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, 2004 0-21026
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ROCKY SHOES & BOOTS, INC.
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(Exact name of registrant as specified in its charter)
OHIO 31-1364046
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(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
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(Address of principal executive offices)
(740) 753-1951
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(Registrant's telephone number, including area code)
(Former name, former address, and former Fiscal year if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes__X__ No____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes___ No__X__
4,552,476 common shares, no par value, outstanding at April 30, 2004
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2004 and 2003 (Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004 and 2003 5
Notes to Interim Unaudited Condensed Consolidated Financial
Statements 6 -10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 15
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 2. Changes in Securities, Use of Proceeds and Issuer Purchase of
Equity Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003 March 31, 2003
Unaudited Unaudited
------------ ------------ ------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,164,802 $ 2,159,050 $ 2,391,867
Trade receivables - net 17,657,161 19,532,287 10,639,471
Other receivables 842,220 830,131 1,854,435
Inventories 35,135,584 38,068,187 28,342,873
Deferred income taxes 959,810 959,810 578,951
Prepaid expenses 1,132,264 1,045,238 1,748,220
------------ ------------ ------------
Total current assets 56,891,841 62,594,703 45,555,817
FIXED ASSETS - net 17,325,445 17,610,238 18,770,432
DEFERRED PENSION ASSET 1,499,524 1,499,524 1,651,222
DEFERRED INCOME TAXES -- -- 153,495
OTHER ASSETS 4,498,312 4,470,371 1,842,517
------------ ------------ ------------
TOTAL ASSETS $ 80,215,122 $ 86,174,836 $ 67,973,483
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 2,082,062 $ 2,810,161 $ 4,881,731
Current maturities - long term debt 511,006 503,934 488,169
Accrued expenses:
Income taxes 380,652 1,929,808 --
Taxes - other 451,917 372,432 410,500
Salaries and wages 644,661 1,885,896 712,192
Plant closing costs 75,500 195,500 210,000
Other 346,083 686,934 393,097
------------ ------------ ------------
Total current liabilities 4,491,881 8,384,665 7,095,689
LONG TERM DEBT-less current maturities 13,998,680 17,514,994 10,340,806
DEFERRED LIABILITIES 2,057,783 1,890,500 1,687,053
------------ ------------ ------------
TOTAL LIABILITIES 20,548,344 27,790,159 19,123,548
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
March 31, 2004 - 4,532,226; December 31, 2003 -
4,360,400; March 31, 2003 - 4,051,430 36,089,849 34,880,199 32,368,617
Accumulated other comprehensive loss (1,950,400) (1,950,400) (2,311,749)
Retained earnings 25,527,329 25,454,878 18,793,067
------------ ------------ ------------
Total shareholders' equity 59,666,778 58,384,677 48,849,935
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 80,215,122 $ 86,174,836 $ 67,973,483
============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
March 31,
2004 2003
------------ ------------
NET SALES $ 21,882,089 $ 13,754,941
COST OF GOODS SOLD 16,263,485 10,289,413
------------ ------------
GROSS MARGIN 5,618,604 3,465,528
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,327,691 4,250,606
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INCOME (LOSS) FROM OPERATIONS 290,913 (785,078)
OTHER INCOME AND (EXPENSES):
Interest expense (258,573) (196,180)
Other - net 74,206 91,873
------------ ------------
Total other - net (184,367) (104,307)
INCOME (LOSS) BEFORE INCOME TAXES 106,546 (889,385)
INCOME TAX EXPENSE (BENEFIT) 34,095 (266,816)
------------ ------------
NET INCOME (LOSS) $ 72,451 $ (622,569)
============ ============
NET INCOME (LOSS) PER SHARE
Basic $ 0.02 ($ 0.14)
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Diluted $ 0.01 ($ 0.14)
