FORM 10-Q
                        SECURITIES & EXCHANGE COMMISSION
                             Washington, D. C. 20549

(Mark One)

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

For the quarterly period ended    September 30, 2003March 31, 2004
                              --------------------------

                         Or

( ) 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       0-9068
                      -------------------

                                WEYCO GROUP, INC.
------------------------------------------------------------------ --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          WISCONSIN                                           39-0702200
- -------------------------------                       ---------------------------------------------
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

                           333 W. Estabrook Boulevard
                                 P. O. Box 1188
                           Milwaukee, Wisconsin 53201
                --------------------------------------------------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (414) 908-1600
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              (Registrant's telephone number, including area code)

     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 such
filing requirements for the past 90 days.

Yes     (X)X                         No
     ( )-------                         ------

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes     (X)X                         No
     ( )-------                         ------

As of November 3, 2003April 26, 2004 the following shares were outstanding:

   Common Stock, $1.00 par value                         4,420,8034,338,875 Shares
   Class B Common Stock, $1.00 par value                 1,310,9151,306,043 Shares









                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

     The condensed financial statements included herein have been prepared by
     the Company, without audit, pursuant to the rules and regulations of the
     Securities and Exchange Commission. Certain information and footnote
     disclosures normally included in financial statements prepared in
     accordance with accounting principles generally accepted accounting principlesin the United
     States of America have been condensed or omitted pursuant to such rules and
     regulations. It is suggested that these financial statements be read in
     conjunction with the financial statements and notes thereto included in the
     Company's latest annual report on Form 10-K.

