##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 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
  o þ 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
March 31, 2007 and 2006 (Unaudited), and
December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2007 and
2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2007 and
2006 (Unaudited)
    
    
    5Notes to Interim Unaudited Condensed
Consolidated Financial Statements
    
    
    614Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    1519Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURE
    
    
    24EX-10.1EX-31.AEX-31.LBEX-32.AEX-32.B
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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 ROCKY BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31, 2007
    
    
    December 31, 2006
    
    
    March 31, 2006(Unaudited)
    
    
    
    
    
    (Unaudited)ASSETS:CURRENT ASSETS:Cash and cash equivalents
    
    $
    1,776,893
    
    
    $
    3,731,253
    
    
    $
    2,082,547Trade receivables  net
    
    
    58,953,715
    
    
    
    65,259,580
    
    
    
    53,556,447Other receivables
    
    
    1,222,207
    
    
    
    1,159,444
    
    
    
    2,236,354Inventories
    
    
    71,831,189
    
    
    
    77,948,976
    
    
    
    82,996,488Deferred income taxes
    
    
    3,902,775
    
    
    
    3,902,775
    
    
    
    133,783Income tax receivable
    
    
    3,079,485
    
    
    
    3,632,808
    
    
    
    1,160,148Prepaid expenses
    
    
    1,873,910
    
    
    
    1,581,303
    
    
    
    2,369,364Total current assets
    
    
    142,640,174
    
    
    
    157,216,139
    
    
    
    144,535,131FIXED ASSETS  net
    
    
    23,897,559
    
    
    
    24,349,674
    
    
    
    23,286,912DEFERRED PENSION ASSET
    
    
    26,998
    
    
    
    13,564
    
    
    
    1,537,639IDENTIFIED INTANGIBLES
    
    
    36,966,851
    
    
    
    37,105,291
    
    
    
    38,212,701GOODWILL
    
    
    24,874,368
    
    
    
    24,874,368
    
    
    
    23,963,637OTHER ASSETS
    
    
    2,416,357
    
    
    
    2,796,776
    
    
    
    3,257,543TOTAL ASSETS
    
    $
    230,822,307
    
    
    $
    246,355,812
    
    
    $
    234,793,563LIABILITIES AND SHAREHOLDERS EQUITY:CURRENT LIABILITIES:Accounts payable
    
    $
    12,782,486
    
    
    $
    10,162,291
    
    
    $
    22,756,879Current maturities  long term debt
    
    
    7,294,702
    
    
    
    7,288,474
    
    
    
    6,281,020Accrued expenses:Salaries and wages
    
    
    523,406
    
    
    
    178,235
    
    
    
    826,949Co-op advertising
    
    
    163,510
    
    
    
    452,272
    
    
    
    418,151Interest
    
    
    1,597,843
    
    
    
    338,281
    
    
    
    878,603Taxes  other
    
    
    510,935
    
    
    
    552,782
    
    
    
    489,589Commissions
    
    
    782,244
    
    
    
    649,636
    
    
    
    674,126Other
    
    
    1,947,349
    
    
    
    2,025,079
    
    
    
    1,154,579Total current liabilities
    
    
    25,602,475
    
    
    
    21,647,050
    
    
    
    33,479,896LONG TERM DEBT  less current maturities
    
    
    82,567,824
    
    
    
    103,203,107
    
    
    
    87,828,446DEFERRED INCOME TAXES
    
    
    17,009,025
    
    
    
    17,009,025
    
    
    
    12,567,208DEFERRED LIABILITIES
    
    
    312,542
    
    
    
    368,580
    
    
    
    536,600TOTAL LIABILITIES
    
    
    125,491,866
    
    
    
    142,227,762
    
    
    
    134,412,150COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common
stock, no par value; 25,000,000 shares authorized; issued and
outstanding March 31, 2007 - 5,466,543; December
31, 2006 - 5,417,198; March 31, 2006 - 5,390,473
    
    
    53,649,754
    
    
    
    53,238,841
    
    
    
    52,425,074Accumulated other comprehensive loss
    
    
    (967,609
    )
    
    
    (993,182
    )
    
    
    Retained earnings
    
    
    52,648,296
    
    
    
    51,882,391
    
    
    
