically funded working capital requirements and capital
expenditures with cash generated from operations and borrowings under a
revolving credit agreement or other long-term lending arrangements. We require
working capital to support fluctuating accounts receivable and inventory levels
caused by our seasonal business cycle. Our borrowing requirements are generally
the lowest in the first quarter and the highest during the third quarter.
Our revolving credit agreement provides for advances based on a percentage of
eligible accounts receivable and inventory with maximum borrowings of $47.5
million. The credit agreement is used to support working capital requirements.
Borrowings under the credit agreement and cash flows generated from operations
are expected to be sufficient to meet our cash requirements for the next 12
months. Excess cash flows from operations are used to pay down the credit
agreement. At June 28, 2003, we had $8.3 million of outstanding borrowings under
the credit agreement and unused availability of $9.1 million. Our current credit
agreement expires in June of 2004. We are currently in the process of reviewing
with lenders a credit facility that will meet our future credit needs when our
current agreement expires.
Net cash provided by operating activities was $2.0 million in the first half of
2003 compared to $3.8 million provided by operating activities in the same
period of 2002. In the first half of 2003, accounts receivable decreased by $2.8
million. This was offset by a net loss of $0.6 million, an increase in inventory
of $1.6 million and a decrease of $1.4 million in accounts payable. The $1.6
million increase in inventory is a normal seasonal build up in anticipation of
third quarter sales. The decrease in accounts receivable is normal for the
period. In the first half of 2002, inventory and accounts receivable decreased
by $5.2 million and $4.2 million, respectively, and we recorded a non-cash
goodwill impairment charge of $1.0 million. These were offset by a net loss of
$6.8 million, and a decrease of $2.5 million in accounts payable.
Net cash used in investing activities was $0.6 million in the first half of 2003
compared to $0.3 million for the same period of 2002. The majority of the cash
used in both years was for capital expenditures.
Net cash used in financing activities was $1.5 million in the first half of 2003
compared to $3.7 million for the same period of 2002. During the first half of
2003, we repaid $0.1 million in short-term borrowings and $1.4 million in
long-term obligations. During the same period of 2002, we repaid $2.9 million in
short-term borrowings and $0.8 million in long-term obligations. In the first
quarter of 2003, we redeemed the cash surrender value of certain of our life
insurance policies for cash totaling approximately $0.6 million. Such cash was
applied directly to pay down a portion of the principal balance of our term
loan, thereby reducing the amount due in 2004 to $2.2 million.
At the end of the second quarter of 2003, we were in compliance with all
covenants in our credit agreements.
A summary of our contractual cash obligations at June 28, 2003 is as follows:
(In Thousands) Payments due by period
----------------------
Contractual Obligations Remaining 2007 and
Total in 2003 2004 2005 2006 Thereafter
----- ------- ---- ---- ---- ----------
Long-term debt $ 3,000 $ 800 $ 2,200 $ - $ - $ -
Operating leases 5,100 900 1,100 1,200 1,000 900
Total contractual cash obligations $ 8,100 $ 1,700 $ 3,300 $ 1,200 $ 1,000 $ 900
We also have a commercial commitment as described below:
(In thousands)
Other Commercial Commitment Total Amount Committed Outstanding at 6/28/03 Date of Expiration
--------------------------- ---------------------- ---------------------- ------------------
Line of credit $ 47,500 $ 8,311 June 2004
13
Critical Accounting Policies
Our significant accounting policies are summarized in the footnotes to our
annual consolidated financial statements. Some of our accounting policies
require management to exercise significant judgment in selecting the appropriate
assumptions for calculating financial estimates. Such judgments are subject to
an inherent degree of uncertainty. These judgments are based on our historical
experience, known trends in our industry, terms of existing contracts and other
information from outside sources, as appropriate. Actual results may differ from
these estimates under different assumptions and conditions. Certain of the most
critical policies that require significant judgment are as follows:
Revenue Recognition. We recognize revenue in accordance with Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements. Revenues are
recognized when all of the following criteria are met: when persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable and collectibility is reasonably assured. Revenue for our product
sales is recognized at the time products are shipped to customers.
Allowance for Doubtful Accounts. We establish estimates of the uncollectibility
of accounts receivable. Our management analyzes accounts receivable, historical
write-offs as bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. We maintain an allowance
for doubtful accounts at an amount that we estimate to be sufficient to provide
adequate protection against losses resulting from collecting less than full
payment on receivables. A considerable amount of judgment is required when
assessing the realizability of receivables, including assessing the probability
of collection and the current credit-worthiness of each customer. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, an additional provision for
doubtful accounts may be required. We have not experienced significant bad debts
expense and our reserve for doubtful accounts of $0.4 million should be adequate
for any exposure to loss in our June 28, 2003 accounts receivable.
