ROCKY SHOES & BOOTS, INC.
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
June 2, 2005
VIA EDGAR AND OVERNIGHT COURIER
- -------------------------------
Michael Moran, Esq.
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 3-8
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Rocky Shoes & Boots, Inc.
File No. 0-21026
Form 10-K for the fiscal year end December 31, 2004
Form 10-Q for the fiscal year end March 31, 2005
Dear Mr. Moran:
We have received your comments to the annual report on Form 10-K for
the fiscal year ended December 31, 2004, the current report on Form 8-K filed on
March 24, 2005, and the quarterly report on Form 10-Q for the first quarter
ended March 31, 2005 filed by Rocky Shoes & Boots, Inc. (the "Company") set
forth in your letter dated as of May 13, 2005. For your convenience, we have
repeated the text of the staff's comments, followed by our response.
We respectfully respond to your comments as follows:
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
General
1. WHERE A COMMENT BELOW REQUESTS ADDITIONAL DISCLOSURES OR OTHER
REVISIONS TO BE MADE, THESE REVISIONS SHOULD BE INCLUDED IN YOUR FUTURE
FILINGS, AS APPLICABLE.
RESPONSE:
We will include the additional disclosures or revisions required in
this comment letter process in future filings, as applicable. All
additional disclosures or revisions for future filings provided herein
are based on information known to the Company as of the date of this
letter and may be subject to change.
Letter to Michael Moran
June 2, 2005
Page -2-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Gross Margin, page 19
2. YOU DISCLOSE THAT YOUR GROSS MARGIN PERCENTAGE DECLINED 170 BASIS
POINTS FROM 2004 TO 2003. YOUR DISCLOSURE ELSEWHERE INDICATES THAT
EFFORTS WERE INITIATED IN 2004 TO REDUCE YOUR OVERALL INVENTORY. PLEASE
EXPLAIN WHAT EFFORTS WERE TAKEN TO REDUCE YOUR INVENTORY. IF CERTAIN
INVENTORY WAS LIQUIDATED AT REDUCED MARGINS YOU SHOULD DISCUSS THE
IMPACT ON OVERALL MARGINS IN YOUR RESULTS OF OPERATIONS IF THE IMPACT
WAS MATERIAL. PLEASE QUANTIFY FOR US THE INCREMENTAL IMPACT ON MARGINS
OF ANY INVENTORY REDUCTION.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the decrease in inventory was not the result of
liquidated inventory at reduced margins. Management's decision to
reduce inventory was accomplished by purchasing less inventory and
reducing the number of SKU's. Therefore there was no incremental impact
on margins from any inventory reduction.
Critical Accounting Policies and Estimates
Revenue Recognition, page 24
3. YOU INDICATE THAT REVENUE IS GENERALLY RECOGNIZED AT THE TIME OF
SHIPMENT. PLEASE EXPLAIN WHEN YOU RECOGNIZE REVENUE OTHER THAN AT THE
TIME OF SHIPMENT. ALSO, PLEASE DESCRIBE IN DETAIL WHAT RECOURSE
INDIVIDUAL RETAIL STORES HAVE WITH RESPECT TO PURCHASES. IN THIS
REGARD, EXPLAIN IF THERE IS ANY RETURN PRIVILEGES EMBEDDED WITHIN YOUR
SALES CONTRACTS TO INDEPENDENT RETAILERS. FURTHERMORE, PLEASE DESCRIBE
YOUR SHIPPING TERMS TYPICALLY USED IN YOUR SUPPLY AND DELIVERY
CHANNELS.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company's typical shipping terms are FOB Shipping
Point. However, as stated in our annual report, revenue is recognized
when title passes. In some cases, the Company does have customers that
take title to goods at the port location of our foreign suppliers and
these customers arrange all shipping. In these situations, revenue is
recognized when title passes at the port. The term "generally" was used
because title does not pass at shipping point in all cases. As revenue
is recognized when title passes, the term "generally upon shipment"
will be removed in future filings.
The Company does not have specific return privileges in any of its
sales arrangements. In some cases, the Company will accept returns from
customers because of quality and for customer relations. However, these
returns represent less the 3.5% of sales and, in accordance with FASB
48, paragraph 5f, can be reasonably estimated based on past experience.
Estimated returns are recorded as a reduction of sales.
