UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
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:  0-21026

ROCKY BRANDS, 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 such filing requirements for the past 90 days.  YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨
   Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
   
(Do not check if a smaller reporting company)
 

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

As of October 28, 2009, 5,554,465 shares of Rocky Brands, Inc. common stock, no par value, were outstanding.
 

 
FORM 10-Q

ROCKY BRANDS, INC.

TABLE OF CONTENTS
   
PAGE
 
NUMBER
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets September 30, 2009 and 2008 (Unaudited), and December 31, 2008
3
     
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)
4
     
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)
5
     
 
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the Three-Month and Nine-Month Periods Ended September 30, 2009 and 2008
6 –16
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17 – 23
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
24
     
Item 4.
Controls and Procedures
24
     
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
25
     
Item 1A.
Risk Factors
25
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25
     
Item 3.
Defaults Upon Senior Securities
25
     
Item 4.
Submission of Matters to a Vote of Security Holders
25
     
Item 5.
Other Information
25
     
Item 6.
Exhibits
25
     
SIGNATURE
26

 
2

 

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

ROCKY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 30, 2009
   
December 31, 2008
   
September 30, 2008
 
   
(Unaudited)
         
(Unaudited)
 
ASSETS:
                 
CURRENT ASSETS:
                 
Cash and cash equivalents
  $ 4,002,909     $ 4,311,313     $ 4,332,477  
Trade receivables – net
    58,296,661       60,133,493       72,654,591  
Other receivables
    1,598,829       1,394,235       1,289,396  
Inventories
    68,065,444       70,302,174       83,320,590  
Deferred income taxes
    2,173,391       2,167,966       1,978,946  
Prepaid and refundable income taxes
    247,011       75,481       -  
Prepaid expenses
    1,323,115       1,455,158       2,366,859  
Total current assets
    135,707,360       139,839,820       165,942,859  
FIXED ASSETS – net
    23,132,489       23,549,319       24,254,455  
IDENTIFIED INTANGIBLES
    30,627,527       31,020,478       36,044,132  
OTHER ASSETS
    3,304,123       2,452,501       2,154,179  
TOTAL ASSETS
  $ 192,771,499     $ 196,862,118     $ 228,395,625  
                         
LIABILITIES AND SHAREHOLDERS' EQUITY:
                       
CURRENT LIABILITIES:
                       
Accounts payable
  $ 7,683,778     $ 9,869,948     $ 14,492,182  
Current maturities – long term debt
    503,841       480,723       464,846  
Accrued expenses:
                       
Salaries and wages
    1,161,324       480,500       1,043,421  
Co-op advertising
    795,147       636,408       673,703  
Interest
    1,648,116       451,434       1,870,687  
Income taxes payable
    -       -       96,666  
Taxes - other
    387,817       641,670       612,445  
Commissions
    341,903       387,242       463,735  
Other
    2,041,371       2,306,105       2,928,714  
Total current liabilities
    14,563,297       15,254,030       22,646,399  
LONG TERM DEBT – less current maturities
    82,940,392       87,258,939       107,115,967  
DEFERRED INCOME TAXES
    9,558,761       9,438,921       12,569,600  
DEFERRED PENSION LIABILITY
    3,919,603       3,743,552       967,930  
DEFERRED LIABILITIES
    197,010       216,920       202,096  
TOTAL LIABILITIES
    111,179,063       115,912,362       143,501,992  
COMMITMENTS AND CONTINGENCIES
                       
SHAREHOLDERS' EQUITY:
                       
Common stock, no par value;
                       
25,000,000 shares authorized; issued and outstanding September 30, 2009 - 5,547,215; December 31, 2008 - 5,516,898 and September 30, 2008 - 5,508,398
    54,387,752       54,250,064       54,193,211  
Accumulated other comprehensive loss
    (2,982,564 )     (3,222,215 )     (1,462,344 )
Retained earnings
    30,187,248       29,921,907       32,162,766  
Total shareholders' equity
    81,592,436       80,949,756       84,893,633  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 192,771,499     $ 196,862,118     $ 228,395,625  

See notes to the interim unaudited condensed consolidated financial statements.

 
3

 

ROCKY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
NET SALES
  $ 66,572,437     $ 72,500,603     $ 167,825,613     $ 193,492,740  
                                 
COST OF GOODS SOLD
    41,856,651       45,414,533       105,299,667       116,060,912  
                                 
GROSS MARGIN
    24,715,786       27,086,070       62,525,946       77,431,828  
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    18,576,780       21,961,032       56,642,081       65,897,978  
                                 
INCOME FROM OPERATIONS
    6,139,006       5,125,038       5,883,865       11,533,850  
                                 
OTHER INCOME AND (EXPENSES):
                               
Interest expense, net
    (1,955,485 )     (2,285,051 )     (5,665,905 )     (7,101,237 )
Other – net
    224,442       34,254       257,899       31,385  
Total other - net
    (1,731,043 )     (2,250,797 )     (5,408,006 )     (7,069,852 )
                                 
INCOME BEFORE INCOME TAXES
    4,407,963       2,874,241       475,859       4,463,998  
                                 
INCOME TAX EXPENSE
    1,626,518       500,000       210,518       1,056,000  
                                 
NET INCOME
  $ 2,781,445     $ 2,374,241     $ 265,341     $ 3,407,998  
                                 
NET INCOME PER SHARE
                               
Basic
  $ 0.50     $ 0.43     $ 0.05     $ 0.62  
Diluted
  $ 0.50     $ 0.43     $ 0.05     $ 0.62  
                                 
WEIGHTED AVERAGE NUMBER OF
                               
COMMON SHARES OUTSTANDING
                               
Basic
    5,547,215       5,508,398       5,546,993       5,508,252  
Diluted
    5,547,215       5,512,634       5,546,993       5,518,138  

See notes to the interim unaudited condensed consolidated financial statements.

