##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-21026
 ROCKY BRANDS, INC.
  Ohio
    
    31-1364046(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 39 E. Canal Street, Nelsonville, Ohio 45764
 (740) 753-1951
 Not Applicable
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



FORM 10-Q
 ROCKY BRANDS, INC.
 TABLE OF CONTENTS
 PAGENUMBERPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2008 and 2007 (Unaudited), and
December 31, 2007
    
    3Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30,
2008 and 2007 (Unaudited)
    
    4Condensed Consolidated Statements of Cash Flows
for the Three and Nine Months Ended September 30,
2008 and 2007 (Unaudited)
    
    5Notes to Interim Unaudited Condensed Consolidated
Financial Statements
    
    6 -15Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    16 - 22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    23Item 4. Controls and Procedures
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    24Item 1A. Risk Factors
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    24Item 3. Defaults Upon Senior Securities
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    24Item 5. Other Information
    
    24Item 6. Exhibits
    
    24SIGNATURE
    
    25EX-31.AEX-31.BEX-32.AEX-32.B
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PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 ROCKY BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2008
    
    
    
    
    
    
    September 30, 2007(Unaudited)
    
    
    December 31, 2007
    
    
    (Unaudited)ASSETS:CURRENT ASSETS:Cash and cash equivalents
    
    $
    4,332,477
    
    
    $
    6,537,884
    
    
    $
    2,707,273Trade receivables  net
    
    
    72,654,591
    
    
    
    65,931,092
    
    
    
    81,279,819Other receivables
    
    
    1,289,396
    
    
    
    674,707
    
    
    
    1,064,827Inventories
    
    
    83,320,590
    
    
    
    75,403,664
    
    
    
    85,081,978Deferred income taxes
    
    
    1,978,946
    
    
    
    1,952,536
    
    
    
    3,902,775Income tax receivable
    
    
    
    
    
    
    719,945
    
    
    
    2,743,633Prepaid expenses
    
    
    2,780,959
    
    
    
    2,226,920
    
    
    
    1,494,045Total current assets
    
    
    166,356,959
    
    
    
    153,446,748
    
    
    
    178,274,350FIXED ASSETS  net
    
    
    24,254,455
    
    
    
    24,484,050
    
    
    
    25,233,363DEFERRED PENSION ASSET
    
    
    
    
    
    
    
    
    
    
    53,866IDENTIFIED INTANGIBLES
    
    
    36,044,132
    
    
    
    36,509,690
    
    
    
    36,673,954GOODWILL
    
    
    
    
    
    
    
    
    
    
    24,874,368OTHER ASSETS
    
    
    1,740,079
    
    
    
    2,284,039
    
    
    
    2,618,442TOTAL ASSETS
    
    $
    228,395,625
    
    
    $
    216,724,527
    
    
    $
    267,728,343LIABILITIES AND SHAREHOLDERS EQUITY:CURRENT LIABILITIES:Accounts payable
    
    $
    14,492,182
    
    
    $
    11,908,902
    
    
    $
    15,514,243Current maturities  long term debt
    
    
    464,846
    
    
    
    324,648
    
    
    
    318,024Accrued expenses:Salaries and wages
    
    
    1,043,421
    
    
    
    751,134
    
    
    
    605,905Co-op advertising
    
    
    673,703
    
    
    
    840,818
    
    
    
    446,410Interest
    
    
    1,870,687
    
    
    
    487,446
    
    
    
    1,822,664Income tax payable
    
    
    96,666
    
    
    
    
    
    
    
    Taxes  other
    
    
    612,445
    
    
    
    516,038
    
    
    
    571,718Commissions
    
    
    463,735
    
    
    
    717,564
    
    
    
    771,062Other
    
    
    2,928,714
    
    
    
    2,624,121
    
    
    
    2,504,345Total current liabilities
    
    
    22,646,399
    
    
    
    18,170,671
    
    
    
    22,554,371LONG TERM DEBT  less current maturities
    
    
    107,115,967
    
    
    
    103,220,384
    
    
    
    122,438,442DEFERRED INCOME TAXES
    
    
    12,569,600
    
    
    
    13,247,953
    
    
    
    17,009,025DEFERRED PENSION LIABILITY
    
    
    967,930
    
    
    