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 4,428,023 4,363,115
============ ============
Diluted 4,971,569 4,363,115
============ ============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 72,451 $ (622,569)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 751,090 896,882
Deferred income taxes -- 172,275
Deferred compensation and pension - net 167,283 --
Loss on sale of fixed assets -- 9,194
Stock issued as directors' compensation 50,000 --
Change in assets and liabilities:
Receivables 1,863,037 3,962,426
Inventories 2,932,603 (5,160,884)
Other current assets (87,026) (481,123)
Other assets (34,064) (46,158)
Accounts payable (738,652) 3,184,305
Accrued and other liabilities (3,171,757) (161,108)
------------ ------------
Net cash provided by operating activities 1,804,965 1,753,240
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (449,621) (574,056)
Proceeds from sale of fixed assets -- 1,955
------------ ------------
Net cash used in investing activities (449,621) (572,101)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 22,879,008 19,092,057
Payments on long term debt (26,388,250) (19,237,631)
Purchase of treasury stock -- (3,106,156)
Proceeds from exercise of stock options 1,159,650 185,736
------------ ------------
Net cash used in financing activities (2,349,592) (3,065,994)
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DECREASE IN CASH AND CASH EQUIVALENTS (994,248) (1,884,855)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,159,050 4,276,722
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,164,802 $ 2,391,867
============ ============
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 FOR THE PERIODS ENDED MARCH 31, 2004 AND 2003
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 periods ended
March 31, 2004 and 2003 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 Shareholders on Form 10-K for the year ended
December 31, 2003.
Certain reclassifications have been made to the prior year amounts in
order to conform to the current year presentation.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for all stock option plans been determined
consistent with the SFAS No. 123, "Accounting for Stock Based
Compensation," the Company's net income (loss) and earnings (loss) per
share would have resulted in the amounts as reported below.
Three Months Ended March 31,
2004 2003
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Net income (loss) as reported $ 72,451 $ (622,569)
Deduct: Stock based employee
compensation expense determined under fair
value based method for all awards, net 153,015 83,410
----------- -----------
Pro forma net loss $ (80,564) $ (705,979)
=========== ===========
Earnings (loss) per share:
Basic - as reported $ 0.02 $ (0.14)
Basic - pro forma $ (0.02) $ (0.16)
Diluted - as reported $ 0.01 $ (0.14)
Diluted - pro forma $ (0.02) $ (0.16)
The pro forma amounts are not representative of the effects on reported
net income for future years.
6
2. INVENTORIES
Inventories are comprised of the following:
March 31, 2004 December 31, 2003 March 31, 2003
-------------- ----------------- --------------
Raw materials $ 5,091,278 $ 5,087,468 $ 5,504,857
Work-in Process 1,209,715 878,091 1,314,838
Finished good 27,338,615 31,168,371 20,557,913
Factory outlet finished goods 1,720,976 1,299,257 1,137,265
Reserve for obsolescence or
lower of cost or market (225,000) (365,000) (172,000)
------------ ------------ ------------
Total $ 35,135,584 $ 38,068,187 $ 28,342,873
============ ============ ============
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Three Months Ended
March 31,
2004 2003
------------- -------------
Interest $ 241,558 $ 217,902
============= =============
Federal, state and local income
taxes $ 1,580,000 $ 335,000
============= =============
Accounts payable at March 31, 2004 and December 31, 2003 include a
total of $10,553 and $45,582, respectively, relating to the purchase of
fixed assets.
4. 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 includes common share
equivalents, when dilutive. There are no adjustments to net income
necessary in the calculation of basic and diluted earnings per share.