 
4

 

ROCKY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 265,341     $ 3,407,998  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    4,772,894       4,712,408  
Deferred compensation and other
    395,792       78,766  
Deferred income taxes
    114,415       (408,638 )
Loss (gain) on disposal of fixed assets
    7,169       (35,739 )
Stock compensation expense
    137,688       195,251  
Change in assets and liabilities
               
Receivables
    1,632,238       (7,338,188 )
Inventories
    2,236,730       (7,916,926 )
Other current assets
    (39,487 )     580,006  
Other assets
    660,878       129,860  
Accounts payable
    (2,140,244 )     2,136,570  
Accrued and other liabilities
    1,472,318       1,752,250  
                 
Net cash provided by (used in) operating activities
    9,515,732       (2,706,382 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of fixed assets
    (3,997,487 )     (3,561,205 )
Investment in trademarks and patents
    (43,777 )     (33,938 )
Proceeds from sale of fixed assets
    25,058       60,336  
                 
Net cash used in investing activities
    (4,016,206 )     (3,534,807 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from revolving credit facility
    165,575,147       192,663,254  
Repayments of revolving credit facility
    (169,512,854 )     (188,714,331 )
Proceeds from long-term debt
    -       355,398  
Debt financing costs
    (1,512,500 )     -  
Repayments of long-term debt
    (357,723 )     (268,539 )
                 
Net cash (used in) provided by financing activities
    (5,807,930 )     4,035,782  
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    (308,404 )     (2,205,407 )
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    4,311,313       6,537,884  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 4,002,909     $ 4,332,477  

See notes to the interim unaudited condensed consolidated financial statements.

 
5

 

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008

1. 
INTERIM FINANCIAL REPORTING

In the opinion of management, the accompanying interim unaudited condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the financial results.  All such adjustments reflected in the unaudited interim condensed consolidated financial statements are considered to be of a normal and recurring nature. The results of the operations for the three-month and nine-month periods ended September 30, 2009 and 2008 are not necessarily indicative of the results to be expected for the whole year.  Accordingly, these unaudited 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, 2008.

We reviewed events for inclusion in our financial statements through October 30, 2009, the date that the accompanying financial statements were issued.  No subsequent events were identified which required disclosure herein.

The components of total comprehensive income are shown below:
 
   
(Unaudited)
   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income
  $ 2,781,445     $ 2,734,241     $ 265,341     $ 3,407,998  
Other comprehensive income:
                               
Amortization of unrecognized transition obligation, service cost and net gain
    79,884       37,852       239,651       115,737  
Total comprehensive income
  $ 2,861,329     $ 2,772,093     $ 504,992     $ 3,523,735  
 
2. 
TRADE RECEIVABLES

Trade receivables are presented net of the related allowance for uncollectible accounts of approximately $1,134,000, $2,026,000 and $1,397,000 at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.  The allowance for uncollectible accounts is calculated based on the relative age and size of trade receivable balances.

 
6

 

3. 
INVENTORIES

Inventories are comprised of the following:

   
September 30,
   
December 31,
   
September 30,
 
   
2009
   
2008
   
2008
 
   
(Unaudited)
         
(Unaudited)
 
                   
Raw materials
  $ 7,685,583     $ 7,311,837     $ 8,898,262  
Work-in-process
    671,388       351,951       671,586  
Finished goods
    59,764,173       62,676,986       73,816,742  
Reserve for obsolescence or lower of cost or market
    (55,700 )     (38,600 )     (66,000 )
Total
  $ 68,065,444     $ 70,302,174     $ 83,320,590  

4. 
SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows:

   
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
Interest
  $ 3,921,125     $ 5,249,383  
                 
Federal, state and local income taxes, net of refunds
  $ 269,546     $ 647,200  
                 
Fixed asset purchases in accounts payable
  $ 66,816     $ 502,874  


 
7

 

5. 
PER SHARE INFORMATION

Basic earnings per share (“EPS”) is computed by dividing net income applicable to common shareholders by the 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-month and nine-month periods ended September 30, 2009 and 2008 is as follows:

   
(Unaudited)
   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Weighted average shares outstanding
    5,547,215       5,508,278       5,546,993       5,508,132  
                                 
Dilutive stock options
    -       4,236       -       9,886  
                                 
Dilutive weighted average shares outstanding
    5,547,215       5,512,514       5,546,993       5,518,018  
                                 
Anti-dilutive stock options/weighted average shares outstanding
    377,054       409,249       398,947       338,749  

