SEC Company Response from ROCKY BRANDS, INC. (RCKY) (CIK 0000895456) (RCKY) — Jul 15, 2005
ROCKY BRANDS, INC. (RCKY) (CIK 0000895456)
Date: July 15, 2005 · CIK: 0000895456 · Accession: 0000950152-05-005951
AI Filing Summary & Sentiment
Referenced dates: MAY 13, 2005
Letter
July 15, 2005 VIA EDGAR AND OVERNIGHT COURIER ------------------------------- Michael Moran, Esq. Branch Chief Division of Corporation Finance United States Securities and Exchange Commission Mail Stop 3-8 100 F. Street, N.E. Washington, D.C. 20549
Re: Rocky Shoes & Boots, Inc. File No. 0-21026 Form 10-K for the fiscal year ended December 31, 2004 Form 10-Q for the fiscal year ended March 31, 2005
Dear Mr. Moran:
We have received your additional comments to the annual report on Form 10-K for the fiscal year ended December 31, 2004, filed by Rocky Shoes & Boots, Inc. (the "Company"), as set forth in your letter to the Company dated as of June 15, 2005. For your convenience, we have repeated the text of your comments, followed by our response.
We respectfully respond to your comments as follows:
Form 10-K for the Year Ended December 31, 2004
1. WE NOTE YOUR RESPONSE TO COMMENT 4 OF OUR LETTER DATED MAY 13, 2005. PLEASE PROVIDE TO US YOUR ANALYSIS WITH RESPECT TO THE INCOME STATEMENT CLASSIFICATION REGARDING YOUR CO-OPERATIVE ADVERTISING PROGRAMS. PLEASE BE SPECIFIC REGARDING EACH PROGRAM YOU HAVE WITH EVERY CUSTOMER. SEE PARAGRAPH 9, AND THE EXAMPLES INCLUDED WITHIN APPENDIX A OF EITF ISSUE 01-9.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises the Staff that the Company recognizes co-operative advertising as a cost because it meets both of the conditions required, as outlined in paragraph 9 of EITF 01-9, to be characterized as a cost and not as a reduction of revenue.
<PAGE>
Letter to Michael Moran July 15, 2005 Page -2-
Paragraph 9 of EITF 01-9 states:
That presumption is overcome and the consideration should be characterized as a cost incurred if, and to the extent that, both of the following conditions are met:
a. The vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration. In order to meet this condition, the identified benefit must be sufficiently separable from the recipient's purchase of the vendor's products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.
b. The vendor can reasonably estimate the fair value of the benefit identified under condition (a). If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, that excess amount should be characterized as a reduction of revenue when recognized in the vendor's income statement.
The Company's co-operative advertising programs fall into two classifications:
o Larger customers receive a co-operative allowance of 2% of annual sales, plus allowances for special events, as approved in advance by the Company. To qualify for the allowance, advertising must be "brand building", in the judgment of the Company, and is subject to the final approval of the Company. Approximately, 10 customers participate in this program, and agreements are oral.
o Smaller customers, referred to as Rocky Gear Outfitters, receive a co-operative allowance of 2% of annual sales. To qualify for the allowance, advertising must be "brand building", in the judgment of the Company, and is subject to the final approval of the Company. Approximately, 150 customers participate in this program, and agreements are oral.
In order to qualify for co-operative advertising programs, the customer is required to provide proof of valid advertising that evidences the brands advertised, and information regarding the actual advertising costs paid by the customer.
The Company believes its co-operative adverting programs overcome the presumption that co-operative advertising costs should be reported as a reduction of revenue. The Company receives an identifiable benefit because the customer is required to advertise a branded product of the Company. The fair value is reasonably estimated because the Company requires proof of the amount of adverting costs incurred by the customer. Therefore, the Company believes that it is appropriate to record co-operative advertising costs as an expense.
The Company records the actual amount of advertising costs as advertising expense included in selling, general and administrative expenses in the statement of income. Accrued co-operative advertising due to customers at the end of any reporting period is reported as a current liability. Estimated co-operative advertising costs for volume related programs are accrued as the related sales occur.
