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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, 2002 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____
4,505,465 common shares, no par value, outstanding at August 6, 2002.
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 and 2001 (Unaudited) and December 31, 2001 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 2002 and 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months and Six Months Ended June 30, 2002 and 2001 5
Notes to Interim Unaudited Condensed Consolidated Financial
Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001 June 30, 2001
Unaudited Unaudited
----------------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,514,834 $ 2,954,935 $ 1,453,055
Trade receivables - net 15,072,183 15,091,100 20,197,326
Other receivables 2,345,324 2,225,498 4,973,000
Inventories 31,319,150 27,713,664 41,384,116
Deferred income taxes 615,609 615,609 502,722
Prepaid expenses 1,491,523 1,053,192 1,454,132
------------ ------------ ------------
Total current assets 52,358,623 49,653,998 69,964,351
FIXED ASSETS - net 19,965,259 20,766,094 22,473,023
DEFERRED PENSION ASSET 2,311,806 1,802,922 2,526,603
DEFERRED INCOME TAXES 295,784 295,784
OTHER ASSETS 2,469,050 2,141,016 2,157,433
------------ ------------ ------------
TOTAL ASSETS $ 77,400,522 $ 74,659,814 $ 97,121,410
============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 4,207,401 $ 1,559,444 $ 6,091,027
Current maturities - long term debt 480,751 469,143 9,516,681
Accrued taxes - other 606,690 991,295 910,612
Accrued salaries and wages 852,859 985,992 1,063,461
Accrued plant closing costs 780,499 903,291
Accrued other 282,721 477,938 558,948
------------ ------------ ------------
Total current liabilities 7,210,921 5,387,103 18,140,729
LONG TERM DEBT-less current maturities 20,004,450 16,976,023 26,212,433
DEFERRED LIABILITIES 180,500 1,253,355 2,646,331
------------ ------------ ------------
TOTAL LIABILITIES 27,395,871 23,616,481 46,999,493
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
June 30, 2002 - 4,505,465; December 31, 2001 - 4,492,215;
June 30, 2001 - 4,489,215 35,373,578 35,302,159 35,284,159
Accumulated other comprehensive loss (831,161) (831,161)
Retained earnings 15,462,234 16,572,335 14,837,758
------------ ------------ ------------
Total shareholders' equity 50,004,651 51,043,333 50,121,917
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 77,400,522 $ 74,659,814 $ 97,121,410
============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES $ 19,194,071 $ 22,006,132 $ 32,943,659 $ 38,070,027
COST OF GOODS SOLD 14,256,438 15,854,003 25,665,373 28,750,824
------------ ------------ ------------ ------------
GROSS MARGIN 4,937,633 6,152,129 7,278,286 9,319,203
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,517,033 4,691,982 8,416,534 8,700,481
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 420,600 1,460,147 (1,138,248) 618,722
OTHER INCOME AND (EXPENSES):
Interest expense (332,959) (632,685) (616,068) (1,211,782)
Other - net 78,198 147,041 167,029 280,027
------------ ------------ ------------ ------------
Total other - net (254,761) (485,644) (449,039) (931,755)
INCOME (LOSS) BEFORE INCOME
TAXES 165,839 974,503 (1,587,287) (313,033)
INCOME TAX (BENEFIT) EXPENSE 48,752 272,164 (477,186) (109,278)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 117,087 $ 702,339 $ (1,110,101) $ (203,755)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
Basic $ 0.03 $ 0.16 $ (0.25) $ (0.05)
============ ============ ============ ============
Diluted $ 0.03 $ 0.16 $ (0.25) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 4,502,608 4,489,215 4,498,240 4,489,215
============ ============ ============ ============
Diluted 4,680,002 4,522,039 4,489,240 4,489,215
============ ============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,110,101) $ (203,755)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,069,977 2,304,910
Deferred taxes and liabilities - net (1,581,738) 195,743
Loss on sale of fixed assets 9,508 7,434
Change in assets and liabilities:
Receivables (100,909) (4,157,545)
Inventories (3,605,486) (9,348,879)
Prepaid expenses (438,331) (158,845)
Other assets (347,810) 20,602
Accounts payable 2,643,981 2,598,861
Accrued and other liabilities (835,747) 309,344
------------ ------------
Net cash used in operating activities (3,296,656) (8,432,130)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,267,649) (452,772)
Proceeds from sale of fixed assets 12,750 6,498
------------ ------------
Net cash used in investing activities (1,254,899) (446,274)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long Term Debt 40,122,478 45,171,590
Payments on Long Term Debt (37,082,443) (36,958,125)
Proceeds from exercise of stock options 71,419
------------ ------------
Net cash provided by financing activities 3,111,454 8,213,465
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,440,101) (664,939)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,954,935 2,117,994
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,514,834 $ 1,453,055
============ ============
See notes to the interim unaudited condensed consolidated financial statements.