    47,956,339Total shareholders equity
    
    
    105,330,441
    
    
    
    104,128,050
    
    
    
    100,381,413TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    230,822,307
    
    
    $
    246,355,812
    
    
    $
    234,793,563
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ROCKY BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three Months EndedMarch 31,2007
    
    
    2006NET SALES
    
    $
    61,657,024
    
    
    $
    57,525,164COST OF GOODS SOLD
    
    
    35,576,338
    
    
    
    32,609,207GROSS MARGIN
    
    
    26,080,686
    
    
    
    24,915,957SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    22,322,941
    
    
    
    21,109,397INCOME FROM OPERATIONS
    
    
    3,757,745
    
    
    
    3,806,560OTHER INCOME AND (EXPENSES):Interest expense, net
    
    
    (2,498,845
    )
    
    
    (2,369,033
    )Other  net
    
    
    (42,995
    )
    
    
    (18,297
    )Total other  net
    
    
    (2,541,840
    )
    
    
    (2,387,330
    )INCOME BEFORE INCOME TAXES
    
    
    1,215,905
    
    
    
    1,419,230INCOME TAX EXPENSE
    
    
    450,000
    
    
    
    526,000NET INCOME
    
    $
    765,905
    
    
    $
    893,230NET INCOME PER SHAREBasic
    
    $
    0.14
    
    
    $
    0.17Diluted
    
    $
    0.14
    
    
    $
    0.16WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBasic
    
    
    5,457,556
    
    
    
    5,362,953Diluted
    
    
    5,594,930
    
    
    
    5,615,942
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ROCKY BRANDS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three Months EndedMarch 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    765,905
    
    
    $
    893,230Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    1,371,353
    
    
    
    1,294,075Deferred compensation and other
    
    
    (43,899
    )
    
    
    579,713Loss (gain) on disposal of fixed assets
    
    
    2,080
    
    
    
    (571,159
    )Stock compensation expense
    
    
    170,443
    
    
    
    164,020Change in assets and liabilitiesReceivables
    
    
    6,243,102
    
    
    
    8,409,949Inventories
    
    
    6,117,787
    
    
    
    (7,609,756
    )Other current assets
    
    
    260,717
    
    
    
    (685,281
    )Other assets
    
    
    380,419
    
    
    
    (43,412
    )Accounts payable
    
    
    2,598,945
    
    
    
    10,035,665Accrued and other liabilities
    
    
    1,329,001
    
    
    
    (1,401,627
    )Net cash provided by operating activities
    
    
    19,195,853
    
    
    
    11,065,417CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (734,363
    )
    
    
    (1,375,830
    )Investment in trademarks and patents
    
    
    (27,265
    )
    
    
    (35,205
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    1,851,584Net cash (used in) provided by investing activities
    
    
    (761,628
    )
    
    
    440,549
    

CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from revolving credit facility
    
    
    54,594,784
    
    
    
    59,587,351Repayment of revolving credit facility
    
    
    (73,380,198
    )
    
    
    (68,351,929
    )Repayments of long-term debt
    
    
    (1,843,641
    )
    
    
    (2,498,562
    )Proceeds from exercise of stock options
    
    
    240,470
    
    
    
    231,041Net cash used in financing activities
    
    
    (20,388,585
    )
    
    
    (11,032,099
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,954,360
    )
    
    
    473,867CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
    
    
    3,731,253
    
    
    
    1,608,680CASH AND CASH EQUIVALENTS,
END OF PERIOD
    
    $
    1,776,893
    
    
    $
    2,082,547
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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 periods ended March 31, 2007 and 2006
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, 2006.The components of total comprehensive income are shown below:
 (Unaudited)Three Months EndedMarch 31, 2007Net income
    
    $
    765,905Other comprehensive income:Amortization of unrecognized
transition obligation and service
cost
    
    
    25,573Total comprehensive income
    
    $
    791,478
 For the three-month period ended March 31, 2006, net income was equal to comprehensive
income.
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2.
    