6. 
RECENT FINANCIAL ACCOUNTING STANDARDS

Recently adopted accounting standards

During 2008, we adopted a new accounting standard, issued by the FASB, related to fair value measurements and disclosures.  This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  In February 2008, this standard was modified to delay the effective date for the implementation for certain non-financial assets and non-financial liabilities.  This standard is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007 and for non-financial assets and liabilities in fiscal years beginning after March 15, 2008.  The adoption of this standard in 2008 did not have a material effect on our consolidated financial statements.  The aspects that were deferred by the modification of the fair value measurements and disclosures standard in February 2008 pertaining to non-financial assets and non-financial liabilities were effective for us beginning January 1, 2009.  Our adoption of these deferred reporting requirements in 2009 did not have a material effect on our consolidated financial statements.  In April 2009, the FASB modified the accounting standard related to fair value measurements and disclosures.  This standard, as modified, provides guidelines for making fair value measurements more consistent with the principles presented in the originally issued standard.  This standard, as modified, provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed.  This standard, as modified, is applicable to all assets and liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures.  This standard, as modified, is required to be adopted no later than the periods ending after June 15, 2009.  The adoption of the modifications to the fair value and disclosures standard in 2009 did not have a material effect on our consolidated financial statements.
 
8

 
In January 2009, we adopted a new accounting standard, issued by the FASB, related to business combinations.  The objective of this standard is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  This standard establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase option; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first reporting period beginning on or after December 15, 2008.  The adoption of the new business combinations standard did not have a material effect on our consolidated financial statements.

In January 2009, we adopted a new accounting standard related to consolidation.   The objective of this standard is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing certain accounting and reporting standards that address:  the ownership interests in subsidiaries held by parties other than the parent; the amount of net income attributable to the parent and non-controlling interest; changes in the parent’s ownership interest; and any retained non-controlling equity investment in a deconsolidated subsidiary.  This standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The adoption of the new consolidation standard did not have a material effect on our consolidated financial statements.

In January 2009, we adopted a new accounting standard related to derivatives and hedging.  This standard intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows.  This standard also requires disclosure about an entity’s strategy and objectives for using derivatives, the fair values of derivative instruments and their related gains and losses.  This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  The adoption of the new derivatives and hedging standard in 2009 did not have a material effect on our consolidated financial statements.

In April 2009, the FASB modified the accounting standard related to financial instruments.  This standard, as modified, requires disclosures about fair value of financial instruments in interim as well as in annual financial statements.  This standard, as modified, is required to be adopted no later than the periods ending after June 15, 2009.  The adoption of the modifications to the financial instruments standard in 2009 did not have a material effect on our consolidated financial statements.
 
9

 
In June 2009, we adopted a new accounting standard related to investments – debt and equity securities.  This standard provides additional guidance to provide greater clarity about the credit and noncredit component of an, other-than-temporary, impairment event and to improve presentation and disclosure of other-than-temporary impairments in the financial statements.  This standard was required to be adopted no later than the periods ending after June 15, 2009.  The adoption of the investments - debt and equity securities standard in 2009 did not have a material effect on our consolidated financial statements.

In June 2009, we adopted a new accounting standard related to subsequent events.  The objective of this standard is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  This standard is effective for interim or annual financial periods ending after June 15, 2009.    The adoption of the subsequent event standard did not have a material effect on our consolidated financial statements.

Accounting standards not yet adopted

In December 2008, the FASB modified the accounting standard related to compensation and retirement benefits.  This standard, as modified, requires enhanced disclosures about plan assets, and requires more detailed disclosures about employers' plan assets, including employers' investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets.  This standard, as modified, is effective for fiscal years ending after December 15, 2009, and early adoption is permitted.  We are currently assessing the potential impact of the adoption of the compensation and retirement benefit standard, as modified, on our consolidated financial statement disclosures.

In June 2009, the FASB modified the accounting standard related to transfers and servicing.  This standard, as modified, intends to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  This standard, as modified, must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  This standard, as modified, must be applied to transfers occurring on or after the effective date.  We are currently assessing the potential impact of the adoption of the transfers and servicing standard, as modified, on our consolidated financial statement disclosures.

In June 2009, the FASB modified the accounting standard related to consolidation.  This standard, as modified, intends to improve financial reporting by enterprises involved with variable interest entities.  This standard, as modified, addresses the effects on certain provisions  relating to the Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in the accounting standard related to  transfers and servicing; and constituent concerns about the application of certain key provisions of this standard, including those in which the  accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.  This standard, as modified, is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.  We are currently assessing the potential impact of the adoption of the consolidation standard, as modified, on our consolidated financial statement disclosures.
 
10

 
7. 
INCOME TAXES
 
We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions.  We are no longer subject to U.S. Federal tax examinations for years before 2005.  State jurisdictions that remain subject to examination range from 2004 to 2008.  Foreign jurisdiction tax returns that remain subject to examination range from 2002 to 2008 for Canada and from 2004 to 2008 for Puerto Rico.  We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of September 30, 2009, accrued interest or penalties were not material, and no such expenses were recognized during the quarter.