                       WEYCO GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

                                     ASSETS
September 30March 31 December 31 2004 2003 (Unaudited) 2002 ---------------------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,792,0427,911,001 $ 7,301,1049,091,567 Marketable securities 1,700,000 2,099,1403,729,197 4,206,100 Accounts receivable, net 34,367,184 32,170,79538,835,619 29,900,197 Accrued income tax receivable 237,241 1,008,079-- 228,074 Inventories - Finished-- finished shoes 43,113,316 48,951,574 Shoes in process 7,104 337,221 Raw materials and supplies 195,598 452,138 ------------ ------------ Total inventories 43,316,018 49,740,93336,736,510 43,727,578 Deferred income tax benefits 2,387,000 2,421,0001,985,878 2,483,037 Prepaid expenses and other current assets 558,412 803,108949,681 968,264 ------------ ------------ Total current assets 92,357,897 95,544,15990,147,886 90,604,817 MARKETABLE SECURITIES 7,325,979 8,026,1277,535,243 6,273,638 OTHER ASSETS 9,341,419 9,683,25213,730,819 13,750,574 PLANT AND EQUIPMENT 39,293,859 31,087,25440,651,798 40,914,250 Less - Accumulated depreciation 10,394,161 8,927,27111,310,433 11,224,993 ------------ ------------ Plant and equipment, net 28,899,698 22,159,98329,341,365 29,689,257 TRADEMARK 10,867,969 10,821,68110,867,969 ------------ ------------ $148,792,962 $146,235,202$151,623,282 $151,186,255 ============ ============
LIABILITIES & SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES: Short-term borrowings $ 24,969,660 $ 27,944,830 Accounts payable $ 5,753,520 $ 11,268,7135,813,425 7,465,606 Dividend payable 570,233 490,810555,462 563,642 Accrued liabilities 8,964,239 8,473,3736,310,449 8,279,846 Accrued income taxes 2,263,958 -- ------------ ------------ Total current liabilities 15,287,992 20,232,89639,912,954 44,253,924 LONG-TERM PENSION LIABILITY 3,109,154 3,077,285 DEFERRED INCOME TAX LIABILITIES 2,939,000 3,416,000 LONG-TERM DEBT 34,962,273 37,801,9925,006,478 5,009,158 SHAREHOLDERS' INVESTMENT: Common stock 5,701,937 3,789,0645,644,918 5,630,418 Other shareholders' investment 89,901,760 80,995,25097,949,778 93,215,470 ------------ ------------ $148,792,962 $146,235,202$151,623,282 $151,186,255 ============ ============
The accompanyingSee notes to consolidated condensed financial statements are an integral part of these financial statements. -1- WEYCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE PERIODSTHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2004 AND 2003 AND 2002 (UNAUDITED)
Three Months ended September 30 Nine Months ended September 30 -------------------------------- --------------------------------2004 2003 2002 2003 2002 ------------- ------------- ------------- ------------------------- ------------ NET SALES $ 49,817,25661,743,369 $ 58,762,489 $ 161,197,464 $ 127,017,35260,379,924 COST OF SALES 32,774,309 39,998,767 106,355,797 88,688,085 ------------- ------------- ------------- -------------40,484,710 40,195,100 ------------ ------------ Gross earnings 17,042,947 18,763,722 54,841,667 38,329,26721,258,659 20,184,824 SELLING AND ADMINISTRATIVE EXPENSES 11,887,045 11,233,478 36,128,815 24,926,799 ------------- ------------- ------------- -------------12,776,351 12,447,444 ------------ ------------ Earnings from operations 5,155,902 7,530,244 18,712,852 13,402,4688,482,308 7,737,380 INTEREST INCOME 131,378 199,864 403,346 683,070120,863 149,826 INTEREST EXPENSE (421,998) (545,035) (1,084,350) (811,387)(167,485) (351,962) OTHER INCOME AND EXPENSE, net 43,692 (2,630) 241,764 (19,688) ------------- ------------- ------------- -------------(EXPENSE) (32,990) 20,950 ------------ ------------ Earnings before provision for income taxes 4,908,974 7,182,443 18,273,612 13,254,4638,402,696 7,556,194 PROVISION FOR INCOME TAXES 1,400,000 2,650,000 6,500,000 4,800,000 ------------- ------------- ------------- -------------3,250,000 2,885,000 ------------ ------------ Net earnings $ 3,508,9745,152,696 $ 4,532,443 $ 11,773,612 $ 8,454,463 ============= ============= ============= =============4,671,194 ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 4)*2) Basic 5,700,959 5,642,352 5,693,346 5,633,3155,637,793 5,685,509 Diluted 5,903,141 5,791,789 5,881,725 5,747,9445,837,573 5,843,840 EARNINGS PER SHARE (Note 4)*2) Basic $ .62.91 $ .82 ============ ============ Diluted $ .88 $ .80 $ 2.07 $ 1.50 ============= ============= ============= ============= Diluted $ .59 $ .78 $ 2.00 $ 1.47 ============= ============= ============= ========================= ============ CASH DIVIDENDS PER SHARE*SHARE $ .10 $ .09 $ .28 $ .25 ============= ============= ============= ========================= ============
*All per share figures have been adjusted to reflect the October 1, 2003 50% stock dividend. The accompanyingSee notes to consolidated condensed financial statements are an integral part of these financial statements. -2- WEYCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTSSTATEMENT OF CASH FLOWS FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2004 AND 2003 AND 2002 (UNAUDITED)