7
A reconciliation of the shares used in the basic and diluted income per
common share computation for the three months ended March 31, 2004 and
2003 is as follows:
March 31,
2004 2003
--------- ---------
Basic weighted average
shares outstanding 4,428,023 4,363,115
Diluted securities:
Stock options 543,546 --
--------- ---------
Diluted weighted average
shares outstanding 4,971,569 4,363,115
========= =========
5. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
In December 2003, the FASB issued Revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
No. 132"). SFAS No. 132 revises the annual disclosure requirements for
pensions and postretirement plans to include additional disclosures
about assets, obligations, cash flows, and net periodic benefit costs
of defined benefit pension and other defined benefit postretirement
plans. SFAS No. 132 also revises the interim disclosure requirements to
include disclosures of the net periodic benefit costs for each period
in which an income statement is presented and the employer's
contributions paid and expected to be paid during the current fiscal
year, if the contributions are significantly different than previously
disclosed amounts. The Statement is effective for financial statements
with fiscal years ending after December 15, 2003. For interim-period
disclosures, the Statement is effective for interim periods beginning
after December 15, 2003. We have adopted this Statement for
interim-period disclosures in these condensed consolidated financial
statements, and we will adopt the annual disclosures with our December
31, 2004 Form 10-K. The adoption of FAS No. 132 does not have an impact
on our financial condition or results of operations, as it pertains
only to disclosure provisions.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP
106-1"). FSP 106-1 permits employers that sponsor postretirement
benefit plans that provide prescription drug benefits to retirees to
make a one-time election to defer accounting for any effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Act"). We have elected to defer accounting for any effect of the
Act until specific authoritative accounting guidance is issued.
Therefore, the amounts included in the financial statements related to
our postretirement benefit plans do not reflect the effects of the Act.
The effect of the Act is not expected to have a material effect on our
results of operations, cash flows or financial position.
8
6. ACQUISITION
On April 15, 2003, the Company completed the purchase of certain assets
from Gates-Mills, Inc. ("Gates"). Under the terms of the Purchase
Agreement, Rocky acquired all of the intellectual property of Gates,
including ownership of the Gates (R) trademark, selected raw material
and finished goods inventory, and certain records in connection with
the Gates business in exchange for a total purchase price of $4.9
million.
7. CAPITAL STOCK
The Company was authorized to repurchase up to 500,000 shares of our
outstanding common shares. Purchases occurred on the open market and/or
in privately negotiated transactions as market conditions warranted.
During the three-month period ended March 31, 2003, the Company
repurchased 483,533 shares at an average price of $6.42. As of March
31, 2003, the Company had purchased a total of 499,933 shares at an
average price of $6.38. No additional shares have been repurchased
since March 31, 2003.
For the three months ended March 31, 2004, options for 171,826 of the
Company's common stock were exercised at an average price of $6.75.
8. RETIREMENT PLANS
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits," generally requires additional
disclosures to those in the original Statement 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans.
Net pension cost of the Company's plans is as follows:
MARCH 31,
2004 2003
Service cost $ 128,079 $ 96,923
Interest 161,513 150,870
Expected return on assets (171,074) (138,247)
Amortization of unrecognized net loss 35,411 44,660
Amortization of unrecognized transition obligation 4,077 4,077
Amortization of unrecognized prior service cost 33,848 33,848
--------- ---------
Net pension cost $ 191,854 $ 192,131
========= =========
9
The Company's unrecognized benefit obligations existing at the date of
transition for the non-union plan is being amortized over 21 years.
Actuarial assumptions used in the accounting for the plans were as
follows:
MARCH 31,
2004 2003
Discount rate 5.75 % 5.75 %
Average rate of increase in compensation levels
(non-union only) 3.0 % 3.0 %
Expected long-term rate of return on plan assets 8.0 % 8.0 %
The Company's desired investment result is a long-term rate of return
on assets that is at least 8%. The target rate of return for the
plans have been based upon the assumption that returns will approximate
the long-term rates of return experienced for each asset class in the
Company's investment policy. The Company's investment guidelines are
based upon an investment horizon of greater than five years, so that
interim fluctuations should be viewed with appropriate perspective.
Similarly, the Plan's strategic asset allocation is based on this
long-term perspective.
The Company expects to make contributions to the plan in 2004 of
approximately $1.5 million. At March 31, 2004 no Company contribution
had been made.
10
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
March 31,
2004 2003
---- ----
Net Sales 100.0% 100.0%
Cost of Goods Sold 74.3% 74.8%
----- -----
Gross Margin 25.7% 25.2%
----- -----
Selling, General and
Administrative Expenses 24.3% 30.9%
----- -----
Income (Loss) from Operations 1.3% (5.7%)
===== =====
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2003
Net Sales
Net sales increased to a first quarter record $21.9 million compared to $13.8
million for the same period in 2003. This 59.1% increase was led by higher
branded sales and shipments of boots to the U.S. military, which rose $3.1
million and $5.0 million, respectively, from the same period in 2003.