5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the accompanying interim 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 unaudited interim consolidated
financial statements are considered to be of a normal and recurring
nature. The results of the operations for the three month and six month
periods ended June 30, 2002 and 2001 are not necessarily indicative of
the results to be expected for the whole year. Accordingly, these
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in
the Company's Annual Report to the Shareholders on Form 10-K for year
ended December 31, 2001.
Certain reclassifications have been made to the prior year amounts in
order to conform to the current year presentation.
2. CLOSURE OF MANUFACTURING OPERATIONS
In September 2001, the Board of Directors approved a restructuring plan
to consolidate and realign the Company's footwear manufacturing
operations. Under this plan, the Company moved the footwear
manufacturing operations at its Nelsonville, Ohio factory to the
Company's factory in Puerto Rico. The restructuring plan was completed
in fourth quarter 2001.
The execution of this plan, which started in September 2001, resulted
in the elimination of 67 employees at the Nelsonville, Ohio facility
and transfer of a significant amount of machinery and equipment to the
Company's Moca, Puerto Rico facility.
A reconciliation of the plant closing costs and accrual for the quarter
ended June 30, 2002 is as follows:
6
ACCRUED ACCRUED
2001 TOTAL BALANCE FIRST QUARTER SECOND QUARTER BALANCE
EXPENSES DEC. 31, 2001 2002 PAYMENTS 2002 PAYMENTS JUNE 30, 2002
---------- ------------- ------------- ------------- -------------
Severance
Non-union $ 71,668 $ 71,668 $ 20,483 $ 5,091 $ 46,094
Union 292,653
Curtailment of pension plan benefits 690,000 690,000 690,000
Employee benefits 34,223 33,000 6,808 22,739 3,453
Factory lease 90,000 85,000 13,000 9,000 63,000
Equipment and relocation costs 260,626 5,000 5,000
Legal and other costs 60,830 18,623 11,825 33,847 (27,049)
---------- ---------- ---------- ---------- ----------
Total $1,500,000 $ 903,291 $ 52,116 $ 70,677 $ 780,498
========== ========== ========== ========== ==========
3. INVENTORIES
Inventories are comprised of the following:
June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
Raw materials $ 5,348,288 $ 4,537,865 $ 6,791,263
Work-in Process 1,798,754 1,578,107 2,969,247
Finished goods 23,049,609 20,077,999 29,369,379
Factory outlet finished goods 1,283,499 1,680,693 2,814,227
Reserve for obsolescence or
lower of cost or market (161,000) (161,000) (560,000)
------------ ------------ ------------
Total $ 31,319,150 $ 27,713,664 $ 41,384,116
============ ============ ============
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Six Months Ended
June 30,
2002 2001
---- ----
Interest $624,184 $1,279,884
======== ==========
Federal, state and local
income taxes $75,000 $77,348
======= =======
Accounts payable at June 30, 2002 and December 31, 2001 include a total
of $9,286 and $5,310, respectively, relating to the purchase of fixed
assets.
5. PER SHARE INFORMATION
Basic earnings/(loss) per share (EPS) is computed by dividing net
income (loss) applicable to common shareholders by the basic weighted
average number of common shares outstanding during each period. The
diluted earnings per share computation
7
includes common share equivalents, when dilutive. There are no
adjustments to net income necessary in the calculation of basic and
diluted earnings per share.
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, 2002 and 2001 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Basic Weighted average
shares outstanding 4,502,608 4,489,215 4,498,240 4,489,215
--------- --------- --------- ---------
Diluted securities:
Stock options 177,394 32,824 - -
--------- --------- --------- ---------
Diluted Weighted average
shares outstanding 4,680,002 4,522,039 4,498,240 4,489,215
========= ========= ========= =========
6. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The adoption of
this statement did not have a material impact on its consolidated
financial statements. SFAS No. 142 changes the accounting for goodwill
and certain other intangible assets from an amortization method to an
impairment only approach. The Company has no goodwill recorded.