We provided for income taxes at an estimated effective tax rate of 36% for both the three-month and nine-month periods ended September 30, 2009 and 2008.  During the three-month period ended September 30, 2009, we recognized an increase to income tax expense of $0.04 million related to the filing of our 2008 Federal income tax return which increased our effective tax rates for the three-month and nine-month periods ended September 30, 2009 to 36.9% and 44.2%, respectively.  During the three months ended September 30, 2008, we recognized a reduction to income tax expense related to the filing of the 2007 Federal income tax return of $0.6 million which reduced our effective tax rates for the three and nine month periods ended September 30, 2008 to 17.4% and 23.7%, respectively.


 
11

 
 
8. 
INTANGIBLE ASSETS

A schedule of intangible assets is as follows:

   
Gross
   
Accumulated
   
Carrying
 
September 30, 2009 (unaudited)
 
Amount
   
Amortization
   
Amount
 
Trademarks:
                 
Wholesale
  $ 27,243,578     $ -     $ 27,243,578  
Retail
    2,900,000       -       2,900,000  
Patents
    2,353,319       1,919,371       433,948  
Customer relationships
    1,000,000       950,000       50,000  
Total Identified Intangibles
  $ 33,496,897     $ 2,869,371     $ 30,627,526  

   
Gross
   
Accumulated
   
Carrying
 
December 31, 2008
 
Amount
   
Amortization
   
Amount
 
Trademarks:
                 
Wholesale
  $ 27,243,578     $ -     $ 27,243,578  
Retail
    2,900,000       -       2,900,000  
Patents
    2,309,541       1,632,641       676,900  
Customer relationships
    1,000,000       800,000       200,000  
Total Identified Intangibles
  $ 33,453,119     $ 2,432,641     $ 31,020,478  

   
Gross
   
Accumulated
   
Carrying
 
September 30, 2008 (unaudited)
 
Amount
   
Amortization
   
Amount
 
Trademarks:
                 
Wholesale
  $ 28,278,595     $ 150,940     $ 28,127,655  
Retail
    6,900,000       -       6,900,000  
Patents
    2,303,989       1,537,513       766,476  
Customer relationships
    1,000,000       750,000       250,000  
Total Identified Intangibles
  $ 38,482,584     $ 2,438,453     $ 36,044,131  

Amortization expense for intangible assets was $145,888 and $166,629 for the three months ended September 30, 2009 and 2008, respectively and $436,729 and $499,496 for the nine months ended September 30, 2009 and 2008, respectively.  The weighted average amortization period for patents is six years and for customer relationships is five years.

Estimate of Aggregate Amortization Expense for the years ending December 31,:

2010
  $ 43,467  
2011
    42,087  
2012
    42,087  
2013
    42,087  
2014
    42,087  
 
12

 
In the fourth quarter of 2008 we recognized impairment losses on the carrying values of the Lehigh and Gates trademarks in the amounts of $4.0 million and $0.9 million, respectively.  We estimated fair value based on projections of the future cash flows for each of the trademarks.  We then compared the carrying value for each trademark to its estimated fair value.  Since the fair value of the trademark was less than its carrying value we recognized the reductions in fair value as non-cash intangible impairment charges in our 2008 operating expenses. These charges are reflected in operating expenses under the caption, “Non-cash intangible impairment charges.”  The Lehigh trademark is reported under our Retail segment.  The Gates trademark is reported under our Wholesale segment.
 
9. 
CAPITAL STOCK

On May 11, 2004, our shareholders approved the 2004 Stock Incentive Plan.  The Plan includes 750,000 of our common shares that may be granted for stock options and restricted stock awards.  As of September 30, 2009, we were authorized to issue approximately 376,103 shares under our existing plans.

The plan generally provides for grants with the exercise price equal to fair value on the date of grant, graduated vesting periods of up to five years, and lives not exceeding ten years.  The following summarizes stock option transactions from January 1, 2009 through September 30, 2009:

   
Shares
   
Weighted
Average
Exercise
Price
 
Options outstanding at January 1, 2009
    435,801     $ 15.88  
Issued
    -       -  
Exercised
    -       -  
Forfeited
    (63,801 )   $ 8.34  
Options outstanding at September 30, 2009
    372,000     $ 17.18  
                 
Options exercisable at:
               
January 1, 2009
    412,051     $ 15.80  
September 30, 2009
    368,250     $ 17.20  
                 
Unvested options at January 1, 2009
    23,750     $ 17.27  
Granted
    -       -  
Vested
    (8,750 )   $ 22.87  
Forfeited
    (11,250 )   $ 13.87  
Unvested options at September 30, 2009
    3,750     $ 14.40  

During the nine-month period ended September 30, 2009, we issued 30,317 shares of common stock to members of our Board of Directors.  We recorded compensation expense of $122,500, which was the fair market value of the shares on the grant date.  The shares are fully vested but cannot be sold for one year.
 