4. PLEASE DISCLOSE IN GREATER DETAIL YOUR ACCOUNTING POLICY FOR REVENUE
TRANSACTIONS WITH CURRENT OR POTENTIAL FUTURE DISCOUNTS FROM YOUR
REGULAR PRICES, REBATE-TYPE ARRANGEMENTS,
Letter to Michael Moran
June 2, 2005
Page -3-
COUPONS, AND FREE GIFT PROMOTIONS. PLEASE ALSO CLARIFY WHETHER YOUR
MARKETING EXPENSES ACCRUAL OR ANOTHER ACCRUAL INCLUDES SOME OF THESE
AMOUNTS, SUCH AS EXPECTED COUPON REDEMPTIONS. SEE EITF 01-9.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company does not use coupons, rebate-type or free
gift arrangements. The Company does have arrangements with our larger
customers that amount to volume discounts. In accordance with EITF
01-9, these costs are estimated and recorded as a reduction of revenue
at the time of sale. The Company has accrued $263,000 at December 31,
2004 for co-operative advertising expenses. Customers who have co-op
agreements with the Company must provide proof of valid advertising
expenses in order to receive a payment.
Sales Returns and Allowance, page 25
5. ENHANCE YOUR DISCLOSURES TO PROVIDE QUANTITATIVE DETAILS REGARDING
ALLOWANCES FOR SALES RETURNS. YOU SHOULD DISCUSS TRENDS IDENTIFIED IN
THE CHANGES TO THE ALLOWANCE FOR SALES RETURNS AS WELL AS THE
PROVISIONS TAKEN IN EACH PERIOD.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company intends to incorporate disclosure providing
quantitative details regarding allowances for sales returns in future
filings. In future filings, we will discuss trends in allowances for
sales returns. Sales returns and allowances for sales returns in 2004,
2003 and 2002 were similar in amounts and were approximately 3.5% of
sales.
6. PLEASE REVISE SCHEDULE II FILED PURSUANT TO RULE 5-04 OF REGULATION S-X
TO SEPARATELY DISCLOSE THE AMOUNTS CHARGED TO COSTS AND EXPENSES AND TO
NET SALES. THE ADDITIONAL DISCLOSURE MAY BE PROVIDED IN A FOOTNOTE TO
THE TABLE. SEE RULE 12-09 OF REGULATION S-X.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that in future filings the Company will add a footnote to
Column C of Schedule II pursuant to Rule 12-09 of Regulation S-X that
all the additions charged to cost and expenses are included in Selling,
General and Administrative expenses. No amounts included in Schedule II
are charged to net sales.
Inventories, page 25
7. PLEASE SUPPLEMENTALLY CONFIRM THAT YOU DID NOT HAVE ANY MATERIAL WRITE
DOWNS ASSOCIATED WITH YOUR INVENTORY AS YOU INDICATE THAT YOU HAD
INITIATED INVENTORY REDUCTION EFFORTS IN 2004. PROSPECTIVELY DISCLOSE
MATERIAL LOSSES RESULTING FROM THE WRITE DOWN OF OBSOLETE OR SLOW
MOVING INVENTORY. YOU MAY REFER TO PARAGRAPH 14, CHAPTER 4 OF ARB 43.
Letter to Michael Moran
June 2, 2005
Page -4-
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that for the period presented the Company confirms that the
Company did not have material write downs as a result of obsolete or
slow moving inventory. Prospectively, the Company will disclose any
material write downs associated with inventory.
Consolidated Balance Sheets, page F-2
8. PROSPECTIVELY, PRESENT YOUR INTANGIBLE ASSETS SEPARATELY ON THE FACE OF
YOUR CONSOLIDATED BALANCE SHEETS. SEE PARAGRAPH 42 OF SFAS NO. 142.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that, prospectively, the Company will show intangible assets
separately on the face of the consolidated balance sheets. This
disclosure was included in the Company's Form 10-Q for the quarter
ended March 31, 2005 (filed with the SEC on May 10, 2005).
Consolidated Statements of Income, page F4
9. PLEASE REPORT OTHER INCOME AND OTHER DEDUCTIONS GROSS ON THE FACE OF
THE INCOME STATEMENT OR IN THE NOTES TO THE EXTENT THERE IS ANY
MATERIAL ITEMS CONTAINED THEREIN.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that in future filings the Company will show Other Income and
Other Deductions separately on the face of the Income Statement and in
the notes to the extent there are any material items. Other Deductions
for the years ended December 31, 2004, 2003 and 2002 were $0, $0 and
$14,000, respectively.