    125,724
    
    
    
    DEFERRED LIABILITIES
    
    
    202,096
    
    
    
    235,204
    
    
    
    335,534TOTAL LIABILITIES
    
    
    143,501,992
    
    
    
    134,999,936
    
    
    
    162,337,372COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, no par value; 25,000,000 shares authorized; issued and
outstanding September 30, 2008 - 5,508,398; December 31, 2007 -
5,488,293; September 30, 2007 - 5,488,293
    
    
    54,193,211
    
    
    
    53,997,960
    
    
    
    53,897,100Accumulated other comprehensive loss
    
    
    (1,462,344
    )
    
    
    (1,051,232
    )
    
    
    (916,463
    )Retained earnings
    
    
    32,162,766
    
    
    
    28,777,863
    
    
    
    52,410,334Total shareholders equity
    
    
    84,893,633
    
    
    
    81,724,591
    
    
    
    105,390,971TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    228,395,625
    
    
    $
    216,724,527
    
    
    $
    267,728,343
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ROCKY BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007NET SALES
    
    $
    72,500,603
    
    
    $
    82,308,547
    
    
    $
    193,492,740
    
    
    $
    202,763,235COST OF GOODS SOLD
    
    
    45,414,533
    
    
    
    53,030,023
    
    
    
    116,060,912
    
    
    
    123,477,571GROSS MARGIN
    
    
    27,086,070
    
    
    
    29,278,524
    
    
    
    77,431,828
    
    
    
    79,285,664SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    21,961,032
    
    
    
    25,108,505
    
    
    
    65,897,978
    
    
    
    70,222,025INCOME FROM OPERATIONS
    
    
    5,125,038
    
    
    
    4,170,019
    
    
    
    11,533,850
    
    
    
    9,063,639OTHER INCOME AND (EXPENSES):Interest expense, net
    
    
    (2,285,051
    )
    
    
    (2,943,139
    )
    
    
    (7,101,237
    )
    
    
    (8,786,060
    )Other  net
    
    
    34,254
    
    
    
    131,365
    
    
    
    31,385
    
    
    
    95,364Total other  net
    
    
    (2,250,797
    )
    
    
    (2,811,774
    )
    
    
    (7,069,852
    )
    
    
    (8,690,696
    )INCOME BEFORE INCOME TAXES
    
    
    2,874,241
    
    
    
    1,358,245
    
    
    
    4,463,998
    
    
    
    372,943INCOME TAX EXPENSE (BENEFIT)
    
    
    500,000
    
    
    
    209,000
    
    
    
    1,056,000
    
    
    
    (155,000
    )NET INCOME
    
    $
    2,374,241
    
    
    $
    1,149,245
    
    
    $
    3,407,998
    
    
    $
    527,943NET INCOME PER SHAREBasic
    
    $
    0.43
    
    
    $
    0.21
    
    
    $
    0.62
    
    
    $
    0.10Diluted
    
    $
    0.43
    
    
    $
    0.21
    
    
    $
    0.62
    
    
    $
    0.09WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBasic
    
    
    5,508,278
    
    
    
    5,484,923
    
    
    
    5,508,132
    
    
    
    5,472,233Diluted
    
    
    5,512,514
    
    
    
    5,594,707
    
    
    
    5,518,018
    
    
    
    5,590,879
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ROCKY BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedSeptember 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,407,998
    
    
    $
    527,943Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    4,712,408
    
    
    
    4,226,093Deferred compensation and other
    
    
    78,766
    
    
    
    3,371Deferred income taxes
    
    
    (408,638
    )
    
    
    Deferred debt financing costs
    
    
    
    
    
    
    811,582(Gain) loss on disposal of fixed assets
    
    
    (35,739
    )
    
    
    29,070Stock compensation expense
    
    
    195,251
    
    
    
    285,984Change in assets and liabilitiesReceivables
    
    
    (7,338,188
    )
    
    
    (15,925,622
    )Inventories
    
    
    (7,916,926
    )
    
    
    (7,133,002
    )Other current assets
    
    
    165,906
    
    
    
    976,434Other assets
    
    
    543,960
    
    
    
    795,282Accounts payable
    
    
    2,136,570
    
    
    
    5,591,785Accrued and other liabilities
    
    
    1,752,250
    
    
    