13

 
In June 2009, our Board of Directors adopted a Rights Agreement, which provides for one preferred share purchase right to be associated with each share of our outstanding common stock.  Shareholders exercising these rights would become entitled to purchase shares of Series B Junior Participating Cumulative Preferred Stock.  The rights are exercisable after the time when a person or group of persons without the approval of the Board of Directors acquire beneficial ownership of 20 percent or more of our common stock or announce the initiation of a tender or exchange offer which if successful would cause such person or group to beneficially own 20 percent or more of the common stock.  Such exercise would ultimately entitle the holders of the rights to purchase at the exercise price, shares of common stock of the surviving corporation or purchaser, respectively, with an aggregate market value equal to two times the exercise price.  The person or groups effecting such 20 percent acquisition or undertaking such tender offer would not be entitled to exercise any rights.  These rights expire during July 2012.

10. 
RETIREMENT PLANS

We sponsor a noncontributory defined benefit pension plan covering non-union workers in our Ohio and Puerto Rico operations.  Benefits under the non-union plan are based upon years of service and highest compensation levels as defined.  On December 31, 2005, we froze the noncontributory defined benefit pension plan for all non-U.S. territorial employees.

Net pension cost of the Company’s plan is as follows:

   
(Unaudited)
   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service cost
  $ 28,843     $ 26,962     $ 86,529     $ 80,888  
Interest
    151,455       143,062       454,363       429,185  
Expected return on assets
    (121,614 )     (171,312 )     (364,841 )     (513,938 )
Amortization of unrecognized net gain or loss
    61,785       17,115       185,357       51,557  
Amortization of unrecognized transition obligation
    -       897       -       3,139  
Amortization of unrecognized prior service cost
    18,098       19,840       54,294       61,041  
Net pension cost
  $ 138,567     $ 36,564     $ 415,702     $ 111,872  

 
14

 

Our unrecognized benefit obligations existing at the date of transition for the non-union plan are being amortized over 21 years.  Actuarial assumptions used in the accounting for the plan were as follows:

   
2009
   
2008
 
             
Discount rate
    6.00 %     6.00 %
                 
Average rate of increase in compensation levels
    3.0 %     3.0 %
                 
Expected long-term rate of return on plan assets
    8.0 %     8.0 %

Our desired investment result is a long-term rate of return on assets that is at least 8%.  The target rate of return for the plan has been based upon the assumption that returns will approximate the long-term rates of return experienced for each asset class in our investment policy.  Our investment guidelines are based upon an investment horizon of greater than five years, so that interim fluctuations should be viewed with appropriate perspective.  Similarly, the plan’s strategic asset allocation is based on this long-term perspective.

11. 
SEGMENT INFORMATION

We have identified three reportable segments:  Wholesale, Retail and Military.  Wholesale includes sales of footwear and accessories to 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.  Retail includes all sales from our stores and all sales in our Lehigh division, which includes sales via shoemobiles to individual customers.  Military includes sales to the U.S. Military.  The following is a summary of segment results for the Wholesale, Retail, and Military segments.

   
(Unaudited)
   
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
NET SALES:
                       
Wholesale
  $ 54,455,334     $ 55,644,255     $ 128,388,832     $ 137,862,115  
Retail
    11,477,763       15,301,188       37,537,253       50,423,468  
Military
    639,340       1,555,160       1,899,528       5,207,157  
Total Net Sales
  $ 66,572,437     $ 72,500,603     $ 167,825,613     $ 193,492,740  
                                 
GROSS MARGIN:
                               
Wholesale
  $ 19,453,302     $ 19,686,172     $ 44,611,073     $ 51,645,615  
Retail
    5,235,573       7,272,130       17,831,763       25,319,276  
Military
    26,911       127,768       83,110       466,937  
Total Gross Margin
  $ 24,715,786     $ 27,086,070     $ 62,525,946     $ 77,431,828  

Segment asset information is not prepared or used to assess segment performance.


 
15

 

12. 
LONG-TERM DEBT

In March 2009, we amended the terms of our revolving credit facility with GMAC Commercial Finance (“GMAC”) which was set to expire on January 5, 2010.  The size of the facility was reduced to $85 million from $100 million and the maturity date was extended to April 30, 2012.  The interest rates for the term of this amendment are LIBOR plus 3.75% or prime plus 2.25%, at our option.  The financing costs associated with this amendment totaled approximately $1.5 million.

Our credit facilities contain certain restrictive covenants, which require us to maintain a minimum fixed charge coverage ratio and limit the annual amount of capital expenditures.  As of September 30, 2009, we were in compliance with these restrictive covenants.

13. 
FINANCIAL INSTRUMENTS

During 2008, we adopted a new accounting standard, issued by the FASB, related to fair value measurements and disclosures.  The fair values of cash, accounts receivable, other receivables and accounts payable approximated their carrying values because of the short-term nature of these instruments.  Accounts receivable consists primarily of amounts due from our customers, net of allowances.  Other receivables consist primarily of amounts due from employees (sales persons’ advances in excess of commissions earned and employee travel advances); other customer receivables, net of allowances; and expected insurance recoveries.  The carrying amount of the mortgages and other short-term financing obligations also approximates fair value, as they are comparable to the available financing in the marketplace during the year.

The carrying amount and fair value of our long-term debt not measured on a recurring basis subject to fair value reporting is as follows:

   
September 30, 2009
 
   
Carrying
   
Fair
 
   
Amount
   
Value
 
Debt
           
Long-term debt and current maturities
  $ 83,444,233     $ 78,956,766  

We estimated the fair value of debt using market quotes and calculations based on market rates.

