ROCKY SHOES & BOOTS INC (Form: 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-21026

ROCKY SHOES & BOOTS, INC.

(Exact name of registrant as specified in its charter)


Ohio		31-1364046
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

39 E. Canal Street, Nelsonville, Ohio 45764
(Address of Principal Executive Offices, Including Zip Code)

(740) 753-1951
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,319,595 shares of Common Stock, no par value, were outstanding at October 24, 2005.

FORM 10-Q

ROCKY SHOES & BOOTS, INC.

TABLE OF CONTENTS


		PAGE
		NUMBER
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets September 30, 2005 and 2004 (Unaudited), and December 31, 2004		3

	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2005 and 2004 (Unaudited)		4

	Condensed Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended September 30, 2005 and 2004 (Unaudited)		5

	Notes to Interim Unaudited Condensed Consolidated Financial Statements		6–13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14–21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22

Item 4.	Controls and Procedures		22

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 3.	Defaults Upon Senior Securities		23

Item 4.	Submission of Matters to a Vote of Security Holders		23

Item 5.	Other Information		23

Item 6.	Exhibits		24

SIGNATURE			25
EX-10A
EX-31A
EX-31B
EX-32A
EX-32B

PART 1 — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2005			December 31, 2004			September 30, 2004
	Unaudited						Unaudited
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents	$	2,050,120		$	5,060,859		$	780,739
Trade receivables — net		83,711,308			27,182,198			45,522,136
Other receivables		1,629,606			1,114,959			782,285
Inventories		77,322,005			32,959,124			38,738,153
Deferred income taxes		1,297,850			230,151			959,810
Income tax receivable					2,264,531
Prepaid expenses		1,339,103			588,618			809,482

Total current assets		167,349,992			69,400,440			87,592,605
FIXED ASSETS — net		23,690,488			20,179,486			20,091,910
DEFERRED PENSION ASSET		1,347,824			1,347,824			2,499,524
IDENTIFIED INTANGIBLES		47,116,646			2,561,427			2,708,179
GOODWILL		20,620,543			1,557,861			1,557,861
OTHER ASSETS		4,072,999			1,658,616			587,942

TOTAL ASSETS	$	264,198,492		$	96,705,654		$	115,038,021

LIABILITIES AND SHAREHOLDERS’ EQUITY:
CURRENT LIABILITIES:
Accounts payable	$	13,242,936		$	4,349,248		$	6,704,676
Current maturities — long term debt		6,389,559			6,492,020			525,596
Accrued expenses:
Income taxes		3,222,774						2,354,207
Taxes — other		596,460			422,692			382,846
Salaries and wages		2,656,279			1,295,722			2,270,769
Other		2,717,026			1,228,708			1,328,492

Total current liabilities		28,825,034			13,788,390			13,566,586
LONG TERM DEBT — less current maturities		121,111,944			10,044,544			32,388,913
DEFERRED INCOME TAXES		18,527,196			1,205,814			262,907
DEFERRED LIABILITIES		1,472,442			296,108			2,232,671

TOTAL LIABILITIES		169,936,616			25,334,856			48,451,077
SHAREHOLDERS’ EQUITY:
Common stock, no par value; 10,000,000 shares authorized; issued and outstanding September 30, 2005 — 5,295,845; December 31, 2004 — 4,694,670; September 30, 2004 — 4,620,170		50,694,385			38,399,114			36,674,834
Accumulated other comprehensive loss		(889,564	)		(1,077,586	)		(1,950,400	)
Retained earnings		44,457,055			34,049,270			31,862,510


Total shareholders’ equity		94,261,876			71,370,798			66,586,944


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	264,198,492		$	96,705,654		$	115,038,021

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
NET SALES	$	94,087,786		$	50,052,894		$	221,105,507		$	99,368,970

COST OF GOODS SOLD		60,014,309			34,056,404			137,100,919			69,977,667


GROSS MARGIN		34,073,477			15,996,490			84,004,588			29,391,303

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		21,820,251			8,323,464			61,966,723			19,047,531


INCOME FROM OPERATIONS		12,253,226			7,673,026			22,037,865			10,343,772

OTHER INCOME AND (EXPENSES):
Interest expense		(2,523,143	)		(422,120	)		(6,517,313	)		(955,561	)
Other — net		130,958			(54,404	)		248,597			43,984

Total other — net		(2,392,185	)		(476,524	)		(6,268,716	)		(911,577	)

INCOME BEFORE INCOME TAXES		9,861,041			7,196,502			15,769,149			9,432,195

INCOME TAX EXPENSE		3,352,605			2,309,143			5,361,364			3,024,563


NET INCOME	$	6,508,436		$	4,887,359		$	10,407,785		$	6,407,632


NET INCOME PER SHARE
Basic	$	1.23		$	1.06		$	1.99		$	1.41
Diluted	$	1.15		$	0.98		$	1.86		$	1.30