However, the total net book value of indefinite-lived intangible assets
at June 30, 2002 was $413,869. Indefinite-lived intangible assets
represent the cost of acquiring the licensing rights to ROCKY(R) Kids
from Philip's Kids, LLC. These rights have previously been determined
to have an indefinite useful life and accordingly are not subject to
amortization. In addition, the Company has intangible assets consisting
of patents and trademarks totaling approximately $500,000 at June 30,
2002 that are being amortized over 15 years. Amortization expense
related to these intangible assets in the first six months of fiscal
2002 and 2001 was $34,972 and $18,904 respectively.
As previously reported, FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" in April 2002. It is effective for the first
quarter in the year ended December 31, 2003. The Company does not
believe the adoption of SFAS No. 145 will have a significant impact on
its consolidated financial statements.
8
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 Interim Unaudited Condensed Consolidated Financial
Statements, expressed as a percentage of net sales. The discussion that follows
the table should be read in conjunction with the Interim Unaudited Condensed
Consolidated Financial Statements of the Company.
PERCENTAGE OF NET SALES
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 74.3% 72.0% 77.9% 75.5%
---------- ----------- ---------- -----------
Gross Margin 25.7% 28.0% 22.1% 24.5%
Selling, General and
Administrative Expenses 23.5% 21.4% 25.6% 22.9%
---------- ----------- ---------- -----------
Income (Loss) from Operations 2.2% 6.6% (3.5%) 1.6%
========== =========== ========== ===========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net Sales
Net sales decreased $2,812,061, or 12.8%, to $19,194,071 for the quarter ended
June 30, 2002 compared to $22,006,132 for the same period a year ago.
Continuation of weak market conditions, particularly in the rugged outdoor
segment, resulted in the decline in net sales for second quarter 2002 compared
to last year. In addition, unusually warm weather conditions throughout most of
the 2001-2002 winter selling season for rugged outdoor footwear adversely
affected sales for the Company's retail customers and therefore orders during
2002.
The Company had increased sales of military boots and Wild Wolf(R) by Rocky(R)
footwear during second quarter 2002 compared to last year, and made initial
shipments of ROCKY(R) Kids footwear and ROCKY(R) Gear clothing and accessories
during the quarter. These sales gains were offset by lower sales in the rugged
outdoor footwear, occupational and casual footwear categories. The Company began
shipping military footwear in second quarter 2001 pursuant to a contract with
the U.S. Government. Second quarter 2002 net sales included $2,600,000 of
military boots versus $1,700,000 for the same period in 2001. All orders under
this contract have been shipped and the contract was completed as of June 30,
2002.
Gross Margin
9
Gross margin decreased $1,214,496, or 19.7%, to $4,937,633 for the quarter ended
June 30, 2002 compared to $6,152,129 for the same period in 2001. As a
percentage of net sales, gross margin was 25.7% this year compared to 28.0% a
year ago. The change in product mix, with military boots representing a higher
percentage of net sales in second quarter 2002, negatively affected the gross
margin. Military boots are produced at lower gross margin than footwear in the
Company's other categories. Positive contributions were realized from the
manufacturing realignment announced during third quarter 2001 and incremental
benefits are expected in future periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased $174,949, or
3.7%, to $4,517,033 for the quarter ended June 30, 2002 compared to $4,691,982
for the same period a year ago. As a percentage of net sales, SG&A increased to
23.5% versus 21.4% a year ago. Despite the shortfall in sales, progress was
achieved regarding controllable costs. Cost reduction programs have been
implemented during the past 18 months to streamline operations and improve
operating efficiency. These savings enhanced the Company's results in second
quarter 2002 despite the challenging retail environment, and incremental
benefits are expected in future periods.
Interest Expense
Interest expense decreased $299,726, or 47.4%, to $332,959 in the quarter ended
June 30, 2002 compared to $632,685 the same quarter a year ago. The Company
benefited from lower outstanding balances and, to a lesser extent, more
favorable interest rates compared with second quarter 2001. The Company's funded
debt decreased 42.7% to $20,485,201 at June 30, 2002 versus $35,729,114 a year
ago due to a $10,064,966 reduction in inventory and a $5,125,143 decline in
accounts receivable at June 30, 2002 compared with last year.