2004 2003 2002 ------------ ----------------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings .............................................................. $ 5,152,696 $ 4,671,194 Adjustments to reconcile net earnings to net cash provided by operating activities $ 13,930,476 $ 2,146,279 ------------ -------------- Depreciation ......................................................... 678,422 667,439 Amortization ......................................................... 48,649 46,755 Deferred income taxes ................................................ 494,479 111,000 Deferred compensation expense ........................................ 17,400 49,323 Pension expense ...................................................... 150,000 150,000 Gain on sale of assets ............................................... (84,704) -- Increase in cash surrender value of life insurance ................... (102,000) (93,000) Changes in operating assets and liabilities -- Accounts receivable .................................................. (8,935,422) (9,044,392) Inventories .......................................................... 6,991,068 (1,457,116) Prepaids and other current assets .................................... 18,584 323,253 Accounts payable ..................................................... (1,652,181) 6,843,872 Accrued liabilities and other ........................................ (2,103,152) (1,091,131) Accrued income taxes ................................................. 2,492,032 3,548,331 ----------- ----------- Net cash provided by operating activities ....................... 3,165,871 4,725,528 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Florsheim business -- (48,408,859) Purchase of marketable securities (3,400,000) (6,004,234)......................................... (1,412,909) (700,000) Proceeds from maturities of marketable securities 4,499,248 7,139,405......................... 626,313 1,216,390 Purchase of plant and equipment (8,379,073) (6,745,417)........................................... (345,023) (1,038,628) Proceeds from sales of plant and equipment 37,623................................ 90,611 -- ------------ ----------------------- ----------- Net cash used for investing activities (7,242,202) (54,019,105) ------------ ------------.......................... (1,041,008) (522,238) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (1,594,878) (1,427,006) Shares purchased and retired (212,102) (195,500)....................................................... (572,272) (490,810) Proceeds from stock options exercised 449,363 462,813..................................... 242,013 64,025 Net (repayments) borrowings (repayments) under revolving credit agreement (2,839,719) 46,454,096 Debt issuance costs -- (374,057) ------------ ------------........................................... (2,975,170) 3,150,717 ----------- ----------- Net cash (used for) provided by financing activities (4,197,336) 44,920,346 ------------ ------------............ (3,305,429) 2,723,932 ----------- ----------- Net (decrease) increase (decrease) in cash and cash equivalents 2,490,938 (6,952,480)...................... (1,180,566) 6,927,222 ----------- ----------- CASH AND CASH EQUIVALENTS at beginning of period ............................... $ 9,091,567 $ 7,301,104 16,850,998 ------------ ----------------------- ----------- CASH AND CASH EQUIVALENTS at end of period ..................................... $ 9,792,042 $ 9,898,518 ============ ============7,911,001 $14,228,326 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid, net of refunds ......................................... $ 5,694,925129,500 $ 4,167,678 ============ ============(937,710) =========== =========== Interest paid ............................................................. $ 916,603153,745 $ 601,524 ============ ============396,679 =========== ===========
The accompanyingSee notes to consolidated condensed financial statements are an integral part of these financial statements. -3- NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:NOTES: (1) In the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial information have been made. The results of operations for the three months or nine months ended September 30, 2003,March 31, 2004, are not necessarily indicative of results for the full year. (2) On July 28, 2003 the Board of Directors of the Company declared a 50% stock dividend on the Company's Common Stock, $1.00 par value, and on the Company's Class B Common Stock, $1.00 par value, so as to affect a three-for-two stock split without a change in par value. The additional shares were issued on October 1, 2003, to shareholders of record on August 29, 2003. The stock dividend has been reflected in the shareholders equity accounts as of September 30, 2003. All per share information in these financial statements and notes have been restated to reflect this stock dividend. The Board also declared a quarterly dividend of $.10 per share, adjusted for the stock dividend, payable October 1, 2003. This represents a 7% increase in the Company's quarterly dividend. (3) On May 20, 2002, the Company acquired certain assets of Florsheim Group, Inc.'s domestic wholesale and retail operations. On July 1 and July 27, 2002, the Company acquired certain assets and assumed the operating liabilities of Florsheim Europe S.r.l. and Florsheim France SARL, respectively. The total purchase price was $48.7 million, and the Company entered into a two-year $60 million revolving line of credit to fund the acquisition and related expenses. In accordance with the original agreement, the revolving line of credit was reduced to $50 million on April 30, 2003. On May 5, 2003, the revolving line of credit agreement was extended an additional year, to April 30, 2005. See the Company's December 31, 2002 annual report on Form 10-K for further information regarding the acquisition and borrowings under the line of credit. During the third quarter of 2003, the Company finalized the purchase price allocation which resulted in a $46,000 net increase in the value of the trademark since December 31, 2002. The following table sets forth the unaudited proforma information for the Company as if the acquisition had occurred as of January 1, 2002 (in thousands, except per share data):