Substantial growth was achieved in the ROCKY(R) Work footwear category as well
as the Outdoor apparel and footwear categories. Sales of GATES(R) products, a
brand that was acquired in the second quarter 2003, contributed $.5 million to
the first quarter 2004 net sales increase.
Gross Margin
Gross profit increased to $5.6 million, or 25.7% of net sales for the first
quarter 2004 from $3.5 million, or 25.2% of net sales, the prior year. First
quarter 2004 gross margins were influenced by the boots produced for delivery to
the U.S. military and an increase in sourced product sales. The Company
manufactures military boots at lower gross margin than its branded products,
while sourced products result in higher gross margin than the Company's overall
average. Sourced product sales were 49.6% of net sales for the first quarter
2004 compared to 49.1% for the same period last year.
11
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $5.3 million, or
24.3% of net sales, for the quarter ended March 31, 2004 compared to $4.3
million, or 30.9% of net sales, the prior year. The increase in SG&A expenses
was primarily due to higher commissions that increased $.4 million, distribution
costs associated with the growth in branded product sales that increased $.1
million and industry trade show expense that increased $.2 million when compared
to a year ago.
Interest Expense
Interest expense was $.3 million in the quarter ended March 31, 2004 compared to
$.2 million the prior year. The Company had increased borrowing in the quarter,
which was used to finance inventory for the increased level of sales. This was
partially offset by lower interest rates in the quarter compared to the first
quarter 2003.
Income Taxes
Income tax expense for the quarter ended March 31, 2004 was $.03 million
compared to a tax benefit of $.3 million for the same period a year ago. The
Company's effective tax rate was 32.0% for the three months ended March 31, 2004
versus 30.0% for the same period in 2003. The increase in the effective tax rate
in 2004 over 2003 is due primarily to the increase in sales of sourced products,
which are taxed at U.S. effective tax rates.
Liquidity and Capital Resources
The Company principally funds working capital requirements and capital
expenditures through income from operations, borrowings under its credit
facility and other indebtedness. Working capital is primarily used to support
changes in accounts receivable and inventory because 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. At March 31, 2004, the Company had working
capital of $52.4 million versus $38.5 million on the same date last year and
$54.2 million at December 31, 2003.
The Company's line of credit provides for advances based on a percentage of
eligible accounts receivable and inventory with maximum borrowings under the
line of credit of $45.0 million. As of March 31, 2004, the Company had borrowed
$9.1 million against its then currently available line of credit of $29.4
million compared with $5.0 million and $13.8 million respectively in the same
period of 2003.
The Company generated cash flow from operations of $1.8 million in the first
three months of 2004 compared to $1.8 million in the same period of 2003. The
collection of accounts receivable and reduction in inventories was partially
offset by the reduction in accounts payable and accrued liabilities. The
reduction in accrued liabilities was due to the payment of income taxes and
incentives that resulted from the record results of fiscal 2003. All of the
respective balance sheet fluctuations reflect the seasonal nature of the
Company's business, and the increased sales and bookings for the current year.
The principal use of cash flows in investing activities for the first three
months of 2004 and 2003 has been for the acquisition and investment in property,
plant, and equipment. In the first three
12
months of 2004, property, plant, and equipment expenditures were $.4 million
versus $.6 million in the same period of 2003. The current year expenditures
primarily represent investments in expansion of the workspace at the Company's
distribution center, as well as sales fixtures and displays.
The Company's net cash used in financing activities for the three months ended
March 31, 2004 was $2.3 million, comprised of the proceeds from the exercise of
stock options of $1.2 million, offset by net reductions on its revolving credit
facility and long-term mortgage facility of $3.5 million.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss 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.