14. 
RECLASSIFICATIONS

Certain amounts in the September 30, 2008 consolidated financial statements have been reclassified to conform to the current period’s presentation.
 
16

 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, information derived from our Interim Unaudited Condensed Consolidated Financial Statements, expressed as a percentage of net sales.  The discussion that follows the table should be read in conjunction with our Interim Unaudited Condensed Consolidated Financial Statements.

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net Sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost Of Goods Sold
    62.9 %     62.6 %     62.7 %     60.0 %
Gross Margin
    37.1 %     37.4 %     37.3 %     40.0 %
                                 
Selling, General and Administrative Expenses
    27.9 %     30.3 %     33.8 %     34.0 %
                                 
Income From Operations
    9.2 %     7.1 %     3.5 %     6.0 %

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Net sales. Net sales for the three months ended September 30, 2009 were $66.6 million compared to $72.5 million for the same period in 2008. Wholesale sales for the three months ended September 30, 2009 were $54.5 million compared to $55.6 million for the same period in 2008. The $1.2 million decrease in wholesale sales was the result of decreased sales in our work footwear and apparel categories, partially offset by increases in the Hunting, Western and Duty categories. Retail sales for the three months ended September 30, 2009 were $11.5 million compared to $15.3 million for the same period in 2008. The $3.8 million decrease in retail sales resulted from plant closings and layoffs in the manufacturing sector as the current economic conditions have impacted a significant portion of our retail customer base. In addition, retail sales were negatively impacted by our ongoing transition to more internet driven transactions and the decision to remove a portion of our Lehigh mobile stores from operations which resulted in reductions in SG&A expenses. Military segment sales for the three months ended September 30, 2009, were $0.6 million, compared to $1.6 million in the same period in 2008. Shipments in 2009 were under the $6.4 million contract issued in July 2007and the $29.0 million contract, issued in July 2009.

Gross margin. Gross margin for the three months ended September 30, 2009 was $24.7 million, or 37.1% of net sales, compared to $27.1 million, or 37.4% of net sales, in the same period last year. Wholesale gross margin for the three months ended September 30, 2009 was $19.5 million, or 35.7% of net sales, compared to $19.7 million, or 35.4% of net sales, in the same period last year. Retail gross margin for the three months ended September 30, 2009 was $5.2 million, or 45.6% of net sales, compared to $7.3 million, or 47.5% of net sales, for the same period in 2008. The 190 basis point decrease reflects reduced sales via our mobile stores, which carry the highest gross margin in our retail business. Military gross margin for the three months ended September 30, 2009 was less than $0.1 million, or 4.2% of net sales, compared to $0.1 million, or 8.2% of net sales, for the same period in 2008.
 
17

 
SG&A expenses. SG&A expenses were $18.6 million, or 27.9% of net sales, for the three months ended September 30, 2009, compared to $22.0 million, or 30.3% of net sales for the same period in 2008. The net change primarily reflects decreases in compensation and benefits of $1.3 million, shipping expenses of $0.6 million, Lehigh mobile store expenses of $0.3 million, travel expenses of $0.2 million, advertising expenses of $0.2 million and show expenses of $0.2 million.

Interest expense. Interest expense was $2.0 million in the three months ended September 30, 2009, compared to $2.3 million for the same period in the prior year. The decrease of $0.3 million resulted from a reduction in average borrowings combined with lower interest rates compared to the same period last year.

Income taxes. Income tax expense for the three months ended September 30, 2009 was $1.6 million, compared to income tax expense of $0.5 million for the same period a year ago. We provided for income taxes at an estimated effective tax rate of 36% for the three months ended September 30, 2009 and 2008. During the three-month period ended September 30, 2009, we recognized an increase to income tax expense of $0.04 million related to the filing of our 2008 Federal income tax return which increased our effective tax rate for the three months ended September 30, 2009 to 36.9%. During the three-month period ended September 30, 2008, we recognized a reduction to income tax expense related to the filing of the 2007 Federal income tax return of $0.6 million which reduced our effective tax rate for the three-month period ended September 30, 2008 to 17.4%.
 
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Net sales. Net sales for the nine months ended September 30, 2009 were $167.8 million compared to $193.5 million for the same period in 2008. Wholesale sales for the nine months ended September 30, 2009 were $128.4 million compared to $137.9 million for the same period in 2008. The $9.5 million decrease in wholesale sales is the result of decreased sales in the majority of our footwear categories and apparel. Retail sales for the nine months ended September 30, 2009 were $37.5 million compared to $50.4 million for the same period in 2008. The $12.9 million decrease in retail sales results from plant closings and layoffs in the manufacturing sector as the current economic conditions have impacted a significant portion of our retail customer base. In addition, retail sales were negatively impacted by our ongoing transition to more internet driven transactions and the decision to remove a portion of our Lehigh mobile stores from operations to help lower costs. Military segment sales for the nine months ended September 30, 2009, were $1.9 million, compared to $5.2 million in the same period in 2008. Shipments in 2009 were under the $6.4 million contract issued in July 2007 and the $29.0 million contract, issued in July 2009.