Nine Months ended September 30 2002 ---------- Net Sales $ 160,216 Net Earnings $ 10,322 Basic Earnings Per Share $ 1.83 Diluted Earnings Per Share $ 1.79
-4- (4) The following table sets forth the computation of basicnet earnings per share and diluted net earnings per share:
Three Months Ended September 30 Nine Months Ended September 30 -------------------------------- --------------------------------March 31, 2004 March 31, 2003 2002 2003 2002 ----------- ----------- ----------- ------------------------- -------------- Numerator: Net Earnings ..................................................... $ 3,508,9745,152,696 $ 4,532,443 $11,773,612 $ 8,454,463 =========== =========== =========== ===========4,671,194 ============== ============== Denominator: Basic weighted average shares..... 5,700,959 5,642,352 5,693,346 5,633,315shares .............. 5,637,793 5,685,509 Effect of dilutive securities: Employee stock options ......... 202,182 149,437 188,379 114,629 ----------- ----------- ----------- -----------................... 199,780 158,331 -------------- -------------- Diluted weighted average shares .. 5,903,141 5,791,789 5,881,725 5,747,944 =========== =========== =========== ===========............. 5,837,573 5,843,840 ============== ============== Basic earnings per share ................................. $ .62.91 $ .80 $ 2.07 $ 1.50 =========== =========== =========== ===========.82 ============== ============== Diluted earnings per share ............................. $ .59.88 $ .78 $ 2.00 $ 1.47 =========== =========== =========== ===========.80 ============== ==============
Diluted weighted average shares outstanding for 2003the first quarter of 2004 exclude outstanding options to purchase 155,6255,412 shares of common stock at a weighted-average price of $33.70$36.94 because they are antidilutive. Diluted weighted average shares outstanding for 2002the first quarter of 2003 include all outstanding options, as none wereare antidilutive. (5)(3) The components of the Company's net periodic pension cost are:
March 31, 2004 March 31, 2003 -------------- -------------- Benefits earned during the period ....................... $ 196,000 $ 143,000 Interest cost on projected benefit obligation ........... 396,000 366,000 Expected return on plan assets .......................... (498,000) (418,000) Net amortization and deferral ........................... 56,000 59,000 -------------- -------------- Net pension expense .................................. $ 150,000 $ 150,000
The Company has not and does not expect to make any contributions to its defined benefit pension plan in 2004. -4- (4) The Company continues to operate in two business segments: wholesale distribution and retail sales of men's footwear. Summarized segment data for September 30,the quarters ended March 31, 2004 and 2003 and 2002 is:
Wholesale Distribution Retail Total ------------ ------------ ----------------------- ----------- ----------- THREE MONTHS ENDED SEPTEMBER 30 2003MARCH 31, 2004 Product sales .................... $54,540,000 $ 6,451,000 $60,991,000 Licensing revenues ............... 752,000 -- 752,000 ----------- ----------- ----------- Net Sales....................... $ 43,943,000 $ 5,874,000 $ 49,817,000sales ..................... 55,292,000 6,451,000 61,743,000 Earnings from operations........ 4,338,000 818,000 5,156,000 2002operations ......... 7,585,000 897,000 8,482,000 MARCH 31, 2003 Product sales .................... $53,944,000 $ 5,679,000 $59,623,000 Licensing revenues ............... 757,000 -- 757,000 ----------- ----------- ----------- Net Sales....................... $ 53,490,000 $ 5,272,000 $ 58,762,000sales ..................... 54,701,000 5,679,000 60,380,000 Earnings from operations........ 7,037,000 493,000 7,530,000 NINE MONTHS ENDED SEPTEMBER 30 2003 Net Sales....................... $143,494,000 $ 17,703,000 $161,197,000 Earnings from operations........ 16,277,000 2,436,000 18,713,000 2002 Net Sales....................... $117,726,000 $ 9,291,000 $127,017,000 Earnings from operations........ 12,597,000 805,000 13,402,000operations .......... 7,138,000 599,000 7,737,000
-5- (6)(5) The Company has stock option plans under which options to purchase Common Stock are granted to officers and key employees at prices not less than the fair market value of the Common Stock on the date of the grant. The Company accounts for such stock option grants under the provisions of APB Opinion #25, "Accounting for Stock Issued to Employees." No stock-based employee compensation expense has been reflected in net income, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on quarterly net earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No.148,No. 148, to stock-based employee compensation.