Income Taxes
Income taxes for the three months ended June 30, 2002 decreased to $48,752
compared to $272,164 for the same period a year ago. The decrease in income tax
expense is due to reduced operating income in the current quarter as compared
with the prior year. The Company's effective tax rate of 29.4% for the three
months ended June 30, 2002 compares with an effective tax rate of 27.9% for the
same period last year.
10
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
Net Sales
Net sales for the six months ended June 30, 2002 decreased $5,126,368 or 13.5%
to $32,943,659 versus $38,070,027 for the same period a year ago. This decline
is generally attributable to the continuation of weak market conditions combined
with the inventory impact from the unusually warm 2001-2002 winter season. These
factors particularly affected sales in the rugged outdoor category. Sales of
occupational and casual footwear were primarily impacted by weak market
conditions.
Sales of military boots increased during the first half of 2002. In addition,
the Company made initial shipments of ROCKY(R) Kids footwear and ROCKY(R) Gear
clothing and accessories during this period. The Company began shipping military
footwear in second quarter 2001 pursuant to a contract with the U.S. Government.
Military boot sales totaled $6,400,000 during the first six months of 2002
compared to $1,700,000 for the same period last year. All orders under this
contract were shipped as of June 30, 2002.
Gross Margin
Gross margin for the six months ended June 30, 2002 decreased $2,040,917, to
$7,278,286 versus $9,319,203 for the same period a year ago. As a percentage of
net sales, gross margin was 22.1% in the first half of 2002 versus 24.5% for the
same period a year ago. Similar to the second quarter, higher sales of military
boots, which are produced at a lower margin than the Company's branded footwear,
affected product mix and gross margin for the first six months of 2002 compared
to last year. Positive contributions were realized from the manufacturing
realignment announced during third quarter 2001 and incremental benefits are
expected in future periods.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) for the six months ended
June 30, 2002 were $8,416,534 compared with $8,700,481 for the same period a
year ago. SG&A expenses were 25.5% of net sales in the first half of 2002 versus
22.9% in 2001. Cost reduction programs have been implemented during the past 18
months to streamline operations and improve operating efficiency. These savings
enhanced the Company's results for the first six months of 2002 despite the
challenging retail environment.
Interest Expense
Interest expense for the six months ended June 30, 2002 decreased $595,714 or
49.2% to $616,068 versus $1,211,782 for the same period a year ago. The
significant reduction is principally due to lower borrowings, and, to a lesser
extent, the decline in interest rates versus the prior year. The Company's
funded debt decreased 42.7% to $20,485,201 at June 30, 2002 versus $35,729,114 a
year ago. This was primarily due to the $10,064,966 reduction in inventory and a
$5,125,143 reduction in accounts receivable compared to the same date in 2001.
11
Income Taxes
Income tax benefit increased to $477,186 for the six months ended June 30, 2002
from $109,278 for the comparable period last year. The Company's effective tax
benefit rate of 30.1% for the first half of 2002 compares with 34.9% for the
same period last year.
Liquidity and Capital Resources
The Company has principally funded 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 principally as a result of the Company's seasonal business cycle.
These requirements are generally lowest in the months of January through March
of each year, and highest during the months of May through October. In addition,
the Company requires financing to develop and introduce new footwear styles,
and, to a lesser extent, for machinery, equipment and facilities due to the
increased percentage of sourced footwear sold and the recently completed
manufacturing realignment. At June 30, 2002, the Company had working capital of
$45,147,702 versus $44,266,895, at December 31, 2001.
The Company's line of credit, which extends through September 2003, provides for
advances based on a percentage of eligible accounts receivable and inventory
with maximum borrowings under the line of credit of $50,000,000. The Company had
borrowed $14,272,775 against its currently available line of credit of
$19,228,129 at June 30, 2002.
The Company's cash flow used in operations decreased to $3,296,656 in first half
of 2002 from $8,432,130 for the same period in the prior year. The period over
period comparison reflects smaller increases in accounts receivable and
inventory in the current year, which were partially offset by the increased net
loss. All of the related balance sheet fluctuations reflect the seasonal nature
of the Company's business and are normal when consideration is given to reduced
net sales for the 2002 year-to-date period and the Company's emphasis on
inventory management.
The principal use of cash flows in investing activities for the first six months
of 2002 and 2001 has been for investment in property, plant, and equipment. In
the first half of 2002, property, plant, and equipment expenditures were
approximately $1,268,000 versus $453,000 for the same period in 2001. During the
first half of 2002, the Company made investments in its Puerto Rico factory that
enhanced manufacturing capabilities. In addition, projects have been initiated
to upgrade sales and customer support capabilities.