    2,525,818Net cash used in operating activities
    
    
    (2,706,382
    )
    
    
    (7,285,262
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (3,561,205
    )
    
    
    (4,957,897
    )Investment in trademarks and patents
    
    
    (33,938
    )
    
    
    (66,488
    )Proceeds from sale of fixed assets
    
    
    60,336
    
    
    
    77,037Net cash used in investing activities
    
    
    (3,534,807
    )
    
    
    (4,947,348
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from revolving credit facility
    
    
    192,663,254
    
    
    
    206,281,446Repayments of revolving credit facility
    
    
    (188,714,331
    )
    
    
    (201,297,047
    )Proceeds from long-term debt
    
    
    355,398
    
    
    
    40,000,000Repayments of long-term debt
    
    
    (268,539
    )
    
    
    (32,719,514
    )Debt financing costs
    
    
    
    
    
    
    (1,428,530
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    372,275Net cash provided by financing activities
    
    
    4,035,782
    
    
    
    11,208,630DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (2,205,407
    )
    
    
    (1,023,980
    )CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
    
    
    6,537,884
    
    
    
    3,731,253CASH AND CASH EQUIVALENTS,
END OF PERIOD
    
    $
    4,332,477
    
    
    $
    2,707,273
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ROCKY BRANDS, INC.
AND SUBSIDIARIES
 
 
 1.
    
    INTERIM FINANCIAL REPORTINGIn 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
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, 2008 and 2007 are not necessarily indicative of the results to be expected for the
whole year. Accordingly, these condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto contained in
our Annual Report on Form 10-K for the year ended December 31, 2007.The components of total comprehensive income are shown below:
 (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    2,734,241
    
    
    $
    1,149,245
    
    
    $
    3,407,998
    
    
    $
    527,943Other comprehensive income:Amortization of unrecognized transition
obligation, service cost and net loss
    
    
    37,852
    
    
    
    25,573
    
    
    
    115,737
    
    
    
    76,719Total comprehensive income
    
    $
    2,772,093
    
    
    $
    1,174,818
    
    
    $
    3,523,735
    
    
    $
    604,662
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2.
    
    INVENTORIESInventories are comprised of the following:
 September 30,
    
    
    
    
    
    
    September 30,2008
    
    
    December 31,
    
    
    2007(Unaudited)
    
    
    2007
    
    
    (Unaudited)Raw materials
    
    $
    8,898,262
    
    
    $
    6,086,118
    
    
    $
    8,222,483Work-in-process
    
    
    671,586
    
    
    
    144,171
    
    
    
    261,295Finished goods
    
    
    73,816,742
    
    
    
    69,301,375
    
    
    
    76,798,200Reserve for obsolescence or
lower of cost or market
    
    
    (66,000
    )
    
    
    (128,000
    )
    
    
    (200,000
    )Total
    
    $
    83,320,590
    
    
    $
    75,403,664
    
    
    $
    85,081,978
 3.
    
    SUPPLEMENTAL CASH FLOW INFORMATIONSupplemental cash information including, cash paid for interest and Federal, state and
local income taxes, net of refunds, was as follows:
 Nine Months EndedSeptember 30,2008
    
    
    2007Interest
    
    $
    5,249,383
    
    
    $
    5,970,000Federal, state and local income taxes
    
    $
    647,200
    
    
    $
    (991,000
    )Fixed asset purchases in accounts payable
    
    $
    502,874
    
    
    $
    132,350
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4.
    
    PER SHARE INFORMATIONBasic 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, 2008 and 2007 is as follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Weighted average
shares outstanding
    
    
    5,508,278
    
    
    
    5,484,923
    
    
    
    5,508,132
    
    
    
    5,472,233Dilutive stock options
    
    
    4,236
    
    
    
    109,784
    
    
    
    9,886
    
    
    
    118,646Dilutive weighted average
shares outstanding
    
    
    5,512,514
    
    
    
    5,594,707
    
    
    
    5,518,018
    
    
    
    5,590,879Anti-dilutive weighted average
shares outstanding
    
    
    409,249
    
    
    
    270,707
    
    
    
    338,749
    
    
    
    270,707
 5.
    