Product Warranties. We provide a limited warranty for the replacement of
defective products. Our standard warranties require us to repair or replace
defective products at no cost to the consumer. We estimate the costs that may be
incurred under our basic limited warranty and record a liability in the amount
of such costs at the time product revenue is recognized. Factors that affect our
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims, and cost per claim. We periodically assess the
adequacy of our recorded warranty liabilities and adjust the amounts as
necessary. We utilize historical trends and information received from customers
to assist in determining the appropriate loss reserve levels. We believe our
warranty liability of $1.0 million at June 28, 2003 should be adequate to cover
the estimated costs we will incur in the future for warranty claims on products
sold before June 28, 2003.
Pension and Other Postretirement Benefit Plans. The determination of our
obligation and expense for pension and other postretirement benefits is
dependent on our selection of certain assumptions used by actuaries in
calculating such amounts. Those assumptions are described in Note 7 to the
annual consolidated financial statements and include, among others, the discount
rate, expected long-term rate of return on plan assets and rates of increase in
compensation and healthcare costs. In accordance with accounting principles
generally accepted in the United States of America, actual results that differ
from our assumptions are accumulated and amortized over future periods and
therefore, generally affect our recognized expense and recorded obligation in
such future periods. While we believe that our assumptions are appropriate,
significant differences in our actual experience or significant changes in our
assumptions may materially affect our pension and other postretirement
obligations, our future expense and equity. See Item 3 in this Form 10-Q for
sensitivity analysis relating to the effects of possible changes to our
assumptions regarding such obligations.
Allowance for Excess and Obsolete Inventory. On a periodic basis, we analyze the
level of inventory on hand, its cost in relation to market value and estimated
customer requirements to determine whether write-downs for excess or obsolete
inventory are required. Actual customer requirements in any future periods are
inherently uncertain and thus may differ from estimates. If actual or expected
requirements were significantly greater or lower than the established reserves,
a reduction or increase to the obsolescence allowance would be recorded in the
period in which
14
such a determination was made. We have established reserves for slow moving and
obsolete inventories and believe the reserve of $1.5 million at June 28, 2003 is
adequate.
Valuation of Long-Lived and Intangible Assets. As a matter of policy, we review
our major assets for impairment at least annually, and whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Our major long-lived and intangible assets are goodwill and
property and equipment. We depreciate our property and equipment over their
estimated useful lives. In connection with the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets" we determined that the goodwill
associated with our Industrial Division was impaired. Accordingly, we recorded a
$1.0 million charge in the first quarter of 2002. In assessing the
recoverability of our remaining goodwill of $10.8 million related to Danner
division and the investments we have made in our other long-term investments,
primarily property and equipment of $4.8 million, we have made assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets not previously recorded. Please refer to the "Forward-Looking Statements"
caption below for a discussion of factors that will have an effect on our
ability to attain future levels of product sales and cash flows.
Forward-Looking Statements
We caution you that this quarterly report on Form 10-Q contains forward-looking
statements within the meaning of the Securities and Exchange Act of 1934.
Forward-looking statements are only predictions or statements of our current
plans, which we review on a continual basis. Forward-looking statements are
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement includes phrases such as we "believe," "expect," or other words of
similar import. Similarly, statements that describe our future plans, objectives
or goals are also forward looking statements. Such forward-looking statements
are subject to certain risks and uncertainties which could cause actual results
or outcomes to differ materially from those currently anticipated. All
forward-looking statements may differ from actual results due to, but not
limited to:
o Weather conditions affecting the demand for outdoor footwear products
o General economic conditions including interest rates
o Those related to general economic conditions including interest rates
o Outbreak of disease affecting product development and sourcing
production
o Demand for outdoor footwear products
o Inventory levels required for sourced product and emphasis on
forecasting capabilities
o Performance of its manufacturing facilities
o Limited ability to resupply customer for fill-in orders for sourced
product
o Dealer inventory levels
o Cancellation of current orders
o Trading policies or import and export regulations and foreign
regulation of manufacturers or suppliers
o Increased competition
o Ability to protect intellectual property
o Cyclical nature of the Footwear sector
o Changes in consumer buying patterns
o Loss of a material customer
o Lead times (or delays) for sourced product
o Unforeseen work stoppages
o Acts of terrorism or military activities
o Foreign currency exchange rate risk
You should consider these important factors in evaluating any statement
contained in this report and/or made by us or on our behalf.
15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk results from fluctuations in interest rates. We enter
into interest rate swap agreements (swap agreements) to reduce our exposure to
interest rate fluctuations on our floating rate debt. The swap agreements
exchange floating rate for fixed rate interest payments periodically over the
life of the agreements without exchange of the underlying notional amounts. The
notional amounts of interest rate agreements are used to measure interest to be
paid or received and do not represent an amount of exposure to credit loss. For
interest rate instruments that effectively hedge interest rate exposures, the
net cash amounts paid or received on the agreements are accrued and recognized
as an adjustment to interest expense. In addition, we record the fair value of
the swap agreements each month as an adjustment to interest expense. As of June
28, 2003, we had one swap agreement in effect with a $4.0 million notional
amount maturing October 2003. The variable rate borrowings not offset by the
swap agreement at June 28, 2003 totaled $7.3 million. Swap agreement rates are
based on the three-month LIBOR rate. Based on average floating rate borrowings
outstanding throughout the second quarter of 2003, a 100-basis point (one
percentage point) change in LIBOR would have caused our monthly interest expense
to change by approximately $6,000. We believe that these amounts are not
material to our earnings.
