##### 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 September 30, 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
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    31-1364046
(I.R.S. Employer
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 September 30, 2007 and 2006 (Unaudited), and December 31, 2006
    
    3Condensed Consolidated Statements of Operationsfor the Three and Nine Months Ended September 30, 2007 and 2006 (Unaudited)
    
    4Condensed Consolidated Statements of Cash Flowsfor the Nine Months Ended September 30, 2007 and 2006 (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
    
    25SIGNATURE
    
    26EX-31(A)EX-31(B)EX-32(A)EX-32(B)
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PART 1  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
 
 ROCKY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2007
    
    
    
    
    
    September 30, 2006(Unaudited)
    
    
    December 31, 2006
    
    
    (Unaudited)ASSETS:CURRENT ASSETS:Cash and cash equivalents
    
    $
    2,707,273
    
    
    $
    3,731,253
    
    
    $
    2,327,977Trade receivables  net
    
    
    81,279,819
    
    
    
    65,259,580
    
    
    
    81,054,978Other receivables
    
    
    1,064,827
    
    
    
    1,159,444
    
    
    
    987,939Inventories
    
    
    85,081,978
    
    
    
    77,948,976
    
    
    
    87,710,315Deferred income taxes
    
    
    3,902,775
    
    
    
    3,902,775
    
    
    
    133,783Income tax receivable
    
    
    2,743,633
    
    
    
    3,632,808
    
    
    
    10,873Prepaid expenses
    
    
    1,494,045
    
    
    
    1,581,303
    
    
    
    2,320,048Total current assets
    
    
    178,274,350
    
    
    
    157,216,139
    
    
    
    174,545,913FIXED ASSETS  net
    
    
    25,233,363
    
    
    
    24,349,674
    
    
    
    24,245,710DEFERRED PENSION ASSET
    
    
    53,866
    
    
    
    13,564
    
    
    
    1,563,639IDENTIFIED INTANGIBLES
    
    
    36,673,954
    
    
    
    37,105,291
    
    
    
    37,970,535GOODWILL
    
    
    24,874,368
    
    
    
    24,874,368
    
    
    
    24,874,368OTHER ASSETS
    
    
    2,618,442
    
    
    
    2,796,776
    
    
    
    2,815,654TOTAL ASSETS
    
    $
    267,728,343
    
    
    $
    246,355,812
    
    
    $
    266,015,819LIABILITIES AND SHAREHOLDERS EQUITY:CURRENT LIABILITIES:Accounts payable
    
    $
    15,514,243
    
    
    $
    10,162,291
    
    
    $
    16,290,173Current maturities  long term debt
    
    
    318,024
    
    
    
    7,288,474
    
    
    
    7,282,374Accrued expenses:Salaries and wages
    
    
    605,905
    
    
    
    178,235
    
    
    
    810,280Co-op advertising
    
    
    446,410
    
    
    
    452,272
    
    
    
    77,154Interest
    
    
    1,822,664
    
    
    
    338,281
    
    
    
    694,096Taxes  other
    
    
    571,718
    
    
    
    552,782
    
    
    
    255,598Commissions
    
    
    771,062
    
    
    
    649,636
    
    
    
    633,742Other
    
    
    2,504,345
    
    
    
    2,025,079
    
    
    
    1,391,248Total current liabilities
    
    
    22,554,371
    
    
    
    21,647,050
    
    
    
    27,434,665LONG TERM DEBT  less current maturities
    
    
    122,438,442
    
    
    
    103,203,107
    
    
    
    120,040,154DEFERRED INCOME TAXES
    
    
    17,009,025
    
    
    
    17,009,025
    
    
    
    13,477,939DEFERRED LIABILITIES
    
    
    335,534
    
    
    
    368,580
    
    
    
    379,144TOTAL LIABILITIES
    
    
    162,337,372
    
    
    
    142,227,762
    
    
    
    161,331,902COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, no par value;25,000,000 shares authorized; issued and
outstandingSeptember 30, 2007  5,488,293;
December 31, 2006  5,417,198;
September 30, 2006  5,405,098
    
    
    53,897,100
    
    
    
    53,238,841
    
    
    
    52,723,651Accumulated other comprehensive loss
    
    
    (916,463
    )
    
    
    (993,182
    )
    
    
    Retained earnings
    
    
    52,410,334
    
    
    
    51,882,391
    
    
    
    51,960,266Total shareholders equity
    
    
    105,390,971
    
    
    
    104,128,050
    
    
    
    104,683,917TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    267,728,343
    
    
    $
    246,355,812
    
    
    $
    266,015,819
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ROCKY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NET SALES
    
    $
    82,308,547
    
    
    $
    78,114,725
    
    
    $
    202,763,235
    
    
    $
    192,937,394COST OF GOODS SOLD
    
    
    53,030,023
    
    
    
    45,998,535
    
    
    
    123,477,571
    
    
    
    111,831,955GROSS MARGIN
    
    
    29,278,524
    
    
    
    32,116,190
    
    
    
    79,285,664
    
    
    
    81,105,439SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    25,108,505
    
    
    