<PAGE>
Letter to Michael Moran July 15, 2005 Page -3-
2. WE NOTE YOUR RESPONSE TO COMMENT 14 OF OUR LETTER DATED MAY 13, 2005. IT APPEARS THAT YOU ARE REVIEWING PERFORMANCE BASED ON BRANDED FOOTWEAR, BRANDED ACCESSORIES, AND MILITARY SALES. ALSO, YOU ARE REVIEWING PERFORMANCE SEPARATELY FOR SOURCED AND MANUFACTURED FOOTWEAR. FURTHERMORE, YOU ARE ASSESSING PERFORMANCE OF THESE BUSINESS ACTIVITIES SEPARATELY AGAINST THE PRIOR YEAR PERFORMANCE, AND BUDGET. PROVIDE TO US YOUR ANALYSIS WITH RESPECT TO OPERATING SEGMENTS REGARDING THESE BUSINESS ACTIVITIES. THE FACT THAT YOU REVIEW OPERATING EXPENSES IN TOTAL SHOULD NOT PRECLUDE YOU FROM CONSIDERING WHETHER YOU HAVE SEPARATE OPERATING SEGMENTS. ALSO, DESCRIBE HOW YOUR GENERAL LEDGER SYSTEM IS CODED, FOR EXAMPLE, EXPLAIN IN DETAIL IF YOU MAINTAIN SEPARATE ACCOUNTS TO TRACK OPERATING EXPENSES FOR THE BUSINESS ACTIVITIES MENTIONED ABOVE. SEE PARAGRAPH 10 OF SFAS NO. 131. WE MAY HAVE FURTHER COMMENT.
RESPONSE:
The Company acknowledges the Staff's comment and respectfully advises the Staff that it has given further consideration and performed additional analysis of the information provided to the chief operating decision maker. The Company has also further reviewed and considered the provisions of FAS 131, paragraph 10. Based on this analysis, the Company has concluded that it has eight operating segments. As discussed more fully below, the Company proposes to disclose three reportable segments. Each segment meets the requirements of FAS 131, paragraph 10, in that:
o the business activity earns revenues and incurs expenses,
o the operating results are reviewed regularly by the chief operating decision maker, and
o discrete financial information is available.
The eight operating segments are as follows:
o Branded footwear - Rocky manufactured
o Includes all footwear, except the Wildwolf branded footwear that is manufactured by the Company. Customers consist of several classifications of retailers including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Note that certain manufactured products are also included in the military and the retail operating segments.
o Branded footwear - Rocky sourced
o Includes all footwear, except the Wildwolf branded footwear that is sourced to unrelated manufacturers. Customers consist of several classifications of retailers including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. Note that certain sourced products are also included in the retail operating segment.
o Branded footwear - Wildwolf
o Includes footwear, which may be sourced or manufactured, of the Wildwolf brand and sold principally to one retail customer (Wal-Mart). However, Wal-Mart also purchases branded accessories, and the Wildwolf brand is offered to all retail customers.
<PAGE> Letter to Michael Moran July 15, 2005 Page -4-
o Branded accessories - Rocky apparel
o Includes all apparel sold by the Company, without regard to brand, all of which is sourced. Customers consist of several classifications of retailers including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, and mass merchants.
o Branded accessories - Gates Gloves
o Includes all gloves of the "Gates" brand name, all of which is sourced. Customers consist of several classifications of retailers including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, and mass merchants.
o Branded accessories - Other
o Includes other miscellaneous accessories such as foot warmers and laces, all of which is sourced. Customers consist of several classifications of retailers including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores.
o Retail
o Includes all sales from the Company's two retail stores, without regard to brand or as to origin (i.e., manufactured or sourced).
o Military
o Includes all sales to the U.S. military, all of which is manufactured.
Branded products (including footwear and accessories)
Based on the above operating segments, the Company has considered the aggregation guidance in FAS 131, paragraph 17. As to the operating segments of branded footwear and branded accessories, the aggregation criteria are as follows:
Nature of the products
All the operating segments for branded products consist of individual wearing apparel. These products include footwear, gloves and articles of clothing worn by individuals such as hats, shirts, pants, socks, jackets and similar products.