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic		5,289,736			4,605,800			5,232,964			4,530,867

Diluted		5,646,161			4,992,319			5,585,224			4,943,929

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended
	September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,407,785		$	6,407,632
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		3,772,572			2,464,937
Deferred compensation and pension		773,226			(394,922	)
Deferred income taxes		(16,118	)
Loss on disposal of fixed assets		16,790
Stock issued as directors’ compensation		60,000			66,885
Change in assets and liabilities, (net of effect of acquisition):
Receivables		(27,611,537	)		(25,942,003	)
Inventories		(9,689,337	)		(669,966	)
Other current assets		2,239,986			235,756
Other assets		142,171			(402,958	)
Accounts payable		3,337,976			3,940,097
Accrued and other liabilities		1,325,009			760,740


Net cash used in operating activities		(15,241,477	)		(13,533,802	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(4,268,847	)		(4,467,840	)
Acquisition of business		(92,916,237	)


Net cash used in investing activities		(97,185,084	)		(4,467,840	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		263,128,948			91,920,037
Repayment of revolving credit facility		(194,567,038	)		(76,772,448	)
Proceeds from long-term debt		48,000,000
Repayments of long-term debt		(5,596,971	)		(252,008	)
Debt financing costs		(2,310,550	)
Proceeds from exercise of stock options		761,433			1,727,750


Net cash provided by financing activities		109,415,822			16,623,331


DECREASE IN CASH AND CASH EQUIVALENTS		(3,010,739	)		(1,378,311	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		5,060,859			2,159,050


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,050,120		$	780,739

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES

NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2005 AND 2004

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 and nine-month periods ended September 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the whole year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

We account for our stock option plans in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost has been recognized. Had compensation cost for all stock option plans been determined consistent with the fair value approach described in the SFAS No. 123, “Accounting for Stock Based Compensation,” our net income and earnings per share would have resulted in the pro forma amounts as reported below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Net income as reported	$	6,508,436	$	4,887,359	$	10,407,785	$	6,407,632

Deduct: Stock based employee compensation expense determined under fair value based method for all awards, net of tax		273,930		205,125		821,792		634,970


Pro forma net income	$	6,234,506	$	4,682,234	$	9,585,993	$	5,772,662


Earnings per share:
Basic — as reported	$	1.23	$	1.06	$	1.99	$	1.41
Basic — pro forma	$	1.18	$	1.02	$	1.83	$	1.27

Diluted — as reported	$	1.15	$	0.98	$	1.86	$	1.30
Diluted — pro forma	$	1.10	$	0.94	$	1.72	$	1.17

The pro forma amounts may not be representative of the effects on reported net income for future years.

2. INVENTORIES

Inventories are comprised of the following:


	September 30, 2005			December 31, 2004			September 30, 2004

Raw materials	$	9,766,712		$	4,711,014		$	6,110,035
Work-in-process		937,712			564,717			1,690,521
Finished goods		65,635,079			26,565,240			29,166,558
Factory outlet finished goods		1,697,725			1,268,153			1,996,039

Reserve for obsolescence or lower of cost or market		(715,223	)		(150,000	)		(225,000	)


Total	$	77,322,005		$	32,959,124		$	38,738,153

3. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and federal, state and local income taxes was as follows:


	Nine Months Ended
	September 30,
	2005		2004

Interest	$	6,034,000	$	877,000


Federal, state and local income taxes	$	2,136,000	$	2,580,000

We issued 484,261 common shares valued at $11,473,838, as part of the purchase of the EJ Footwear LLC, Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC (the “EJ Footwear Group”) from SILLC Holdings LLC.

4. PER SHARE INFORMATION

Basic earnings per share (EPS) is computed by dividing net income 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.

A reconciliation of the shares used in the basic and diluted income per common share computation for the three months and nine months ended September 30, 2005 and 2004 is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Basic weighted average shares outstanding		5,289,736		4,605,800		5,232,964		4,530,867

Diluted stock options		356,425		386,519		352,260		413,062


Diluted weighted average shares outstanding		5,646,161		4,992,319		5,585,224		4,943,929


Anti-diluted weighted average shares outstanding		0		84,141		0		84,141

5. RECENT FINANCIAL ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” The statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” The statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. SFAS 123(R) applies to all awards granted after the required effective date (the beginning of the first annual reporting period that begins after June 15, 2005 in accordance with the Securities and Exchange Commission’s delay of the original effective date of SFAS 123(R)) and to awards modified, repurchased or canceled after that date. As a result, beginning January 1, 2006, we will adopt SFAS 123(R) and begin reflecting the stock option expense determined under fair value based methods in our consolidated statement of operations rather than as pro forma disclosure in the notes to the financial statements.