Three Months ended September 30 Nine Months ended September 30March 31 March 31 2004 2003 2002 2003 2002 -------------- -------------- -------------- --------------------------- ------------- Net earnings, as reported ......................... $ 3,508,9745,152,696 $ 4,532,443 $ 11,773,612 $ 8,454,4634,671,194 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects ........ 558,563 253,004 906,892 395,657 -------------- -------------- -------------- ---------------- 83,170 ------------- ------------- Pro forma net income .............................. $ 2,950,4115,152,696 $ 4,279,439 $ 10,866,720 $ 8,058,806 ============== ============== ============== ==============4,588,024 ============= ============= Earnings per share Basic - as reported ............................. $ .62.91 $ .80 $ 2.07 $ 1.50 ============== ============== ============== ==============.82 Basic - pro forma ............................... $ .52.91 $ .76 $ 1.91 $ 1.43 ============== ============== ============== ==============.81 Diluted - as reported ........................... $ .59.88 $ .78 $ 2.00 $ 1.47 ============== ============== ============== ==============.80 Diluted - pro forma ............................. $ .50.88 $ .74 $ 1.85 $ 1.40 ============== ============== ============== ==============.79
(7)-5- (6) Comprehensive income for the periodsthree months ended September 30,March 31, 2004 and 2003 and 2002 is as follows (in thousands):
Three Months ended September 30 Nine Months ended September 30Ended -------------------------- March 31 March 31 2004 2003 2002 2003 2002 -------------- -------------- -------------- --------------------- --------- Net earnings $ 3,509 $ 4,532 $ 11,774 $ 8,454$5,153 $4,671 Foreign currency translation adjustments (35) -- 403 -- -------------- -------------- -------------- --------------(82) 173 ------ ------ Total comprehensive income $ 3,474 $ 4,532 $ 12,177 $ 8,454$5,071 $4,844 ====== ======
The components of Accumulated Other Comprehensive LossIncome as recorded on the accompanying balance sheets are as follows (in thousands):
September 30, 2003March 31 December 31 2002 ------------------ -----------------2004 2003 -------- ----------- Foreign currency translation adjustments $ 171 $ (232) Additional minimum pension liability, net of tax of $553 (864) (864) ------ -------- Accumulated other comprehensive loss $ (693) $ (1,096)$27 $109
-6- (8) In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement in 2003 did not have a material impact on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ACQUISITION On May 20, 2002,Operations OVERVIEW The Company is a distributor of men's casual, dress and fashion shoes under the Florsheim, Nunn Bush, Nunn Bush NXXT, Brass Boot, Stacy Adams and SAO by Stacy Adams brand names. Inventory is purchased from third party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars. The Company's products are sold to shoe specialty stores, department stores and clothing retailers primarily in North America, with some distribution in Europe. The Company also has a retail division, which consists of 30 Company-owned retail stores in the United States and three in Europe. Sales in retail outlets are made directly to consumers by Company employees. The Company also has licensing agreements with third parties who sell its branded shoes overseas, as well as licensing agreements with apparel and accessory manufacturers in the United States. As such, the Company's results are primarily impacted by the economic conditions and the retail environment in the United States. Overall, net earnings increased from $4,671,000, or $.80 per diluted share for the first quarter of 2003, to $5,153,000, or $.88 per diluted share for the first quarter of 2004. For the first quarter of 2004, the Company acquired certain assets of Florsheim Group, Inc.'s domestichad increases in both its wholesale and retail operations. On July 1 and July 27, 2002,These increases along with a 1% increase in overall gross margins resulted in the Company acquired certain assets and assumedincrease in earnings for the quarter. A more detailed analysis of operating liabilities of Florsheim Europe S.r.l. and Florsheim France SARL, respectively. The total purchase price was $48.5 million, and the Company entered into a two-year $60 million revolving line of credit to fund the acquisition and related expenses. See the Company's December 31, 2002 annual report on Form 10-K and Note 3 to these financial statements for further information regarding the acquisition and borrowings under the line of credit.results follows. LIQUIDITY & CAPITAL RESOURCES The Company's primary source of liquidity is its cash and short-term marketable securities, which aggregated approximately $11,492,000$11,640,000 at September 30, 2003March 31, 2004 as compared with $9,400,000$13,298,000 at December 31, 2002. To date in 2003,2003. In the first quarter of 2004, the primary source of cash was operations, while the primary use of cash was the repayment of long term debt. -6- Net cash provided by operating activities for the first quarter of 2004 was down $1.6 million compared with the same period