Nature of the production processes
The Company's development staff oversees the development and testing of all branded products, whether manufactured by the Company or sourced to third parties for manufacture. The production processes used to produce all branded products are substantially the same. The principal raw materials, leather and cloth, are cut and sewn based on patterns developed by the Company. A substantial number of products in all categories use GORE-TEX waterproof material. Machinery used to produce the products is typical for the type of product produced. While certain products are manufactured and other products are sourced to other manufacturers, the same production processes are used by both. In addition, certain products may be manufactured on some occasions, and sourced on other occasions, depending on customer requirements, costs and other factors. The Company has quality control personnel at all plants that produce its products, whether its own manufacturing or sourced.
<PAGE> Letter to Michael Moran July 15, 2005 Page -5-
Type or class of customer for their products
Branded products are sold to retailers who sell the products to the end user. The Company offers its various branded products to various retailers, including sporting goods stores, outdoor specialty stores, mail order catalogs, independent retailers, mass merchants, retail uniform stores, and specialty safety shoe stores. In most cases the retailer purchases products that are included in more than one of the Company's branded operating segments. Branded products are also sold in the Company's two retail stores and in some cases have been sold to the military as well.
Methods used to distribute their products or provide their services
For all the branded products, the Company uses either Company employees who sell the Company's branded products exclusively, or independent representatives who sell the Company's branded products as well as other non-competing products. In almost all cases, the Company's sales force sells the full branded product line of the Company. All branded products are either distributed through the Company's one distribution center, or direct shipped from the manufacturing location to the retailer's distribution center.
Nature of the regulatory environment
The Company's products and the related manufacturing and distribution processes are not subject to significant regulations that affect the financial performance of any operating segment.
Economic characteristics
The following chart depicts the average gross margin for the last three years of the eight branded product operating segments, and the military reporting segment and the retail reporting segment.
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ROCKY SHOES & BOOTS, INC.
39 EAST CANAL STREET
NELSONVILLE, OHIO 45764
July 15, 2005
VIA EDGAR AND OVERNIGHT COURIER
-------------------------------
Michael Moran, Esq.
Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
Mail Stop 3-8
100 F. Street, N.E.
Washington, D.C. 20549
Re: Rocky Shoes & Boots, Inc.
File No. 0-21026
Form 10-K for the fiscal year ended December 31, 2004
Form 10-Q for the fiscal year ended March 31, 2005
Dear Mr. Moran:
We have received your additional comments to the annual report on Form
10-K for the fiscal year ended December 31, 2004, filed by Rocky Shoes & Boots,
Inc. (the "Company"), as set forth in your letter to the Company dated as of
June 15, 2005. For your convenience, we have repeated the text of your comments,
followed by our response.
We respectfully respond to your comments as follows:
Form 10-K for the Year Ended December 31, 2004
1. WE NOTE YOUR RESPONSE TO COMMENT 4 OF OUR LETTER DATED MAY 13, 2005.
PLEASE PROVIDE TO US YOUR ANALYSIS WITH RESPECT TO THE INCOME STATEMENT
CLASSIFICATION REGARDING YOUR CO-OPERATIVE ADVERTISING PROGRAMS. PLEASE
BE SPECIFIC REGARDING EACH PROGRAM YOU HAVE WITH EVERY CUSTOMER. SEE
PARAGRAPH 9, AND THE EXAMPLES INCLUDED WITHIN APPENDIX A OF EITF ISSUE
01-9.
RESPONSE:
The Company acknowledges the Staff's comment and respectively advises
the Staff that the Company recognizes co-operative advertising as a
cost because it meets both of the conditions required, as outlined in
paragraph 9 of EITF 01-9, to be characterized as a cost and not as a
reduction of revenue.
<PAGE>
Letter to Michael Moran
July 15, 2005
Page -2-
Paragraph 9 of EITF 01-9 states:
That presumption is overcome and the consideration should be
characterized as a cost incurred if, and to the extent that,
both of the following conditions are met:
a. The vendor receives, or will receive, an identifiable
benefit (goods or services) in exchange for the consideration.
In order to meet this condition, the identified benefit must
be sufficiently separable from the recipient's purchase of the
vendor's products such that the vendor could have entered into
an exchange transaction with a party other than a purchaser of
its products or services in order to receive that benefit.
b. The vendor can reasonably estimate the fair value of the
benefit identified under condition (a). If the amount of
consideration paid by the vendor exceeds the estimated fair
value of the benefit received, that excess amount should be
characterized as a reduction of revenue when recognized in the
vendor's income statement.