Gross margin. Gross margin for the nine months ended September 30, 2009 was $62.5 million, or 37.3% of net sales, compared to $77.4 million, or 40.0% of net sales, in the same period last year. Wholesale gross margin for the nine months ended September 30, 2009 was $44.6 million, or 34.7% of net sales, compared to $51.6 million, or 37.5% of net sales, in the same period last year. The 280 basis point decrease is the result of additional sales of closeouts at reduced gross margins, an increase in manufacturing costs, and a decrease in sales price per unit for competitive reasons. Retail gross margin for the nine months ended September 30, 2009 was $17.8 million, or 47.5% of net sales, compared to $25.3 million, or 50.2% of net sales, for the same period in 2008. The 270 basis point decrease reflects reduced sales via our mobile stores, which carry the highest gross margin in our retail business. Military gross margin for the nine months ended September 30, 2009 was $0.1 million, or 4.4% of net sales, compared to $0.5 million or 9.0% of net sales for the same period in 2009.
 
18

 
SG&A expenses. SG&A expenses were $56.6 million, or 33.8% of net sales, for the nine months ended September 30, 2009, compared to $65.9 million, or 34.0% of net sales for the same period in 2008. The net change primarily results from decreases in compensation and benefits expenses of $4.3 million, shipping expenses of $1.5 million, Lehigh mobile store expenses of $0.8 million, advertising expenses of $0.8 million, travel expenses of $0.6, professional and consulting fees of $0.5 million, and show expenses of $0.4 million, partially offset by a $0.5 million increase in bad debt expense.

Interest expense. Interest expense was $5.7 million in the nine months ended September 30, 2009, compared to $7.1 million for the same period in the prior year. The decrease of $1.4 million resulted from a reduction in average borrowings combined with lower interest rates compared to the same period last year.

Income taxes. Income tax expense for the nine months ended September 30, 2009 was $0.2 million, compared to income tax expense of $1.0 million for the same period a year ago. We provided for income taxes at an estimated effective tax rate of 36% for the nine months ended September 30, 2009 and 2008. During the three-month period ended September 30, 2009, we recognized an increase to income tax expense of $0.04 million related to the filing of our 2008 Federal income tax return which increased our effective tax rate for the nine months ended September 30, 2009 to 44.2%. During the nine-month period ended September 30, 2008, we recognized a reduction to income tax expense related to the filing of the 2007 Federal income tax return of $0.6 million which reduced our effective tax rate for the nine-month period ended September 30, 2008 to 23.7%.
 
Liquidity and Capital Resources

Our principal sources of liquidity have been our income from operations, borrowings under our credit facility and other indebtedness.

Over the last several years our principal uses of cash have been for working capital and capital expenditures to support our growth. Our working capital consists primarily of trade receivables and inventory, offset by accounts payable and accrued expenses. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility will fluctuate significantly throughout the year. Our capital expenditures relate primarily to projects relating to our property, merchandising fixtures, molds and equipment associated with our manufacturing operations, retail sales fleet and for information technology. Capital expenditures were $4.0 million for the first nine months of 2009, compared to $4.0 million for the same period in 2008. Capital expenditures for all of 2009 are anticipated to be approximately $4.5 million.

In March 2009, we amended the terms of our revolving credit facility with GMAC Commercial Finance (“GMAC”) which was set to expire on January 5, 2010. The size of the facility was reduced to $85 million from $100 million and the maturity date was extended to April 30, 2012. The financing costs associated with this amendment totaled approximately $1.5 million. The interest rates for the term of this amendment are LIBOR plus 3.75% or prime plus 2.25%, at our option.
 
19

 
The total amount available under our revolving credit facility is subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of September 30, 2009, we had $40.8 million in borrowings under this facility and total capacity of $67.9 million. Our credit facilities contain certain restrictive covenants, which require us to maintain a minimum fixed charge coverage ratio and limit the annual amount of capital expenditures. As of September 30, 2009, we were in compliance with these restrictive covenants.

We believe that our existing credit facilities coupled with cash generated from operations will provide sufficient liquidity to fund our operations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facilities.

Operating Activities. Cash provided by operating activities totaled $9.5 million for the nine months ended September 30, 2009, compared to cash used in operating activities of $2.7 million in the same period of 2008. Cash provided by operating activities for the nine months ended September 30, 2009 was primarily impacted by reductions in accounts receivable and inventory. Cash used in operating activities for the nine months ended September 30, 2008 was primarily impacted by the seasonal buildup of both inventory and accounts receivable.

Investing Activities. Cash used in investing activities was $4.0 million for the nine months ended September 30, 2009, compared to $3.5 million in the same period of 2008. Cash used in investing activities in 2009 reflects an investment in property, plant and equipment of $4.0 million. Our 2009 expenditures primarily relate to investments in our inventory fulfillment operations, investments in molds and equipment associated with our manufacturing operations and for information technology. Our 2008 expenditures primarily relate to investments in molds and equipment associated with our manufacturing operations and for information technology.

Financing Activities. Cash used in financing activities for the nine months ended September 30, 2009 was $5.8 million and reflects a decrease in net borrowings under the revolving credit facility of $3.9 million, debt financing costs associated with the amendment of our credit facility with GMAC of $1.5 million and repayments on long-term debt of $0.4 million. Cash provided by financing activities for the nine months ended September 30, 2008 was $4.0 million and reflects an increase in net borrowings under the revolving credit facility of $3.9 million and information technology software financing of $0.3 million, offset by repayments on long-term debt of $0.2 million.