    RECENT FINANCIAL ACCOUNTING STANDARDSIn September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 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, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 defers implementation of SFAS 157 for
certain non-financial assets and non-financial liabilities. SFAS 157 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. We have
evaluated the impact of the provisions applicable to our financial assets and liabilities
and have determined that there will not be a material impact on our consolidated financial
statements. The aspects that have been deferred by FSP FAS 157-2 pertaining to
non-financial assets and non-financial liabilities will be effective for us beginning
January 1, 2009. We are currently reviewing SFAS 157 and FSP FAS 157-2 to determine the
impact and materiality of their adoption on our consolidated financial statements.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefits
Pension and Other Postretirement Plans, an Amendment of FASB Statements 87, 88, 106, and
132(R) (SFAS 158). SFAS 158, requires an employer to recognize in its statement
of financial position the funded status of its defined benefit plans and to recognize as a
component of other comprehensive income, net of tax, any unrecognized transition obligations
and assets, the actuarial gains and losses and prior service costs and credits that arise
during the
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period. The recognition provisions of SFAS 158 are effective for fiscal years
ending after December 15, 2006. The adoption of SFAS 158 as of December 31, 2006 resulted
in a write-down of our pension asset by $1.6 million, increased accumulated other
comprehensive loss by $1.0 million, and decreased deferred income tax liabilities by $0.6
million. In addition, SFAS 158 requires a fiscal year end measurement of plan assets and
benefit obligations, eliminating the use of earlier measurement dates previously
permissible. However, the new measurement date requirement is effective and we have changed
our measurement date to December 31st.
 In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R).
SFAS 141R replaces SFAS 141, Business Combinations. The objective of SFAS 141R 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. SFAS 141R 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. SFAS
141R applies prospectively to business combinations for which the acquisition date is on of
after the beginning of the first annual reporting period beginning on or after December 15,
2008. Early adoption of SFAS 141R is prohibited. We do not anticipate the adoption of SFAS
141R will have a material impact on our financial statements.In December 2007, the FASB issued SFAS No, 160, Non-controlling Interests in Consolidated
Financial Statements, an amendment of ARB No, 51 (SFAS 160). The objective of SFAS 160
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. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption of SFAS 160 is prohibited. We do not anticipate
the adoption of SFAS 160 will have a material impact on our financial statements.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB No. 133 (SFAS 161). SFAS 161 intends to
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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. SFAS 161 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. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We are currently evaluating
the impact of adopting SFAS 161 and do not anticipate that its adoption will have a material
impact on our consolidated financial statements.
 6.
    
    INCOME TAXESWe file income tax returns in the U.S. Federal jurisdiction and various state and foreign
jurisdictions. An examination of our 2004 Federal income tax return resulted in an
immaterial adjustment. The examination of the 2003 Federal income tax return resulted in no
changes. We are no longer subject to U.S. Federal tax examinations for years before 2004.
State jurisdictions that remain subject to examination range from 2003 to 2007. Foreign
jurisdiction tax returns that remain subject to examination range from 2003 to 2007 for
Canada and from 2004 to 2007 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 the date of adoption of FIN 48, accrued interest
or penalties were not material, and no such expenses were recognized during the quarter.We provided for income taxes at estimated effective tax rates of 36% and 37% for the
three-month and nine-month periods ended September 30, 2008 and 2007, respectively. During
the three months ended September 30, 2008, we recognized an adjustment 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. During the three months ended September 30, 2007, we
recognized a prior year state income tax refund of $0.3 million which reduced the effective
tax rate for the three-month period ended September 30 2007 to 15.4%. The tax benefit for
the nine-month period ended September 30, 2007 results from the recognition of the
aforementioned tax refund when combined with our provision for income taxes at the effective
tax rate of 37%.
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7.
    
