Rocky Shoes & Boots, Inc. announced it has been notified that an order to fulfill a third-party contract for combat boots for the U.S. Military has been terminated by the U.S. government for convenience. Termination for convenience is the government's unilateral right to cancel a contract without cause.
On October 17, 2005, the company announced it had received a contract to produce approximately $30.0 million of “Hot Weather” boots for the U.S. Military. The company's contract was with a third party, Atlantic Diving Supply, Virginia Beach, Virginia (ADS), which had the prime contract to supply the combat boots to the U.S. military under a General Services Administration schedule contract. Shipment of the boots began in the fourth quarter of fiscal 2005 with an estimated completion date of December 2006. The company is currently exploring the exact financial consequences of the government's termination of the contract for convenience and the recovery of costs incurred in the performance of the contract prior to termination.
Mike Brooks, chairman and CEO, stated, “While we are clearly disappointed with the government's termination of this order, we know this decision was not based on Rocky's ability to produce high quality boots and successfully fulfill this contract. Instead, the contract with ADS was terminated by the government, for the convenience of the government, as permitted under applicable government contract laws and regulations and not due to any problem or default by ADS or Rocky, thus entitling ADS, and indirectly Rocky, under the same government laws and regulations to be compensated by the government for its work to date, including finished boots and work-in-process, plus various other costs incurred, including any costs incurred in the cancellation of materials contracts. Furthermore, we believe Rocky remains well positioned to source additional footwear orders for the U.S. Military going forward.”
The company also announced that it has withdrawn its registration statement filed with the Securities and Exchange Commission on September 15, 2005, for a follow-on equity offering of 2.6 million shares of common stock consisting of 2 million primary shares to be offered by the company and 600,000 shares to be offered by certain selling stockholders. The company expects to incur a non-operational charge in fiscal 2005 of approximately 4 cents diluted earnings per share for accounting and legal fees associated with the follow-on equity offering.
Mike Brooks further commented, “The company's cash flows in 2005 and projected cash flows in 2006 are more than sufficient to service the indebtedness incurred in connection with the EJ Footwear acquisition in January 2005, including the $48 million of term loans. The planned follow-on equity offering would have reduced the company's outstanding indebtedness sooner and would have thereby put the company in a more favorable position for making future acquisitions relatively sooner, but in light of the current trading price of the company's stock and the company's projected cash flows, the Board of Directors was of the opinion that an equity offering was not in the best interests of shareholders at this time.”
The company stated that it has already made principal payments reducing the $18 million senior portion of its term loan to $10 million during 2005 and the first week of 2006, and that the company expects to use cash flows from operations to pay off the remaining $10 million of the senior term loan in 2006. At the end of 2006, the company expects that the $30 million junior portion of its current term debt will remain outstanding and expects that its $100 revolving line of credit will have an outstanding balance of approximately $55.0 million, compared to $60.0 million outstanding at December 31, 2005.
Based on information available as of this date, the Company has revised its outlook for fiscal 2005 and fiscal 2006. For fiscal 2005, the company now expects diluted earnings per share to be in the range of $2.21 to $2.25, including costs associated with the follow-on offering, compared to its previous guidance on October 17, 2005, of $2.25 to $2.29. The company remains comfortable with its revenue forecast of $294 million to $296 million for fiscal 2005. For fiscal 2006, the company now expects revenues to be in the range of $287 million to $292 million, compared to it previous guidance of $313 million to $318 million, and diluted earnings per share to be in the range of $2.35 to $2.45, compared to its previous expectation of $3.05 to $3.15. It is important to note that the company's earnings per share guidance for fiscal 2006 does not include a non-cash charge of approximately 7 cents related to stock option expensing. Including that charge, for fiscal 2006, the company expects diluted earnings per share to be in the range of $2.28 to $2.38. It is also important to note that the company's guidance for fiscal 2006 does not include any footwear sales to the military compared to approximately $27.5 million in fiscal 2005.
Mike Brooks concluded, “During the past 12 months we have worked extremely hard to integrate the EJ Footwear acquisition and to build a stronger organization for the future, and we are very pleased with our progress to date. Fiscal 2005 was a record year for our Company in terms of sales and profits, driven by the expansion of our work and western footwear categories, as well as meaningful gains in our apparel business. As we begin 2006, our growth prospects are bright and we are committed to capitalizing on the many opportunities that lie ahead.”