Inflation

We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and employee benefits. We attempt to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs.
 
20

 
Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of our significant accounting policies is included in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2008.

Our management regularly reviews our accounting policies to make certain they are current and also to provide readers of the interim condensed consolidated financial statements with useful and reliable information about our operating results and financial condition. These include, but are not limited to, matters related to accounts receivable, inventories, pension benefits and income taxes. Implementation of these accounting policies includes estimates and judgments by management based on historical experience and other factors believed to be reasonable. This may include judgments about the carrying value of assets and liabilities based on considerations that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
Our management believes the following critical accounting policies are most important to the portrayal of our financial condition and results of operations and require more significant judgments and estimates in the preparation of our interim condensed consolidated financial statements.

Revenue recognition

Revenue principally consists of sales to customers, and, to a lesser extent, license fees. Revenue is recognized when the risk and title passes to the customer, while license fees are recognized when earned. Customer sales are recorded net of allowances for estimated returns, trade promotions and other discounts, which are recognized as a deduction from sales at the time of sale.

Accounts receivable allowances

Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management also records estimates for customer returns and discounts offered to customers. Should a greater proportion of customers return goods and take advantage of discounts than estimated by us, additional allowances may be required.

Sales returns and allowances

We record a reduction to gross sales based on estimated customer returns and allowances. These reductions are influenced by historical experience, based on customer returns and allowances. The actual amount of sales returns and allowances realized may differ from our estimates. If we determine that sales returns or allowances should be either increased or decreased, then the adjustment would be made to net sales in the period in which such a determination is made.

Inventories

Management identifies slow moving or obsolete inventories and estimates appropriate loss provisions related to these inventories. Historically, these loss provisions have not been significant as the vast majority of our inventories are considered saleable, and we have been able to liquidate slow moving or obsolete inventories through our factory outlet stores or through various discounts to customers. Should management encounter difficulties liquidating slow moving or obsolete inventories, additional provisions may be necessary. Management regularly reviews the adequacy of our inventory reserves and makes adjustments to them as required.
 
21

 
Intangible assets

Intangible assets, including goodwill, trademarks and patents are reviewed for impairment annually, and more frequently, if necessary. In performing the review of recoverability, we estimate future cash flows expected to result from the use of the asset and our eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management's subjective judgments. The time periods for estimating future cash flows are often lengthy, which increases the sensitivity to assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. A significant assumption of estimated cash flows from trademarks is future sales of branded products. Other assumptions include discount rates, royalty rates, cost of capital, and market multiples. An impairment charge may be recorded if the expected future cash flows decline.

Pension benefits

Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. These assumptions are reviewed annually.

Pension expenses are determined by actuaries using assumptions concerning the discount rate, expected return on plan assets and rate of compensation increase. An actuarial analysis of benefit obligations and plan assets is determined as of December 31 each year.

The funded status of our plans and reconciliation of accrued pension cost is determined annually as of December 31. Further discussion of our pension plan and related assumptions is included in Note 10, “Retirement Plans,” to the unaudited condensed consolidated financial statements for the quarterly period ended September 30, 2009. Actual results would be different using other assumptions. Management records an accrual for pension costs associated with our sponsored non-contributory defined benefit pension plan covering our non-union workers. Future adverse changes in market conditions or poor operating results of underlying plan assets could result in losses or a higher accrual. At December 31, 2005, we froze the non-contributory defined benefit pension plan for all non-U.S. territorial employees.

Income taxes

Management has recorded a valuation allowance to reduce its deferred tax assets for a portion of state and local income tax net operating losses that it believes may not be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance; however, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
 
 
22

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management’s intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as “believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,” “estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements contained in this Quarterly Report on Form 10-Q and in other statements we make involve risks and uncertainties including, without limitation, the factors set forth under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2008, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our businesses and financial results and could cause actual results to differ materially from plans and projections. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. All forward-looking statements made in this Quarterly Report on Form 10-Q are based on information presently available to our management. We assume no obligation to update any forward-looking statements.
 
 
23

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes since December 31, 2008.
 
ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected.

Internal Controls. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
24

 

PART II — OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

None

ITEM 1A - RISK FACTORS

There have been no material changes to our risk factors as disclosed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None
 
ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS

EXHIBIT
 
EXHIBIT
NUMBER
 
DESCRIPTION
     
31 (a)*
 
Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Chief Executive Officer.
     
31 (b)*
 
Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Chief Financial Officer.
     
32 (a)+
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.
     
32 (b)+
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.
 

 
*
Filed with this report.
 
Furnished with this report.

 
25

 

SIGNATURE

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.

 
Rocky Brands, Inc.
 
     
Date:   October 30, 2009
  /s/ James E. McDonald
 
 
James E. McDonald, Executive Vice President and
 
 
Chief Financial Officer*
 

*
In his capacity as Executive Vice President and Chief Financial Officer, Mr. McDonald is duly authorized to sign this report on behalf of the Registrant.

 
26