    INTANGIBLE ASSETSA schedule of intangible assets is as follows:
 Gross
    
    
    Accumulated
    
    
    CarryingSeptember 30, 2008 (unaudited)
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,278,595
    
    
    $
    150,940
    
    
    $
    28,127,655Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,303,989
    
    
    
    1,537,513
    
    
    
    766,476Customer relationships
    
    
    1,000,000
    
    
    
    750,000
    
    
    
    250,000Total Identified Intangibles
    
    $
    38,482,584
    
    
    $
    2,438,453
    
    
    $
    36,044,131
 Gross
    
    
    Accumulated
    
    
    CarryingDecember 31, 2007
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,272,514
    
    
    $
    86,251
    
    
    $
    28,186,263Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,276,132
    
    
    
    1,252,705
    
    
    
    1,023,427Customer relationships
    
    
    1,000,000
    
    
    
    600,000
    
    
    
    400,000Total Identified Intangibles
    
    $
    38,448,646
    
    
    $
    1,938,956
    
    
    $
    36,509,690
 Gross
    
    
    Accumulated
    
    
    CarryingSeptember 30, 2007 (unaudited)
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,272,514
    
    
    $
    64,689
    
    
    $
    28,207,825Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,274,325
    
    
    
    1,158,196
    
    
    
    1,116,129Customer relationships
    
    
    1,000,000
    
    
    
    550,000
    
    
    
    450,000Total Identified Intangibles
    
    $
    38,446,839
    
    
    $
    1,772,885
    
    
    $
    36,673,954
 Amortization expense for intangible assets was $166,629 and $166,108 for the three months ended
September 30, 2008 and 2007, respectively and $499,496 and $497,825 for the nine months ended
September 30, 2008 and 2007, 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,:
 2009
    
    $
    666,5132010
    
    
    126,4302011
    
    
    125,0502012
    
    
    125,0502013
    
    
    125,050
 11




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8.
    
    CAPITAL STOCKOn 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, 2008, we were authorized to issue approximately 406,420 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, 2008 through
September 30, 2008:
 WeightedAverageExerciseShares
    
    PriceOptions outstanding at January 1, 2008
    
    
    472,551
    
    
    $
    15.37Issued
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (23,250
    )
    
    $
    12.15Options outstanding at September 30, 2008
    
    
    449,301
    
    
    $
    15.53Options exercisable at:January 1, 2008
    
    
    420,801
    
    
    $
    14.97September 30, 2008
    
    
    424,363
    
    
    $
    15.43Unvested options at January 1, 2008
    
    
    51,750
    
    
    $
    18.55Granted
    
    
    
    
    
    
    Vested
    
    
    (26,813
    )
    
    $
    19.74Forfeited
    
    
    
    
    
    
    Unvested options at September 30, 2008
    
    
    24,937
    
    
    $
    17.27
 During the nine-month period ended September 30, 2008, we issued 19,985 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.
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##### Table of Contents



9.
    
    RETIREMENT PLANSWe 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.SFAS 158 requires a fiscal year end measurement of plan assets and benefit obligations,
eliminating the use of earlier measurement dates previously permissible. The new
measurement date requirement is effective for fiscal years ending after December 15, 2008.
As a result, we have changed our measurement date to December 31 and recognized the pension
expense related to the period October 1, 2007 through December 31, 2007 as an adjustment to
beginning retained earnings and accumulated other comprehensive loss.As a result of the change in measurement date, we recognized the increase in the
under-funded status of the defined benefit pension plan between September 30, 2007 and
December 31, 2007 of $846,071, as well as the corresponding increase in accumulated other
comprehensive loss of $526,850 and related decrease in our deferred tax liability of
$296,125. The increase in accumulated other comprehensive loss of
$526,850 has been recognized as an adjustment to the opening balance
of accumulated other comprehensive loss as of January 1, 2008. We also recognized the net pension expense of $23,096 relating to the period
October 1, 2007 through December 31, 2007 as a reduction of the opening balance of retained
earnings as of January 1, 2008.Net pension cost of the Companys plan is as follows:
 (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    26,962
    
    
    $
    26,298
    
    
    $
    80,888
    
    
    $
    78,895Interest
    
    
    143,062
    
    
    
    139,507
    
    
    
    429,185
    
    
    
    418,520Expected return on assets
    
    
    (171,312
    )
    
    
    (179,239
    )
    
    
    (513,938
    )
    
    
    (537,717
    )Amortization of unrecognized
net gain or loss
    
    
    17,115
    
    
    
    
    
    
    
    51,557
    
    
    
    Amortization of unrecognized
transition obligation
    
    
    897
    
    
    
    2,691
    
    
    
    3,139
    
    
    
    8,073Amortization of unrecognized
prior service cost
    
    
    19,840
    
    
    
    22,882
    
    
    
    61,041
    
    
    
    68,646Net pension cost
    
    $
    36,564
    
    
    $
    12,139
    
    
    $
    111,872
    
    
    $
    36,417
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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:
 2008
    
    2007Discount 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.
 10.
    