The Company's cash flows from financing activities reflect the increases and
decreases in borrowings under its revolving credit facility and long-term
mortgage facility to finance working capital requirements and other operating
capital expenditures.
Inflation
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of materials, salaries, and
employee benefits. The Company attempts to offset the effects of inflation
through increased selling prices, productivity improvements, and reduction of
costs.
12
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including those
related to accounts receivable, inventories, pension benefits, income taxes, and
restructuring costs. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Accounts receivable allowances
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Management also records estimates for customer returns and discounts
offered to customers. Should a greater proportion of customers return goods and
take advantage of discounts than estimated by the Company, additional allowances
may be required.
Inventories
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
any slow moving or obsolete inventories through the Company's factory clearance
center or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional
provisions may be required.
Pension benefits
Management records an accrual for pension costs associated with the Company
sponsored noncontributory defined benefit pension plans covering the union and
non-union workers of the
13
Company's operations. Future adverse changes in market conditions or poor
operating results of underlying plan assets could result in losses or a higher
accrual.
Income taxes
Currently, management has not recorded a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. The Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, however in the event the Company were to determine that it would not
be able to realize all or part of its net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Likewise, should the Company determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Restructuring costs
As disclosed in Note 2 of Notes to the Interim Unaudited Condensed Consolidated
Financial Statements, in 2001 management established an accrual for estimated
restructuring and realignment costs associated with the closing of its
Nelsonville manufacturing facility. The Company expects no additional
restructuring and realignment costs associated with this plan, however should
the Company incur additional costs related to the closing of the manufacturing
facility, additional accruals may be required.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations 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 intent, beliefs, expectations, projections,
forecasts, and plans of the Company and its management and include any
statements regarding gross margin (paragraphs 4 and 10), and selling, general
and administrative expenses (paragraph 5). Investors are cautioned that such
statements involve risks and uncertainties, including, but not limited to,
changes in consumer demand, seasonal fluctuations, impact of weather,
competition, reliance on suppliers, changing retailing trends, reliance on
foreign manufacturing, changes in tax rates, capital expenditures, 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. One or
more of these factors have affected, and in the future could affect the
Company's business and financial results and cause actual results to differ
materially from plans and projections. Although the Company and its management
believe that the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate. Therefore,
there can be no assurance that the forward-looking statements included herein
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements contained herein, the inclusion of such
information should not be regarded as a representation by
14
the Company, its management or any other person that the Company's objectives
and plans 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.
PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2001.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2002 Annual Meeting of Shareholders was held on May 15, 2002, and the
following proposals were acted upon:
Proposal 1: The election of Class II Directors of the Company, each to serve
until the 2004 Annual Meeting of Shareholders or until their successors are
elected and qualified:
Number of Shares Voted
---------------------------------------------
FOR WITHHOLD TOTAL
AUTHORITY
Leonard L. Brown 3,689,453 324,050 4,013,503
David Fraedrich 3,070,718 942,785 4,013,503
Curtis A. Loveland 3,690,503 323,000 4,013,503
Robert D. Rockey 3,688,603 324,900 4,013,503
15
Proposal 2: To approve and adopt amendments to the Company's 1995 Stock Option
Plan.
Number of Shares Voted
- ----------------------------------------------------------------
FOR WITHHOLD ABSTAINED TOTAL
AUTHORITY
3,178,196 828,732 6,575 4,013,503
Proposal 3: To ratify appointment of Deloitte & Touche LLP to serve as the
Company's independent public accountants for the fiscal year ending December 31,
2002.
Number of Shares Voted
- -------------------------------------------------------------------
FOR AGAINST ABSTAINED TOTAL
4,007,593 3,550 2,360 4,013,503
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 10.1 Fifth Amendment to Loan and Security
Agreement, dated June 21, 2002, among the
Company, Lifestyle Footwear, Inc., and GMAC
Business Credit, LLC.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None
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SIGNATURE
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, 2002 /s/ James E. McDonald
------------------------------------
James E. McDonald, Vice President and
Chief Financial Officer*
In his capacity as Vice President and Chief Financial Officer, Mr. McDonald
is duly authorized to sign this report on behalf of the Registrant.
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