Consolidated Statement of Cash Flows, page F-6
10. PLEASE EXPLAIN THE NATURE OF PROCEEDS FROM LONG TERM DEBT OF $127.6
MILLION AND PAYMENTS ON LONG TERM DEBT OF $129.1 MILLION. YOUR
LIQUIDITY AND CAPITAL RESOURCES DISCUSSION DOES NOT DISCUSS
TRANSACTIONS OF THIS MAGNITUDE.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the proceeds and payments of long-term debt principally
represent the gross borrowings and payments under the Company's line of
credit. In future filings, the Company will provide this information in
the liquidity section of Management's Discussion and Analysis.
Note 1. Summary of Significant Accounting Policies
Advertising, page F-8
11. PLEASE SUPPLEMENTALLY CONFIRM THAT YOU DO NOT CAPITALIZE ANY OF YOUR
ADVERTISING EXPENDITURES. OTHERWISE, PLEASE REVISE YOUR ACCOUNTING
POLICY RELATED TO ADVERTISING COSTS
Letter to Michael Moran
June 2, 2005
Page -5-
ACCORDINGLY. PLEASE ALSO DISCLOSE THE AMOUNTS OF ADVERTISING REPORTED
AS ASSETS AS OF EACH BALANCE SHEET DATE AND THE LINE ITEM THEY ARE
INCLUDED IN. SEE PARAGRAPH .49 AND .50 OF SOP 93-7.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that all advertising expenditures are expensed as incurred.
The Company does record advertising that requires payment in advance as
prepaid expenses. Items such as deposits on tradeshows and advertising
are included in this account. The expense is recognized in the month
that the tradeshow or advertisement actually occurs. The balances for
prepaid advertising as of December 31, 2004 and 2003 were $190,000 and
$217,000, respectively. In future filings, if material, the amount of
deposits for trade shows and other advertising will be disclosed in the
notes to the financial statements.
Asset Impairments, page F-9
12. CLARIFY THAT YOU TEST INDEFINITE LIVED INTANGIBLES ON AT LEAST AN
ANNUAL BASIS BY COMPARISON OF THE CARRYING VALUE OF THE ASSETS TO FAIR
VALUE, IF TRUE.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that, in future filings, the Company will state that
indefinite lived intangible assets are tested at least annually for
impairment by the comparison of the carrying value of the assets to the
fair value.
Product Group Information, page F-11
13. WE NOTE THAT YOUR SALES TO FOREIGN COUNTRIES HAVE BEEN INCREASING.
FURTHERMORE, YOU INDICATED THAT THE ACQUISITION OF EJ FOOTWEAR WILL
LIKELY RESULT IN INCREASED FOREIGN SALES. IN THIS REGARD, PLEASE
DISCLOSE THE AGGREGATED TRANSACTION GAIN OR LOSS RECORDED IN YOUR
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE YEARS ENDED DECEMBER
31, 2004. PLEASE REFER TO PARAGRAPHS 15 AND 30 OF SFAS 52. IF
SIGNIFICANT, PLEASE DISCLOSE ANY EXCHANGE RATE CHANGES SUBSEQUENT TO
YEAR-END AND ITS EFFECTS ON UNSETTLED BALANCES RELATED TO FOREIGN
CURRENCY TRANSACTIONS. PLEASE REFER TO PARAGRAPH 32 OF SFAS 52.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that, for the year ended December 31, 2004, the Company's
foreign sales were approximately $2.8 million or 2.1% of net sales. The
largest portion of these sales were by Rocky Canada, Inc. EJ Footwear
had foreign sales in the same period of $700,000. As a percent of
sales, in future periods, foreign sales would account for a smaller
portion of the combined results.
Both the Company and EJ Footwear maintain books and records in U.S.
dollars. The Company does have foreign exchange gain or loss
transactions due to the operations in Canada and the Dominican
Republic. In fiscal 2004, the Company had a net foreign exchange gain
of $112,000, compared with $36,000 in fiscal 2003. In future filings,
foreign exchange gains and losses and
Letter to Michael Moran
June 2, 2005
Page -6-
the effects of exchange rate changes after year end will be disclosed
in the footnotes to the financial statements, if material.