The Company's co-operative advertising programs fall into two
classifications:
o Larger customers receive a co-operative allowance of 2% of
annual sales, plus allowances for special events, as approved
in advance by the Company. To qualify for the allowance,
advertising must be "brand building", in the judgment of the
Company, and is subject to the final approval of the Company.
Approximately, 10 customers participate in this program, and
agreements are oral.
o Smaller customers, referred to as Rocky Gear Outfitters,
receive a co-operative allowance of 2% of annual sales. To
qualify for the allowance, advertising must be "brand
building", in the judgment of the Company, and is subject to
the final approval of the Company. Approximately, 150
customers participate in this program, and agreements are
oral.
In order to qualify for co-operative advertising programs, the customer
is required to provide proof of valid advertising that evidences the
brands advertised, and information regarding the actual advertising
costs paid by the customer.
The Company believes its co-operative adverting programs overcome the
presumption that co-operative advertising costs should be reported as a
reduction of revenue. The Company receives an identifiable benefit
because the customer is required to advertise a branded product of the
Company. The fair value is reasonably estimated because the Company
requires proof of the amount of adverting costs incurred by the
customer. Therefore, the Company believes that it is appropriate to
record co-operative advertising costs as an expense.
The Company records the actual amount of advertising costs as
advertising expense included in selling, general and administrative
expenses in the statement of income. Accrued co-operative advertising
due to customers at the end of any reporting period is reported as a
current liability. Estimated co-operative advertising costs for volume
related programs are accrued as the related sales occur.
<PAGE>
Letter to Michael Moran
July 15, 2005
Page -3-
2. WE NOTE YOUR RESPONSE TO COMMENT 14 OF OUR LETTER DATED MAY 13, 2005.
IT APPEARS THAT YOU ARE REVIEWING PERFORMANCE BASED ON BRANDED
FOOTWEAR, BRANDED ACCESSORIES, AND MILITARY SALES. ALSO, YOU ARE
REVIEWING PERFORMANCE SEPARATELY FOR SOURCED AND MANUFACTURED FOOTWEAR.
FURTHERMORE, YOU ARE ASSESSING PERFORMANCE OF THESE BUSINESS ACTIVITIES
SEPARATELY AGAINST THE PRIOR YEAR PERFORMANCE, AND BUDGET. PROVIDE TO
US YOUR ANALYSIS WITH RESPECT TO OPERATING SEGMENTS REGARDING THESE
BUSINESS ACTIVITIES. THE FACT THAT YOU REVIEW OPERATING EXPENSES IN
TOTAL SHOULD NOT PRECLUDE YOU FROM CONSIDERING WHETHER YOU HAVE
SEPARATE OPERATING SEGMENTS. ALSO, DESCRIBE HOW YOUR GENERAL LEDGER
SYSTEM IS CODED, FOR EXAMPLE, EXPLAIN IN DETAIL IF YOU MAINTAIN
SEPARATE ACCOUNTS TO TRACK OPERATING EXPENSES FOR THE BUSINESS
ACTIVITIES MENTIONED ABOVE. SEE PARAGRAPH 10 OF SFAS NO. 131. WE MAY
HAVE FURTHER COMMENT.
RESPONSE:
The Company acknowledges the Staff's comment and respectfully advises
the Staff that it has given further consideration and performed
additional analysis of the information provided to the chief operating
decision maker. The Company has also further reviewed and considered
the provisions of FAS 131, paragraph 10. Based on this analysis, the
Company has concluded that it has eight operating segments. As
discussed more fully below, the Company proposes to disclose three
reportable segments. Each segment meets the requirements of FAS 131,
paragraph 10, in that:
o the business activity earns revenues and incurs expenses,
o the operating results are reviewed regularly by the chief
operating decision maker, and
o discrete financial information is available.
The eight operating segments are as follows:
o Branded footwear - Rocky manufactured
o Includes all footwear, except the Wildwolf branded
footwear that is manufactured by the Company.