in 2003. The increase in net earnings of $.5 million, offset by a $1.5 million deferred compensation payment (which is included in accrued liabilities and other) were the principal items affecting the change in cash provided by operations. The primary useschanges in inventory and accounts payable are due to timing, and together had no impact on the decrease in operating cash flows. The increase in net cash used for investing activities is primarily due to an increase in marketable securities during the first quarter of cash are purchases2004, as compared with a decrease during the same period of plant2003. This is due to differences in the timing of investments and equipment, repaymentsmaturities between periods. Also, in the first quarter of long-term debt,2003, $600,000 of the $1 million of capital expenditures was related to the 2003 expansion and paymentreconfiguration of cash dividends. -7- the Company's distribution center. The lower capital spending in 2004 represents a more normal level of quarterly expenditures. Cash flows from operations for the nine months ended September 30, 2003 were generated principally by net earningsfinancing activities decreased due to first quarter 2004 repayments of $11.8 million plus $1.8 millionborrowings. As of depreciation and amortization. Cash flows for operations for the nine months ended September 30, 2002 were generated by net earnings of $8.5 million plus $1.5 million of depreciation and amortization. This was offset by an $8.4 million increase in accounts receivable, due primarily to the buildup of Florsheim accounts receivable after the May 20, 2002 acquisition. During the third quarterMarch 31, 2004, the Company completed the construction projecthad a total of $50 million available under its existing borrowing facility, of which total borrowings were $25.0 million. This facility includes certain financial covenants, including minimum net worth levels, minimum levels of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and a minimum ratio of funded debt to expand and reconfigure the distribution center to more efficiently handle the increased volumes resulting from the acquisition. The total cost was approximately $8.5 million.EBITDA. As of September 30, 2003, approximately $8.2 million has been paid. The Company expects capital expenditures to return to a more normalized level overMarch 31, 2004 the next twelve months. The Company estimates normal capital expenditures to be $1 to $2 million. At September 30, 2003, $35 million was outstanding under the line of credit facility. The Company was in compliance with all debt covenants as of September 30, 2003. In October 2003, thecovenants. The Company purchased 86,200 shares ofintends to use its Common Stock for $2.6 million in a single transaction.2004 operating cash flows primarily to reduce outstanding borrowings and pay dividends. The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business.business in 2004. RESULTS OF OPERATIONS Overall net sales increased 2.3%, from $60,380,000 for the thirdfirst quarter ended September 30,of 2003 of $49.8 million have decreased 15.2% compared with $58.8 millionto $61,743,000 for the thirdfirst quarter of 2002, primarily due to a decrease in wholesale net sales. Wholesale net sales for the current quarter were $43.9 million, as compared with $53.5 million for the same period in 2002. Wholesale sales for the quarter were down principally because the Company's Florsheim and Stacy Adams divisions' sales were down 29% and 21%, respectively.2004. The Company's Nunn Bush division sales were down 6% for the quarter. Florsheim sales were down because in the third quarter of 2002, the Company sold a significant amount of obsolete inventory that was acquired in the Florsheim acquisition. Those sales did not recur in 2003. Additionally, after the acquisition of Florsheim on May 20, 2002, the Florsheim warehouse in Jefferson City, Missouri was closed as inventory was movedincrease resulted from Jefferson City to the Company's consolidated distribution center in Glendale, Wisconsin. Sales of Florsheim product resumed in the middle of June 2002. When the Company started shipping Florsheim product again, the Company received some unusually large orders to build up retail inventories which were depleted as a result of the shutdown. The majority of those orders were shipped in the third quarter of 2002. The Company's Stacy Adams division's sales were down principally as the result of the Company's SAO sub-brand, as the entire streetwear casual market remains challenging. -8- Retail net sales for the quarter ended September 30, 2003 were $5.9 million as compared with $5.3 million in 2002, up 11%. Same store sales were up 6% for the third quarter. For the nine months ended September 30, 2003, net sales were $161.2 million, as compared with $127.0 million for the same period in 2002. The 26.9% increase was due to increases in both the wholesale and retail divisions. Wholesale net sales through September 30, 2003 were $143.5 million as compared to $117.7 million for the same periodcurrent quarter were $54.5 million versus $53.9 million in the first quarter last year. This increase resulted from increases of 2002. Wholesale net sales at9% and 1% in the Company's FlorsheimStacy Adams and Nunn Bush divisions, respectively, while