Management regularly reviews its accounting policies to make certain they are
current and also provide readers of the consolidated financial statements with
useful and reliable information about our operating results and financial
condition. These include, but are not limited to, matters related to accounts
receivable, inventories, pension benefits, and income taxes. Implementation of
these accounting policies includes estimates and judgments by management based
on historical experience and other factors believed to be reasonable. This may
include judgments about the carrying value of assets and liabilities based on
considerations 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 are most
important to the portrayal of the Company's financial condition and results of
operations, and require more significant judgments and estimates in the
preparation of its consolidated financial statements.
Revenue Recognition:
Customer sales are recognized when revenue is realized and earned. The Company
recognizes revenue when the risk and title passes to the customer, generally at
the time of shipment. Customer sales are recorded net of allowances for
estimated returns, trade promotions and other discounts, which are recognized as
a deduction from sales at the time of sale.
13
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
slow moving or obsolete inventories through the Company's factory outlet stores
or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional
provisions may be necessary. Management regularly reviews the adequacy of its
inventory reserves and makes adjustments to them as required.
Pension benefits:
Accounting for pensions and other postretirement benefits involves estimating
the cost of benefits to be provided well into the future and attributing that
cost over the time period each employee works. To accomplish this, extensive use
is made of assumptions about inflation, investment returns, mortality, turnover,
medical costs and discount rates. These assumptions are reviewed annually.
Pension and post-retirement benefit expenses are determined by actuaries using
assumptions concerning the discount rate, expected return on plan assets and
rate of compensation increase. An actuarial analysis of benefit obligations and
plan assets is determined as of September 30 each year. The funded status of the
Company's plans and reconciliation of accrued pension cost is determined
annually as of December 31. Further discussion of the Company's pension and
post-retirement benefit plans and related assumptions is included in Note 9,
Retirement Plans, to the consolidated financial statements included in the
Annual Report on Form 10-K. Actual results would be different using other
assumptions. 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 Company. The union plan was frozen in 2001
and no additional benefits have been earned under this plan since that time.
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 a 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,
14
an adjustment to the deferred tax assets would be charged to income in the
period such determination was made. Finally, if the Company decided to
repatriate any of its earnings in its Five Star subsidiary to the United States,
the Company's effective tax rate would increase.
Sales returns and allowances:
Revenue principally consists of sales to customers, and, to a lesser extent,
license fees. Revenue is recognized upon shipment of product to customers, while
license fees are recognized when earned. The Company records a reduction to
gross sales based on estimated customer returns and allowances. These reductions
are influenced by historical experience, based on customer returns and
allowances. The actual amount of sales returns and allowances realized may
differ from the Company's estimates. If the Company determines that sales
returns or allowances should be either increased or decreased, then the
adjustment would be made to net sales in the period in which such a
determination is made.
Intangible Assets:
The Company had $4.2 million of intangible assets at March 31, 2004 and $4.1
million at December 31, 2003. Goodwill and trademarks are tested for impairment
at least annually by comparing the fair value of the reporting units to their
carrying values. Fair values are estimated using discounted cash flow
methodologies that are based on projections of the amounts and timing of future
revenues and cash flows. Based on this testing, none of our goodwill nor
trademarks were impaired as of December 31, 2003, and no impairment indicators
have occurred since that date.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995.
This Quarterly Report on Form 10-Q 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. Investors
are cautioned that such statements involve risks and uncertainties, including,
but not limited to, changes in consumer demand, seasonality, impact of weather,
competition, reliance on suppliers, changing retailing trends, reliance on
foreign manufacturing, changes in tax rates, limited protection of proprietary
technology, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. 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 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.
15
PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2003.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's
management carried out an evaluation, with the participation of the Company's
principal executive officer and principal financial officer, of the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934). Based upon that evaluation, the Company's principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity 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.
31.1 Certification of CEO under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Form 8-K dated February 5, 2004, filed with the Securities and
Exchange Commission on February 5, 2004 pursuant to Item 12,
regarding the Company's net sales for the fourth quarter of
2003 and earnings guidance for 2003.
Form 8-K dated February 26, 2004, filed with the Securities
and Exchange Commission on February 26, 2004 pursuant to Item
12, regarding the Company's financial results for the fourth
quarter and year ended December 31, 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: May 7, 2004 /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.
18