14. PLEASE TELL US IN MORE DETAIL HOW YOU DETERMINED THAT YOU HAVE ONLY ONE
REPORTABLE SEGMENT. WE NOTE THAT YOU SELL DIFFERENT PRODUCTS (E.G.
APPAREL, GLOVES, AND SHOES), YOU HAVE DIFFERENT DISTRIBUTION CHANNELS
AND YOU MANUFACTURE AND RESELL PRODUCTS. IF POSSIBLE, PLEASE SUPPLEMENT
YOUR RESPONSE BY PROVIDING US WITH EXAMPLES OF INTERNAL REPORTS THAT
YOUR MANAGEMENT USES TO ASSESS THE PERFORMANCE OF YOUR BUSINESS SUCH AS
BUDGETS, FLASH REPORTS AND INTERNAL FINANCIAL STATEMENTS.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the chief operating decision maker reviews only
information at a consolidated level for sales and initial gross margin.
Initial gross margin includes only the direct cost of the product.
While the Company has alternative distribution channels, all sales were
handled by the same sales force and distributed though a single
distribution facility or shipped directly to the customer for the
sourced vendor. The Company's sales force is organized by product type
(i.e. rugged outdoor, occupational-duty, occupational-work). No
profitability information is prepared below the initial gross margin
level.
During the past two years, the Company expanded its product offerings
to include gloves and apparel. In both cases, these offerings are
entirely sourced to third-party manufacturers, sold through the
existing sales force, and distributed through the single distribution
facility.
Additionally, we have provided the staff with internal financial
information used by the chief operating decision maker. For the Staff's
information, budgets and flash reports are prepared in the same format
as internal financial information provided. This supplemental
information has been redacted pursuant to a confidentiality treatment
request filed with the Securities and Exchange Commission on the same
date as this letter.
Note 2. Acquisitions, page F-12
15. PLEASE EXPLAIN WHY YOU DID NOT MEET THE DISCLOSURE REQUIREMENTS OF
PARAGRAPH 57 OF SFAS NO. 141 FOR THE ACQUISITION OF EJ FOOTWEAR. IN
THIS REGARD, WE DID NOT SEE ANY DISCLOSURE RELATIVE TO THE INTANGIBLE
ASSETS THAT YOU LISTED IN YOUR PURCHASE PRICE ALLOCATED. WE MAY HAVE
FURTHER COMMENT.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that at the date that the financial statements for the year
ended December 31, 2004 were completed, the information was based on
management's estimates and not yet finalized, as disclosed in Note 2 to
the financial statements. Management continued to work with valuation
specialists and subsequently the required disclosures under paragraph
51 and 52 of FAS 141 were included in the Company's Form 10-Q for the
quarter ended March 31, 2005 (filed with the SEC on May 10, 2005).
Letter to Michael Moran
June 2, 2005
Page -7-
16. YOU INDICATE THAT $1.6 MILLION IN TRANSACTION COSTS WERE ALLOCATED TO
THE PURCHASE PRICE OF THE EJ FOOTWEAR ACQUISITION. PLEASE EXPLAIN IF
SUCH COSTS WERE CONSIDERED DIRECT COSTS OF THIS BUSINESS COMBINATION.