Florsheim division sales were up 131%, and 3%, respectively, anddown 11% for the quarter. The increase in the Stacy Adams division was down 3%. Salesdue to a 16% increase in the Company's dress shoe business. The decrease in the Florsheim division sales was due to the Company discontinuing distribution to several retailers whose image and environment was not appropriate for the Florsheim divisionbrand. The Company also sold less closeout product in 2004. While sales of Florsheim product were up as a result ofdown, the acquisitionCompany still expects to show an increase in May 2002.Florsheim sales for 2004. Retail net sales were $17.7$6.5 million to datethis year, compared with $5.7 million last year. Same store sales increased 13% in 2003the first quarter of 2004. Also included in overall net sales are licensing revenues of $752,000 in the first quarter of 2004 as compared with $9.3 million$757,000 in 2002. The increase is primarily the resultsame period of the Florsheim acquisition. Same store sales were flat for the nine months ended September 30, 2003. -7- Gross earnings as a percent of net sales for the third quarter increased from 31.9% in 2002 to 34.2% in 2003. Gross earnings as a percent of net sales for the nine months ended September 30 increased from 30.2% in 2002 to 34.0% in 2003. The increases in gross earnings as a percent of net sales for the quarter and nine months ended September 2003 result primarily from the increases in both wholesale and retail gross margins as a percent of net sales, but are also due to the increase in retail net sales relative to overall net sales. Retail sales, which carry a higher margin, comprise 11% of overall net sales to date in 2003 versus 7% last year. This change in mix resulted in an increase of approximately 1% in gross earnings as a percent of net sales for both the three and nine months ended September 30. Wholesale gross earnings as a percent of net sales increased from 29.0%33.4% for the third quarter of 2002 to 30.5% for the thirdfirst quarter of 2003 and from 27.8%to 34.4% for the nine months ended September 30, 2002 to 30.5% forfirst quarter of 2004. This is the same periodresult of 2003. Wholesale gross margins have increased due principally to increases in gross margins at the Florsheim division as sales in 2003 include less obsolete and off price products. Retail gross earnings as a percent of net sales in the wholesale division, which increased from 61.8% for the third quarter of 200230.4% in 2003 to 63.6% for the third quarter of 2003, and from 60.2% for the nine months ended September 30, 2002 to 63.2% for the same period of 2003.31.2% in 2004. Retail gross margins were flat. The increase in retailwholesale gross earnings asmargins resulted from an increase in margins at the Company's Florsheim division. This increase resulted from a percentreduction of net salescloseout sales. However, the gross margin dollars generated from 2002 to 2003 is primarily attributable to product mix.the increase in gross margin percentages offset the loss in gross margins dollars resulting from the decrease in volume for the Florsheim division. Margins at the Company's Stacy Adams and Nunn Bush divisions were flat. Selling and administrative expenses as a percent of net sales were 20.6% for the thirdfirst quarter increased from 19.1%of 2003 versus 20.7% in 2002 to 23.9% in 2003. For the nine months ended September 30, selling and administrative expenses as a percent of net sales increased from 19.6% in 2002 to 22.4% in 2003.2004. Wholesale selling and administrative expenses as a percent of net sales increased from 15.8% for the quarter ended September 30, 2002 to 20.4% for the quarter ended September 30,were 17.4% in 2003 and increased from 17.1% for the nine months ended September 30, 2002 to 19.1% for the same period17.5% in 2003. Retail2004, and retail selling and administrative expenses as a percent of net sales decreased from 52.5% for the quarter ended September 30, 2002 to 49.7% for the quarter ended September 30,were 51.6% in 2003 and from 51.5% for the nine months ended September 30, 2002 to 49.4% for the nine months ended September 30, 2003. -9- In general, increases48.2% in wholesale2004. The decrease in retail selling and administrative expenses as a percent of net sales this year wereis primarily due to increased advertisingthe fixed component, principally rent and occupancy costs, of the Florsheim brand, offset by operating efficiencies achieved by the Company since the acquisition. Retail selling and administrative expenses as a percent of net sales have decreased since last year, as the Company has been ablerelative to reduce the operating costs of the stores since last year. Overall selling and administrative expenses as a percent of net sales are affected by these factors, as well as the previously discussed change in the mix of retail to wholesale net sales. The retail segment has significantly higher selling and administrative expenses as a percent of net sales than the wholesale segment. Interest expenseincome for the first quarter ended September 30, 2003of 2004 was $422,000$121,000 as compared to $545,000with $150,000 for the same period in 2002.2003. This decrease iswas due to the decreasereductions in the average balance of debtcash and marketable securities outstanding which was $34 millionbetween 2003 and 2004. Interest expense for the thirdfirst quarter 2003of 2004 was $167,000 as compared to $52 millionwith $352,000 for the thirdfirst quarter of 2002. For2003. The decrease is primarily due to a reduction in the nine months ended September 30, 2003, interest expense was $1,084,000average balance of borrowings. The effective tax rate for the first quarter of 2004 is 38.7% as compared to $811,000 for the nine months ended September 30, 2002.with 38.2% in 2003. This slight increase is due to a higher level of average debt outstandingdecreased municipal bond income this year relative to pre-tax earnings, which results in an increase in the effective tax rate. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements with respect to the Company's outlook for the nine months ended September 30, 2003, as comparedfuture. These statements represent the Company's reasonable judgment with respect to 2002, which had significantly lower debt balances priorfuture events and are subject to the May 20, 2002 acquisition. The effective tax rate was 28.5% for the quarter ended September 30, 2003, as compared with 36.9% for the same period of 2002risks and 35.6% for the nine months ended September 30, 2003 as compared with 36.2% for the same period of 2002. The decreaseuncertainties that could cause actual results to differ materially. These factors could include significant adverse changes in the tax rate foreconomic conditions affecting overseas suppliers or the quarter and to date in 2003 is due tomen's footwear markets served by the impact of a favorable settlement of a tax issue which occurred in the third quarter of 2003.Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes since the March 24, 2003 filing offrom those reported in the Company's Annual Report on Form 10-K.10-K for the year ended December 31, 2003. -8- Item 4. Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company's principal executive officer and principal financial officer have reviewed and evaluated the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. -10- There have not been any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recent fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings None2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities In April 1998, the Company first authorized a stock repurchase program to purchase 750,000 shares of its common stock in open market transactions at prevailing prices. In April 2000 and again in May 2001, the Board of Directors extended the stock repurchase program to cover the repurchase of 750,000 additional shares. Therefore, 2.25 million shares have been authorized for repurchase since the program began. The Company did not repurchase any shares under the program during the quarter ended March 31, 2004. Considering previous years' repurchases, as of March 31, 2004 the Company had 813,100 shares of Common Stock remaining under the program. The repurchase authorization does not expire. -9- Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders was held April 27, 2004 to elect two members to the Board of Directors. Thomas W. Florsheim and Leonard J. Goldstein were nominated for election to the Board of Directors for terms of three years. A total of 4,986,563 votes were cast for the nominees, with 4,693,929 votes cast for and 292,634 votes withheld for Mr. Florsheim, and 4,965,533 votes cast for and 21,030 votes withheld for Mr. Goldstein. Thomas W. Florsheim, Jr. and Robert Feitler continue as Directors of the Company for a term expiring in 2005. Virgis W. Colbert, John W. Florsheim, and Frederick P. Stratton continue as Directors of the Company for a term expiring in 2006. Item 6. Exhibits and Reports on Form 8-K See the Exhibit Index included herewith for a listing of Exhibits. There was one 8-K filingFiling during the quarter. On July 22, 2003February 23, 2004, the Company filed a press release announcing its results for the quarter ended June 30,December 31, 2003. 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. WEYCO GROUP, INC. November 10, 2003May 7, 2004 /s/ John F. Wittkowske - ----------------- ---------------------------------------------------------- ----------------------- Date John F. Wittkowske Senior Vice President & Chief Financial Officer -11--10- WEYCO GROUP, INC. (THE "REGISTRANT") (COMMISSION FILE NO. 0-9068) EXHIBIT INDEX TO CURRENT REPORT ON FORM 10-Q DATE OF SEPTEMBER 30, 2003March 31, 2004
INCORPORATED EXHIBIT HEREIN BY FILED NUMBER DESCRIPTION REFERENCE TO HEREWITH - ------ ---------------------------------------------------------------------------------- ------------ -------- 31.1 Certification pursuant to Rule 13a-14of Principal Executive Officer X (a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Thomas W. Florsheim, Jr. 31.2 Certification pursuant to Rule 13a-14of Principal Financial Officer X (a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, John F. Wittkowske 32.1 Certification pursuant to 18 U.S.C. X Section 1350, as adopted pursuant to Section 906 Certification of the Sarbanes-Oxley Act of 2002, Thomas W. Florsheim, Jr.Chief Executive Officer X 32.2 Certification pursuant to 18 U.S.C. X Section 1350, as adopted pursuant to Section 906 Certification of the Sarbanes-Oxley Act of 2002, John F. WittkowskeChief Financial Officer X