    INVENTORIESInventories are comprised of the following:
 March 31, 2007
    
    
    December 31, 2006
    
    
    March 31, 2006(Unaudited)
    
    
    
    
    
    (Unaudited)Raw materials
    
    $
    6,603,390
    
    
    $
    6,564,731
    
    
    $
    9,319,830Work-in-process
    
    
    995,124
    
    
    
    249,644
    
    
    
    704,551Finished goods
    
    
    64,532,675
    
    
    
    71,518,898
    
    
    
    73,466,076Reserve for obsolescence or
lower of cost or market
    
    
    (300,000
    )
    
    
    (384,297
    )
    
    
    (493,969
    )Total
    
    $
    71,831,189
    
    
    $
    77,948,976
    
    
    $
    82,996,488
 Included in raw materials, at December 31, 2006 and March 31, 2006, is $1.6 million of
purchases associated with the U.S. military. These raw material purchases were made
exclusively for production under a subcontract for the U.S. military. Subsequent to the
purchase of raw materials, the subcontract was cancelled for convenience by the U.S.
military. In March 2007, we received a partial settlement of the contract. As a result of
this settlement, the value of the raw material inventory will be realized either through the
settlement or by other third-party sales, and a reduction of cost of goods sold of
approximately $0.7 million was recognized in the first quarter of 2007, which represents a
reimbursement of contract related expenses incurred in prior periods.3.
    
    SUPPLEMENTAL CASH FLOW INFORMATIONSupplemental cash information including, cash paid for interest and Federal, state and
local income taxes was as follows:
 Three-Months EndedMarch 31,2007
    
    
    2006Interest
    
    $
    1,033,000
    
    
    $
    2,092,000Federal, state and local income taxes
    
    $
    97,000
    
    
    $
    317,000Fixed asset purchases in accounts payable
    
    $
    21,250
    
    
    $
    
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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 months ended March 31, 2007 and 2006 is as follows:
 Three Months EndedMarch 31,2007
    
    
    2006Weighted average
shares outstanding
    
    
    5,457,556
    
    
    
    5,362,953Diluted stock options
    
    
    137,374
    
    
    
    252,989Diluted weighted average
shares outstanding
    
    
    5,594,930
    
    
    
    5,615,942Anti-diluted weighted average
shares outstanding
    
    
    264,125
    
    
    
    223,171
 5.
    
    RECENT FINANCIAL ACCOUNTING STANDARDSIn June 2006, the FASB ratified the Emerging Issues Task Force (EITF) position EITF 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should be
Presented in the Income Statement (that is Gross versus Net Presentation) (EITF 06-3),
that addresses disclosure requirements for taxes assessed by a governmental authority that
is both imposed on and concurrent with a specific revenue-producing transaction between a
seller and a customer, and may include, but is not limited to, sales, use, value-added, and
some excise taxes. EITF 06-3 requires disclosure of the method of accounting for the
applicable assessed taxes, and the amount of assessed taxes that are included in revenues if
they are accounted for under the gross method. The provisions of EITF 06-3 are effective
for interim and annual reporting periods beginning after December 15, 2006, with earlier
application permitted. We report sales, net of sales tax remittance. Adoption on January
1, 2007 did not have a material effect on our financial statements.In September 2006, the FASB issued a Statement of Accounting Standards (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. SFAS 157 does not require any new fair value
measurements, rather it applies under existing accounting pronouncements that require or
permit fair value measurements. The provisions of SFAS 157 are effective for
fiscal years beginning after November 15, 2007. We are currently evaluating the impact of
adopting SFAS 157 on our financial statements.
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Also 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 period. The recognition provisions of Statement No. 158
were effective for fiscal years ending after December 15, 2006. In addition, Statement No.
158 requires a fiscal year end measurement of plan assets and benefit obligations,
eliminating the use of earlier measurement dates currently permissible. However, the new
measurement date requirement will not be effective until fiscal years ended after December
15, 2008. We utilize a measurement date of September 30th and will be required to change to
December 31st. The adoption of Statement No. 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 February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of statement No. 115 (SFAS 159). SFAS
159 permits entities to choose to measure many financial instruments and certain other items
at fair value. The standard also establishes presentation and disclosure requirements
designed to facilitate comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective for annual
periods in fiscal years beginning after November 15, 2007. If the fair value option is
elected, the effect of the first remeasurement to fair value is reported as a cumulative
effect adjustment to the opening balance of retained earnings. In the event we elect the
fair value option promulgated by this standard, the valuations of certain assets and
liabilities may be impacted. The statement is applied prospectively upon adoption. We are
currently evaluating the impact of adopting SFAS 159 on our financial statements.
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6.
    