We are also exposed to market risk related to the assumptions we make in
estimating our pension liability. The discount rate used, in part, to calculate
the pension plan obligation is related to the prevailing long-term interest
rates. At December 31, 2002, we used an estimated discount rate of 7 percent. A
one-percentage point (100 basis points) reduction in the discount rate would
result in an increase in the actuarial present value of projected pension
benefits of approximately $2.0 million at December 31, 2003 with a similar
charge to equity. Furthermore, a plus or minus one percent change in the assumed
expected rate of return on pension plan assets would affect the pension plan
liability by approximately $0.1 million.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), within 90
days prior to the filing date of this Quarterly Report on Form 10-Q, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and Executive Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-14(c) under the Exchange Act). Based upon
their evaluation of these disclosure controls and procedures, the President and
Chief Executive Officer and the Executive Vice President and Chief Financial
Officer concluded that the disclosure controls and procedures were effective as
of the date of such evaluation to ensure that material information relating to
the Company, including its consolidated subsidiaries, was made known to them by
others within those entities, particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared.
(b) Changes in internal controls. There were no significant changes in our
internal controls or other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
16
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
We are party to routine litigation arising in the normal course of business. We
do not expect these matters, individually or in the aggregate, to have a
material adverse effect on our financial position, results of operations or cash
flows.
In October 2002, we received a letter from a public interest environmental group
alleging that we are in violation of product labeling requirements contained in
the California Safe Drinking Water and Toxic Enforcement Act of 1986
(Proposition 65 or the Act). The Act requires, among other things, that
manufacturers of products sold in California provide "clear and reasonable
warning" if the product contains a chemical listed by the State of California as
a carcinogen or reproductive toxicant above "No Significant Risk Levels." In our
situation, the environmental group alleges polyvinyl chloride (PVC) in our
rainwear products contains lead and/or lead compounds above the California
standards. If in fact, the lead or lead compounds exceed the California
standards, we plan to take the appropriate corrective or remedial action
warranted. While the maximum statutory penalties for violating Proposition 65
are severe, we do not believe that violations, if any, of Proposition 65 by us
will have a material adverse effect on us, or our business, operations or
financial position. This matter has been settled pending the Court's approval of
the settlement. Generally, a court will only disallow a Proposition 65
settlement when it feels that a disproportionate amount of the settlement has
been allocated to the plaintiff's attorney's fees and costs, rather than a
supplemental environmental project in lieu of a penalty. We do not believe that
is the case here.
ITEM 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders on May 13, 2003. At such
meeting, Luke E. Sims and John D. Whitcombe were elected as directors of the
Company for terms to expire at the 2006 annual meeting of shareholders and until
their successors are duly elected and qualified pursuant to the following votes:
Luke E. Sims - 5,191,975 shares voted for, 0 against, and 37,341 abstain; and
John D. Whitcombe - 5,194,875 shares voted for, 0 against, and 34,441 abstain.
The other directors of the Company where terms of office continued after the
2003 annual meeting of shareholders are as follows: terms expiring at the 2004
annual meeting - George W. Schneider, Joseph P. Schneider and Stephen F.
Loughlin; and terms expiring at the 2005 annual meeting - Richard A. Rosenthal
and Frank J. Uhler, Jr.
17
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of President and Chief Executive Officer pursuant to
18 U.S.C. section 1350
(99.2) Certification of Executive Vice President and Chief Financial
Officer pursuant to 18 U.S.C. section 1350
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated May 12, 2003,
furnishing under Item 12 the Company's press release, dated May 12, 2003,
with respect to its financial results for the first quarter ended March 29,
2003.
18
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.
LACROSSE FOOTWEAR, INC.
(Registrant)
Date: August 4, 2003 By: /s/ Joseph P. Schneider
-------------------------------------
Joseph P. Schneider
President and Chief Executive Officer
Date: August 4, 2003 By: /s/ David P. Carlson
-------------------------------------
David P. Carlson
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
19
CERTIFICATIONS
I, Joseph P. Schneider, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LaCrosse Footwear,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 4, 2003 By: /s/ Joseph P. Schneider
--------------------------------------------
Joseph P. Schneider
President and Chief Executive Officer
20
CERTIFICATIONS
I, David P. Carlson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LaCrosse Footwear,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 4, 2003 By: /s/ David P. Carlson
--------------------------------------------
David P. Carlson
Executive Vice President and Chief
Financial Officer
21
LaCrosse Footwear, Inc.
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarter Ended June 28, 2003
Exhibit
No. Exhibit Description
- ------- -------------------
(99.1) Certification of President and Chief Executive Officer pursuant to 18
U.S.C. section 1350
(99.2) Certification of Executive Vice President and Chief Financial Officer
pursuant to 18 U.S.C. section 1350
22