Customers consist of several classifications of
retailers including sporting goods stores, outdoor
specialty stores, mail order catalogs, independent
retailers, mass merchants, retail uniform stores, and
specialty safety shoe stores. Note that certain
manufactured products are also included in the
military and the retail operating segments.
o Branded footwear - Rocky sourced
o Includes all footwear, except the Wildwolf branded
footwear that is sourced to unrelated manufacturers.
Customers consist of several classifications of
retailers including sporting goods stores, outdoor
specialty stores, mail order catalogs, independent
retailers, mass merchants, retail uniform stores, and
specialty safety shoe stores. Note that certain
sourced products are also included in the retail
operating segment.
o Branded footwear - Wildwolf
o Includes footwear, which may be sourced or
manufactured, of the Wildwolf brand and sold
principally to one retail customer (Wal-Mart).
However, Wal-Mart also purchases branded accessories,
and the Wildwolf brand is offered to all retail
customers.
<PAGE>
Letter to Michael Moran
July 15, 2005
Page -4-
o Branded accessories - Rocky apparel
o Includes all apparel sold by the Company, without
regard to brand, all of which is sourced. Customers
consist of several classifications of retailers
including sporting goods stores, outdoor specialty
stores, mail order catalogs, independent retailers,
and mass merchants.
o Branded accessories - Gates Gloves
o Includes all gloves of the "Gates" brand name, all of
which is sourced. Customers consist of several
classifications of retailers including sporting goods
stores, outdoor specialty stores, mail order
catalogs, independent retailers, and mass merchants.
o Branded accessories - Other
o Includes other miscellaneous accessories such as foot
warmers and laces, all of which is sourced. Customers
consist of several classifications of retailers
including sporting goods stores, outdoor specialty
stores, mail order catalogs, independent retailers,
mass merchants, retail uniform stores, and specialty
safety shoe stores.
o Retail
o Includes all sales from the Company's two retail
stores, without regard to brand or as to origin
(i.e., manufactured or sourced).
o Military
o Includes all sales to the U.S. military, all of which
is manufactured.
Branded products (including footwear and accessories)
Based on the above operating segments, the Company has considered the
aggregation guidance in FAS 131, paragraph 17. As to the operating
segments of branded footwear and branded accessories, the aggregation
criteria are as follows:
Nature of the products
All the operating segments for branded products consist of
individual wearing apparel. These products include footwear,
gloves and articles of clothing worn by individuals such as
hats, shirts, pants, socks, jackets and similar products.
Nature of the production processes
The Company's development staff oversees the development and
testing of all branded products, whether manufactured by the
Company or sourced to third parties for manufacture. The
production processes used to produce all branded products are
substantially the same. The principal raw materials, leather
and cloth, are cut and sewn based on patterns developed by the
Company. A substantial number of products in all categories
use GORE-TEX waterproof material. Machinery used to produce
the products is typical for the type of product produced.
While certain products are manufactured and other products are
sourced to other manufacturers, the same production processes
are used by both. In addition, certain products may be
manufactured on some occasions, and sourced on other
occasions, depending on customer requirements, costs and other
factors. The Company has quality control personnel at all
plants that produce its products, whether its own
manufacturing or sourced.
<PAGE>
Letter to Michael Moran
July 15, 2005
Page -5-
Type or class of customer for their products
Branded products are sold to retailers who sell the products
to the end user. The Company offers its various branded
products to various retailers, including sporting goods
stores, outdoor specialty stores, mail order catalogs,
independent retailers, mass merchants, retail uniform stores,
and specialty safety shoe stores. In most cases the retailer
purchases products that are included in more than one of the
Company's branded operating segments. Branded products are
also sold in the Company's two retail stores and in some cases
have been sold to the military as well.
Methods used to distribute their products or provide their
services
For all the branded products, the Company uses either Company
employees who sell the Company's branded products exclusively,
or independent representatives who sell the Company's branded
products as well as other non-competing products. In almost
all cases, the Company's sales force sells the full branded
product line of the Company. All branded products are either
distributed through the Company's one distribution center, or
direct shipped from the manufacturing location to the
retailer's distribution center.
Nature of the regulatory environment
The Company's products and the related manufacturing and
distribution processes are not subject to significant
regulations that affect the financial performance of any
operating segment.
Economic characteristics
The following chart depicts the average gross margin for the
last three years of the eight branded product operating
segments, and the military reporting segment and the retail
reporting segment.
---------------