IN THIS REGARD, PLEASE PROVIDE A DETAILED LISTING OF THE COSTS WHICH
COMPRISE THE $1.6 MILLION REFERENCED IN THIS NOTE. ALSO, PLEASE
RECONCILE THIS AMOUNT TO THE COSTS DEFERRED AS OF DECEMBER 31, 2004
WHICH ARE DISCLOSED IN NOTE 4 TO THE FINANCIAL STATEMENTS.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the costs comprising the $1.6 million estimated
transaction costs were only costs considered to be directly related to
the acquisition and was made up of the following (in thousands):
Federal Trade Commission - Acquisition Fee $ 45
Legal Fees 338
Accounting Due Diligence Fees 218
Professional Broker Fees 1,018
------
Total Acquisition Transaction Costs $1,619
======
Deferred acquisition costs at December 31, 2004 were comprised of the
follow (in thousands):
Direct Transaction Costs:
Federal Trade Commission - Acquisition Fee $ 45
Legal Fees for acquisition 256
Bank Financing Expenses:
Loan Origination Fee 610
Legal Fees for Loan Agreement 22
------
Total Deferred Acquisition Costs $ 933
======
17. YOU FILED AN 8-K ON JANUARY 7, 2005, DISCUSSING THE CONSOLIDATION OF A
DIVISION OF EJ FOOTWEAR, NAMED LEHIGH. PLEASE EXPLAIN IF YOU HAVE
ALLOCATED AN AMOUNT OF THE PURCHASE PRICE OF THE EJ FOOTWEAR
ACQUISITION TO A PLANT CLOSING LIABILITY. IN THIS REGARD, DISCRETIONARY
COST ASSOCIATED WITH EXITING THIS DIVISION, INCLUDING ANY RELOCATION
EXPENSES, AND TERMINATION OF SEVERANCE BENEFITS. IN SHORT, PLEASE
EXPLAIN HOW YOU ACCOUNTED FOR SUCH COST. YOU MAY CONSULT SFAS NO. 141 -
SUBPARAGRAPH 37K, EITF 95-3 AND FTB NO. 85-5.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that at the date of the filing, the Company confirms that the
amounts associated with any relocation expenses and termination or
severance benefits related to the closing of the Lehigh headquarters
had not been determined. We have subsequently determined these amounts,
which represent only severance and relocation costs, to be $543,000 and
have included this amount in the Company's Form 10-Q for the quarter
ended March 31, 2005 (filed with the SEC on May 10, 2005). The lease
for the facility used by Lehigh terminates in June 2005.
Letter to Michael Moran
June 2, 2005
Page -8-
18. PLEASE EXPLAIN TO US IF THERE WERE ANY COMPENSATION ARRANGEMENTS
INCLUDED WITHIN THE PROVISIONS OF THE ACQUISITION AGREEMENT, AND THE
RELATED DOLLAR AMOUNTS OF SUCH ARRANGEMENTS. FURTHERMORE, PLEASE
EXPLAIN THE VESTING REQUIREMENTS PURSUANT TO SUCH ARRANGEMENTS.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that, in connection with the negotiation of the definitive
Purchase and Sale of Equity Interests Agreement (the "Agreement") by
and among SILLC Holdings LLC (the "Seller"), the Company, and for
limited purposes, Strategic Industries, LLC, the Seller caused certain
of its subsidiaries to be sold as part of the transaction to enter into
employment and non-competition agreements with certain key employees.
EJ Footwear LLC entered into Executive Employment Agreements and
Confidentiality, Assignment and Non-Competition Agreements for Key
Employees with Karyn Brown, John Grzybowski, John M. Hull, and David P.
Mitchell. Georgia Boot LLC entered into an Executive Employment
Agreement and Confidentiality, Assignment and Non-Competition Agreement
with Thomas R. Morrison. Each of these agreements contained
substantially the same terms and conditions, including the proviso that
the effectiveness of each such agreement was conditioned upon the
consummation of the transactions contemplated by the Agreement.
The agreements recognized the current at-will employment arrangement of
each employee, including serving as an officer of the applicable
company in consideration of a base salary, participation in a cash
bonus program (subject to certain eligibility conditions), and the
grant, effective after the consummation of the transaction, of stock
options for certain shares of common stock of the Company, vesting
pro-rata over a four year period from the date of grant.
Each employee's 2005 base salary and number of stock options granted on
January 6, 2005 under the employment agreements are as follows:
Karyn Brown: $ *; * shares at a strike price of $*
John Grzybowski: $ *; * shares at a strike price of $*
John M. Hull: $ *; * shares at a strike price of $*
David P. Mitchell: $ *; * shares at a strike price of $*
Thomas R. Morrison: $193,000; 20,000 shares at a strike price of $28.84
--------------------
* This information has been redacted pursuant to a confidentiality
treatment request filed with the Securities and Exchange
Commission on the same date as this letter.
The employees were also entitled to be reimbursed for certain business
expenses incurred on behalf of the employer and for reasonable moving
expenses in the event of a relocation to the Company's home office, and
participation in the employer's insurance, vacation, sick leave and
like benefits. As an employee at will, each employee could be
terminated without cause by the employer; provided, in the event of a
termination without cause, the employee would be entitled to the earned
but unpaid portion of his/her base salary through the termination date
as well as six months severance.