In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin Number 107 (“SAB 107”) that provided additional guidance to public companies relating to share-based payment transactions and the implementation of SFAS 123(R), including guidance regarding valuation methods and related assumptions, classification of compensation expense and income tax effects of share-based payment arrangements.

We have not completed our assessment of the impact or method of adoption of SFAS 123(R) and SAB 107.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is currently evaluating the impact of adopting this standard in its financial statements.

6. ACQUISITION

On January 6, 2005, we completed the purchase of 100% of the issued and outstanding voting limited interests of the EJ Footwear Group from SILLC Holdings LLC.

The EJ Footwear Group was acquired to expand the Company’s branded product lines, principally occupational products, and provide new channels for our existing product lines. The aggregate purchase price for the interests of EJ Footwear Group, including closing date working capital adjustments, was $91.3 million in cash plus 484,261 shares of our common stock valued at $11,473,838. Common stock value was based on the average closing share price during the three days preceding and three days subsequent to the date of the acquisition agreement.

On January 6, 2005, to fund the acquisition of EJ Footwear Group, we entered into a loan and security agreement with GMAC Commercial Finance LLC, refinancing our former $45,000,000 revolving line of credit, for certain extensions of credit (the “Credit Facility”). The Credit Facility is comprised of (i) a five-year revolving credit facility up to a principal amount of $100,000,000 with an interest rate of LIBOR plus two and a half percent (2.5%) or prime plus one percent (1.0%) and (ii) a three-year term loan in the principal amount of $18,000,000 with an interest rate of LIBOR plus three and a quarter percent (3.25%) or prime plus one and three quarters percent (1.75%). The Credit Facility is secured by a first priority perfected security interest in all presently owned and hereafter acquired domestic personal property, subject to specified exceptions. Also, on January 6, 2005, we entered into a note agreement (the “Note Purchase Agreement”) with American Capital Financial Services, Inc., as agent, and American Capital Strategies, Ltd., as lender (collectively, “ACAS”), regarding $30,000,000 in six-year Senior Secured Term B Notes with an interest rate of LIBOR plus eight percent (8.0%). The Note Purchase Agreement provides, among other terms, that (i) the ACAS Senior Secured Term B Notes will be senior indebtedness, secured by essentially the same collateral as the Credit Facility, (ii) such note facility will be “last out” in the event of liquidation of us and our subsidiaries, and (iii) principal payments on such note facility will begin in the fourth year of such note facility.

We have allocated the purchase price to the tangible and intangible assets and liabilities acquired based upon the fair values and income tax basis determined with the assistance of independent appraisals. Goodwill resulting from the transaction can not practicably be allocated between business segments and will not be tax deductible. The purchase price has been allocated as follows:

Purchase price allocation:


Cash	$	91,298,435
Common shares — 484,261 shares		11,473,838
Transaction costs		1,617,802

	$	104,390,075

Allocated to:
Current assets	$	65,899,403
Fixed assets and other assets		3,032,740
Identified intangibles		44,800,000
Goodwill		19,062,682
Liabilities		(11,067,250	)
Deferred taxes — long term		(17,337,500	)

	$	104,390,075

Estimated amounts of identified intangibles and goodwill and the related allocation by segment are subject to final allocation based on independent appraisals of fair value of assets acquired and final determination of income tax basis of assets and liabilities. During the second quarter of 2005, the Company paid the final adjustment of purchase price of $1,795,435.

A schedule of intangible assets is as follows:


	Gross		Accumulated		Carrying
September 30, 2005 (Unaudited)	Amount		Amortization		Amount
Trademarks:
Wholesale	$	28,702,080			$	28,702,080
Retail		15,100,000				15,100,000
Patents		2,962,460	$	497,894		2,464,566
Customer Relationships		1,000,000		150,000		850,000
Goodwill		20,712,414		91,871		20,620,543

Total Intangibles	$	68,476,954	$	739,765	$	67,737,189


	Gross		Accumulated		Carrying
December 31, 2004	Amount		Amortization		Amount
Trademarks (Wholesale)	$	2,225,887			$	2,225,887
Patents		467,336	$	131,796		335,540
Goodwill		1,649,732		91,871		1,557,861

Total Intangibles	$	4,342,955	$	223,667	$	4,119,288


	Gross		Accumulated		Carrying
September 30, 2004 (unaudited)	Amount		Amortization		Amount
Trademarks (Wholesale)	$	2,225,887			$	2,225,887
Patents		607,224	$	124,932		482,292
Goodwill		1,649,732		91,871		1,557,861

Total Intangibles	$	4,482,843	$	216,803	$	4,266,040

Amortization expense for intangible assets was $172,230 and $6,711 for the three months ended September 30, 2005 and 2004, respectively, and $516,098 and $19,350 for the nine months ended September 30, 2005 and 2004, respectively. The weighted average amortization period for patents is six years and for customer relationships is five years.


Estimate of Aggregate Amortization Expense:
Year ending December 31, 2005	$	688,000