    SEGMENT INFORMATIONWe 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 EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007NET SALES:Wholesale
    
    $
    55,644,255
    
    
    $
    64,106,769
    
    
    $
    137,862,115
    
    
    $
    150,574,407Retail
    
    
    15,301,188
    
    
    
    18,201,778
    
    
    
    50,423,468
    
    
    
    51,751,898Military
    
    
    1,555,160
    
    
    
    
    
    
    
    5,207,157
    
    
    
    436,930Total Net Sales
    
    $
    72,500,603
    
    
    $
    82,308,547
    
    
    $
    193,492,740
    
    
    $
    202,763,235GROSS MARGIN:Wholesale
    
    $
    19,686,172
    
    
    $
    20,036,008
    
    
    $
    51,645,615
    
    
    $
    51,316,794Retail
    
    
    7,272,130
    
    
    
    9,242,516
    
    
    
    25,319,276
    
    
    
    26,663,477Military
    
    
    127,768
    
    
    
    
    
    
    
    466,937
    
    
    
    1,305,393
    *Total Gross Margin
    
    $
    27,086,070
    
    
    $
    29,278,524
    
    
    $
    77,431,828
    
    
    $
    79,285,664
 
 *
    
    The gross margin for the nine-month period ended September 30, 2007 included
reductions of cost of goods sold from the reimbursement of contract related expenses incurred in prior
periods of $1.2 million. 14




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Segment asset information is not prepared or used to assess segment performance.
 11.
    
    LONG-TERM DEBTIn May 2007, we entered into a Note Purchase Agreement, totaling $40 million, with Laminar
Direct Capital L.P., Whitebox Hedged High Yield Partners, L.P. and GPC LIX L.L.C., and
issued notes to each for $20 million, $17.5 million and $2.5 million, respectively, at an
interest rate of 11.5% payable semi-annually over the five year term of the notes.
Principal repayment is due at maturity in May 2012. The proceeds from these notes were used
to pay down the GMAC Commercial Finance (GMAC) term loans which totaled approximately
$17.5 million and the $15 million American Capital Strategies, LTD (ACAS) term loan. The
balance of the proceeds, net of debt acquisition costs of approximately $1.4 million, was
used to reduce the outstanding balance on the revolving credit facility. The Note Purchase
Agreement is secured by a security interest in our assets and is subordinate to the security
interest under the GMAC line of credit.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, 2008, we were in compliance with these restrictive covenants.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 RESULTS OF OPERATIONS
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost Of Goods Sold
    
    
    62.6
    %
    
    
    64.4
    %
    
    
    60.0
    %
    
    
    60.9
    %Gross Margin
    
    
    37.4
    %
    
    
    35.6
    %
    
    
    40.0
    %
    
    
    39.1
    %Selling, General and
Administrative Expenses
    
    
    30.3
    %
    
    
    30.5
    %
    
    
    34.0
    %
    
    
    34.6
    %Income From Operations
    
    
    7.1
    %
    
    
    5.1
    %
    
    
    6.0
    %
    
    
    4.5
    %
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Net sales.
 Gross margin.
 16




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SG&A expenses.
 Interest expense.
 Income taxes.
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Net sales.
 Gross margin.
 17




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SG&A expenses.
 Interest expense.
 Income taxes.
 Liquidity and Capital Resources
    18




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Operating Activities.
 Investing Activities.
 Financing Activities.
 Inflation
  Critical Accounting Policies and Estimates
  19




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Revenue recognition
  Accounts receivable allowances
  Sales returns and allowances
  Inventories
  Intangible assets
 20




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Pension benefits
     21




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Income taxes
  SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
  22




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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Internal Controls
 23




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
 EXHIBIT
    
    EXHIBITNUMBER
    
    DESCRIPTION31 (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. 24




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SIGNATURE
  Rocky Brands, Inc.Date: November 4, 2008
    /s/ James E. McDonaldJames E. McDonald, Executive Vice President andChief 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. 25