Letter to Michael Moran
June 2, 2005
Page -9-
Unless the employer terminated an employee without cause or because of
the employee's refusal to relocate to the Company's home office, each
employee was subject to a six month non-competition restrictive
covenant. None of the employee's owned shares of the Seller prior to
the consummation of the EJ Footwear acquisition.
19. PLEASE PROVIDE A DETAILED LISTING OF ALL THE LIABILITIES ASSUMED
TOTALING $8.9 MILLION. YOUR PRO FORMA FINANCIAL STATEMENTS FILED ON
FORM 8K/A ON JANUARY 7, 2005, DO NOT CLEARLY IDENTIFY WHAT THIS
REPRESENTS.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the breakout of liabilities assumed totaling $8.9
million (based upon EJ Footwear's unaudited December 31, 2004 balance
sheet) were as follows (in millions):
Accounts Payable $ 3.9
Accrued Wages and Commissions 1.1
Accrued Advertising 0.4
Accrued Warehouse/Freight 0.4
Accrued Medical Insurance 0.5
Accrued Risk Mgt. Insurance 0.7
Accrued Professional Fees 0.5
Accrued Environmental Reserve 0.4
Accrued Royalties 0.2
Other Miscellaneous Accrued Liabilities 0.8
-----
Total $ 8.9
=====
20. PLEASE SUPPLEMENTALLY DISCLOSE TO US HOW YOU CALCULATED THE VALUE OF
THE ACQUIRED TRADE NAMES AND TRADEMARKS TOTALING $38.5 MILLION THAT YOU
REFERENCE IN FORM 8-K/A ON JANUARY 7, 2005.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company made a preliminary estimate based on
previous acquisitions and the relationship of sales to trademark costs
and adjusted that amount for the fact that EJ Footwear was experiencing
a higher profit margin than previous acquisitions. Subsequent to the
acquisition, the Company worked with third-party valuation specialists
and determined the value of $41.5 million to be most representative of
the value of the acquired trade names and trademarks. This was recorded
and disclosed in the Company's Form 10-Q for the quarter ended March
31, 2005 (filed with the SEC on May 10, 2005).
21. WE NOTE FROM YOUR PRO FORMA FINANCIAL STATEMENTS FILED ON FORM 8-K/A ON
JANUARY 7, 2005, THAT NO ADJUSTMENTS WERE MADE TO INVENTORY. SFAS 141
REQUIRES THAT THE VALUATION OF INVENTORY BE BASED ON THE SELLING PRICE
LESS THE SUM OF COSTS OF COMPLETE, COSTS OF DISPOSAL, AND THE
REASONABLE PROFIT MARGIN FOR THE COMPLETION EFFORT. THE ACQUIRER SHOULD
ONLY RECOGNIZE PROFITS ASSOCIATED WITH VALUE ADDED TO THE ACQUIRED
INVENTORY SUBSEQUENT TO THE ACQUISITION, AND DOES NOT RECOGNIZE PROFIT
ASSOCIATED WITH THE PURCHASED VALUE OF INVENTORY.
Letter to Michael Moran
June 2, 2005
Page -10-
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that EJ Footwear procured 100% of its inventory from
outsourced vendors in a fully completed and boxed state, ready for
shipment to its customers. EJ Footwear derived all of its profit from
its sales operations. Therefore, no profit should be allocated to the
inventory at the acquisition date.
Note 4. Other Assets, page F-14
22. PROSPECTIVELY, PLEASE ENSURE THAT YOU MEET THE DISCLOSURE REQUIREMENTS
OF PARAGRAPH 44-45 OF SFAS NO. 142.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company will disclose the requirements of paragraphs
44 - 45 of SFAS No. 142 in subsequent filings.
Note 14. Supplemental Cash Flow Information, page F-26
23. PLEASE EXPLAIN WHAT COMPRISED THE PURCHASE PRICE ADJUSTMENTS RELATED TO
ACCOUNTS PAYABLE THAT YOU REFERENCE. IN THIS REGARD, WE WOULD EXPECT
PURCHASE PRICE ADJUSTMENTS TO BE MADE WITHIN ONE YEAR OF AN
ACQUISITION.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the adjustment to December 31, 2003 represented an
Account Payable in the amount of $45,582 that was the result of a
deferred payment related to certain performance targets (contingent
purchase price) for the acquisition of Gates Gloves (see page F-11,
Note 2). This amount of additional goodwill had been recorded as an
Accounts Payable at December 31, 2003, but was not paid until January
2004.