    INCOME TAXESWe adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an Interpretation of FASB Statement No. 109(FIN 48), on January 1, 2007.
We did not have any unrecognized tax benefits and there was no effect on our financial
condition or results of operations as a result of implementing FIN 48.We 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 is in process and 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 2003. State jurisdictions that
remain subject to examination range from 2003 to 2006. Foreign jurisdiction (Canada and
Puerto Rico) tax returns that remain subject to examination range from 2001 to 2006. We do
not believe there will be any material changes in our unrecognized tax positions over the
next 12 months.Our policy is that we 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.
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7.
    
    INTANGIBLE ASSETSA schedule of intangible assets is as follows:
 Gross
    
    
    Accumulated
    
    
    CarryingMarch 31, 2007 (unaudited)
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,250,046
    
    
    $
    21,563
    
    
    $
    28,228,483Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,257,570
    
    
    
    969,202
    
    
    
    1,288,368Customer relationships
    
    
    1,000,000
    
    
    
    450,000
    
    
    
    550,000Total Identified Intangibles
    
    $
    38,407,616
    
    
    $
    1,440,765
    
    
    $
    36,966,851
 Gross
    
    
    Accumulated
    
    
    CarryingDecember 31, 2006
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,241,370
    
    
    
    
    
    
    $
    28,241,370Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,238,981
    
    
    $
    875,060
    
    
    
    1,363,921Customer relationships
    
    
    1,000,000
    
    
    
    400,000
    
    
    
    600,000Total Identified Intangibles
    
    $
    38,380,351
    
    
    $
    1,275,060
    
    
    $
    37,105,291
 Gross
    
    
    Accumulated
    
    
    CarryingMarch 31, 2006 (unaudited)
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,933,009
    
    
    
    
    
    
    $
    28,933,009Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,223,941
    
    
    $
    594,249
    
    
    
    1,629,692Customer relationships
    
    
    1,000,000
    
    
    
    250,000
    
    
    
    750,000Total Identified Intangibles
    
    $
    39,056,950
    
    
    $
    844,249
    
    
    $
    38,212,701
 Amortization expense for intangible assets was $165,705 and $143,332 for the three-months ended
March 31, 2007 and 2006, respectively. The weighted average amortization period for patents is six
years and for customer relationships is five years.Estimate of Aggregate Amortization Expense:
 12-months ending March 31, 2008
    
    $
    663,42312-months ending March 31, 2009
    
    
    663,42212-months ending March 31, 2010
    
    
    528,39712-months ending March 31, 2011
    
    
    122,99012-months ending March 31, 2012
    
    
    121,955
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8.
    
    CAPITAL STOCKOn May 11, 2004, our shareholders approved the 2004 Stock Incentive Plan. This Stock
Incentive Plan includes 750,000 of our common shares that may be granted for stock options
and restricted stock awards. As of March 31, 2007, we were authorized to issue
approximately 499,000 shares under our existing plans.The plans generally provide 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, 2007 through
March 31, 2007:
 WeightedAverageExerciseShares
    
    
    PriceOptions outstanding at January 1, 2007
    
    
    536,176
    
    
    $
    14.33Issued
    
    
    
    
    
    
    Exercised
    
    
    (41,750
    )
    
    
    5.76Forfeited
    
    
    
    
    
    
    Options outstanding at March 31, 2007
    
    
    494,426
    
    
    $
    15.00Options exercisable at:January 1, 2007
    
    
    443,426
    
    
    $
    13.39March 31, 2007
    
    
    458,239
    
    
    $
    14.59Unvested options at January 1, 2007
    
    
    92,750
    
    
    $
    18.81Granted
    
    
    
    
    
    
    Vested
    
    
    (56,562
    )
    
    
    17.88Forfeited
    
    
    
    
    