FORM 8-K FILED MARCH 24, 2005
Pro Forma Statement of Operations
24. WE NOTE THAT IN ADJUSTMENT (A), YOU ELIMINATE HISTORICAL PENSION COSTS
OF EJ FOOTWEAR. CONFIRM TO US THAT YOU HAVE NO PLANS TO PROVIDE SIMILAR
BENEFITS TO EMPLOYEES OF EJ FOOTWEAR.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that, as noted in footnote 9 Pension and Other
Post-Retirement Benefits of the EJ Footwear financial statements for
the year ended September 30, 2004(see exhibit for Form 8-K/A), the EJ
Footwear pension plan was frozen effective July 1, 2003 and the EJ
Footwear 401(k) plan was amended to increase the EJ Footwear match
benefit to 100% of the employees first 4% of contributions. In the
Letter to Michael Moran
June 2, 2005
Page -11-
acquisition, the liabilities associated with the EJ Footwear pension
plan were retained by the seller. The Company has established a 401(k)
plan similar to the EJ Footwear plan with the same company match
benefit. There are no plans to establish a pension plan benefit for EJ
Footwear employees in the Company's organization.
25. WE NOTE THAT IN ADJUSTMENT (A), YOU ELIMINATE MANAGEMENT FEES OF
$1,347,000. TELL US WHAT SERVICES WERE PROVIDED IN EXCHANGE FOR THIS
FEE. IF SERVICES, WERE PROVIDED, TELL US WHY YOU NO LONGER NEED THESE
SERVICES.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that, as noted in footnote 12 Related Party Transactions -
Management And Advisory Fees to the EJ Footwear financial statements
for the year ended September 30, 2004(see exhibit for Form 8-K/A), EJ
Footwear's former parent provided certain legal, finance, tax, risk
management, employee benefits, and employee benefits and acquisition
and divestiture related services. These services were primarily limited
to negotiating consolidated risk management insurance coverage,
treasury functions, preparation of federal and state income tax
returns, and negotiating consolidated health insurance coverage for all
of the former parent's companies. Under the Company's organization, all
of these services will be provided by existing Company management with
no material incremental costs expected.
FORM 10-Q FOR THE PERIOD ENDED MARCH 31,2005
Notes to the Financial Statements
Note 6 - Acquisition
26. PLEASE REVISE YOUR DISCLOSURES TO INCLUDE THE INFORMATION REQUIRED BY
PARAGRAPH 58(B) OF SFAS 141, WHICH REQUIRES PRO FORMA RESULTS OF
OPERATIONS FOR THE PERIODS PRESENTED. GIVEN THE SIGNIFICANCE OF THE
ACQUISITION TO YOUR BUSINESS, PLEASE AMEND YOUR FORM 10-Q.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company will amend the Company's Form 10-Q for the
quarter ended March 31, 2005 (filed with the SEC on May 10, 2005) as
follows:
Page 12 - Results Of Operations - Add the following table after
the Percentage of Net Sales table:
PRO FORMA RESULTS OF OPERATIONS
The following table reflects the unaudited consolidated results of
operations on a pro forma basis had EJ Footwear been included in
operating results from January 1, 2004:
Letter to Michael Moran
June 2, 2005
Page -12-
(Unaudited)
Three Months Ended
March 31,
2005 2004
---- ----
Net Sales $61,498,084 $59,285,452
Operating Income 3,546,189 3,723,398
Net Income $ 1,094,454 $ 962,412
Net Income Per Share
Basic $ 0.21 $ 0.20
Diluted $ 0.20 $ 0.18
* * * * *
The Company acknowledges that:
o the Company is responsible for the adequacy and accuracy of
the disclosure in the filings discussed herein (the
"filings");
o staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose
the Commission from taking any action with respect to the
filings: and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any questions regarding any of the foregoing, please
contact Robert J. Tannous, Porter, Wright, Morris & Arthur LLP at (614)
227-1953.
Thank you for your assistance.
Very truly yours,
/s/ James E. McDonald
James E. McDonald,
Executive Vice President and
Chief Financial Officer
cc: Robert Babula (SEC - Staff Accountant)
Christopher Owings (SEC - Assistant Director)
Robert J. Tannous