    
    Unvested options at March 31, 2007
    
    
    36,188
    
    
    $
    20.27
 During the three months ended March 31, 2007, we issued 7,595 shares of common stock to
members of our Board of Directors. We recorded compensation expense of $122,500, which was
the fair market value on the grant date. The shares are fully vested but cannot be sold for
one year.
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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. As a
result of freezing the plan, we recognized a $0.4 million charge in the first quarter of
2006 for previously unrecognized service costs. Net pension cost of the Companys plan is
as follows:
 (Unaudited)
    
    
    (Unaudited)Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Service cost
    
    $
    26,299
    
    
    $
    216,395Interest
    
    
    139,506
    
    
    
    128,932Expected return on assets
    
    
    (179,239
    )
    
    
    (197,326
    )Amortization of unrecognized transition obligation
    
    
    2,691
    
    
    
    4,077Amortization of unrecognized prior service cost
    
    
    22,882
    
    
    
    33,848Curtailment charge
    
    
    
    
    
    
    393,787Net pension cost
    
    $
    12,139
    
    
    $
    579,713
  March 31,
    
    March 31,2007
    
    2006Discount rate
    
    
    6.00
    %
    
    
    5.75
    %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 plans have 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.
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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)Three Months Ended March 31,2007
    
    
    2006NET SALES:Wholesale
    
    $
    44,565,031
    
    
    $
    40,628,779Retail
    
    
    16,967,965
    
    
    
    15,995,420Military
    
    
    124,028
    
    
    
    900,965Total Net Sales
    
    $
    61,657,024
    
    
    $
    57,525,164GROSS MARGIN:Wholesale
    
    $
    16,873,518
    
    
    $
    16,098,302Retail
    
    
    8,530,357
    
    
    
    8,685,666Military
    
    
    676,811
    *
    
    
    131,989Total Gross Margin
    
    $
    26,080,686
    
    
    $
    24,915,957
 
 *
    
    The gross margin for the three months ended March 31, 2007 included a $0.7 million
reduction of cost of goods sold from the reimbursement of contract related expenses
incurred in prior periods. Segment asset information is not prepared or used to assess segment performance.11.
    
    LONG-TERM DEBTOur credit facilities contain certain restrictive covenants, which among other things,
require us to maintain a certain minimum EBITDA and certain leverage and fixed charge
coverage ratios.As of March 31, 2007, we were in compliance with these restrictive covenants; however the
margin of compliances was minimal. These covenants become more restrictive during the
remainder of 2007 and, after December 2007, revert to more restrictive covenants contained
in the original agreements. We must improve our operating results and cash flows, or take
other action, to meet the covenants in the future. Any failure by us to comply with the
restrictive covenants could result in an event of default under the borrowing agreements, in
which case the lenders could elect to declare all amounts outstanding there under to be due
and payable, which could have a material adverse effect on our financial condition.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 RESULTS OF OPERATIONS
  Three Months EndedMarch 31,2007
    
    2006Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost Of Goods Sold
    
    
    57.7
    %
    
    
    56.7
    %Gross Margin
    
    
    42.3
    %
    
    
    43.3
    %Selling, General and
Administrative Expenses
    
    
    36.2
    %
    
    
    36.7
    %Income From Operations
    
    
    6.1
    %
    
    
    6.6
    %
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Net sales.
 Gross margin.
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SG&A expenses.
 Interest expense.
 Income taxes.
 Liquidity and Capital Resources
     16




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Operating Activities.
 Investing Activities.
 Financing Activities.
 Inflation
  Critical Accounting Policies and Estimates
   17




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Revenue recognition
  Accounts receivable allowances
  Sales returns and allowances
  Inventories
  Intangible assets
  18




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Pension benefits
   Income taxes
  SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
  19




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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Internal Controls
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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
    
    DESCRIPTION10.1*
    
    Amendment No. 5 to Loan and Security Agreement and Waiver,
dated as of January 1, 2007 , by and among Rocky Brands, Inc., Lifestyle
Footwear, Inc., Rocky Brands Wholesale LLC, and Rocky Brands Retail LLC, as
Borrowers, and GMAC Commercial Finance LLC, as administrative agent and sole
lead arranger for the Lenders.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.
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EXHIBIT
    
    EXHIBITNUMBER
    
    DESCRIPTION32(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. 23




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SIGNATURE
  Rocky Brands, Inc.Date: May 9, 2007
    /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. 24