    22,606,038
    
    
    
    70,222,025
    
    
    
    65,166,515INCOME FROM OPERATIONS
    
    
    4,170,019
    
    
    
    9,510,152
    
    
    
    9,063,639
    
    
    
    15,938,924OTHER INCOME AND (EXPENSES):Interest expense, net
    
    
    (2,943,139
    )
    
    
    (2,883,656
    )
    
    
    (8,786,060
    )
    
    
    (8,295,285
    )Other  net
    
    
    131,365
    
    
    
    73,056
    
    
    
    95,364
    
    
    
    131,518Total other  net
    
    
    (2,811,774
    )
    
    
    (2,810,600
    )
    
    
    (8,690,696
    )
    
    
    (8,163,767
    )INCOME BEFORE INCOME TAXES
    
    
    1,358,245
    
    
    
    6,699,552
    
    
    
    372,943
    
    
    
    7,775,157INCOME TAX (BENEFIT) EXPENSE
    
    
    209,000
    
    
    
    2,480,000
    
    
    
    (155,000
    )
    
    
    2,878,000NET INCOME
    
    $
    1,149,245
    
    
    $
    4,219,552
    
    
    $
    527,943
    
    
    $
    4,897,157NET INCOME PER SHAREBasic
    
    $
    0.21
    
    
    $
    0.78
    
    
    $
    0.10
    
    
    $
    0.91Diluted
    
    $
    0.21
    
    
    $
    0.76
    
    
    $
    0.09
    
    
    $
    0.88WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBasic
    
    
    5,484,923
    
    
    
    5,400,647
    
    
    
    5,472,233
    
    
    
    5,386,254Diluted
    
    
    5,594,707
    
    
    
    5,553,028
    
    
    
    5,590,879
    
    
    
    5,588,616
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ROCKY BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months Ended September 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    527,943
    
    
    $
    4,897,157Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    4,226,093
    
    
    
    3,894,797Deferred compensation and other
    
    
    3,371
    
    
    
    329,510Deferred debt financing costs
    
    
    811,582
    
    
    
    382,144Loss (gain) on disposal of fixed assets
    
    
    29,070
    
    
    
    (592,027
    )Stock compensation expense
    
    
    285,984
    
    
    
    352,061Change in assets and liabilitiesReceivables
    
    
    (15,925,622
    )
    
    
    (17,840,167
    )Inventories
    
    
    (7,133,002
    )
    
    
    (12,323,583
    )Other current assets
    
    
    976,434
    
    
    
    513,310Other assets
    
    
    795,282
    
    
    
    626,333Accounts payable
    
    
    5,591,785
    
    
    
    3,568,959Accrued and other liabilities
    
    
    2,525,818
    
    
    
    (1,914,759
    )Net cash used in operating activities
    
    
    (7,285,262
    )
    
    
    (18,106,265
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (4,957,897
    )
    
    
    (4,631,428
    )Investment in trademarks and patents
    
    
    (66,488
    )
    
    
    (80,092
    )Proceeds from sale of fixed assets
    
    
    77,037
    
    
    
    1,855,583Net cash used in investing activities
    
    
    (4,947,348
    )
    
    
    (2,855,937
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from revolving credit facility
    
    
    206,281,446
    
    
    
    203,591,775Repayments of revolving credit facility
    
    
    (201,297,047
    )
    
    
    (173,426,868
    )Proceeds from long-term debt
    
    
    40,000,000
    
    
    
    15,000,000Repayments of long-term debt
    
    
    (32,719,514
    )
    
    
    (23,214,985
    )Debt financing costs
    
    
    (1,428,530
    )
    
    
    (610,000
    )Proceeds from exercise of stock options
    
    
    372,275
    
    
    
    341,577Net cash provided by financing activities
    
    
    11,208,630
    
    
    
    21,681,499(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,023,980
    )
    
    
    719,297CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    3,731,253
    
    
    
    1,608,680CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    2,707,273
    
    
    $
    2,327,977
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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, 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)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2007Net income
    
    $
    1,149,245
    
    
    $
    527,943Other comprehensive income:Amortization of unrecognized
transition obligation and service cost
    
    
    25,573
    
    
    
    76,719Total comprehensive income
    
    $
    1,174,818
    
    
    $
    604,662
 For the three-month and nine-month periods ended September 30, 2006, net income was equal
to comprehensive income.
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2.
    
    INVENTORIESInventories are comprised of the following:
 September 30,
    
    
    
    
    
    September 30,2007
    
    
    December 31,
    
    
    2006(Unaudited)
    
    
    2006
    
    
    (Unaudited)Raw materials
    
    $
    8,222,483
    
    
    $
    6,564,731
    
    
    $
    7,448,509Work-in-process
    
    
    261,295
    
    
    
    249,644
    
    
    
    286,903Finished goods
    
    
    76,798,200
    
    
    
    71,518,898
    
    
    
    80,589,267Reserve for obsolescence or
lower of cost or market
    
    
    (200,000
    )
    
    
    (384,297
    )
    
    
    (614,364
    )Total
    
    $
    85,081,978
    
    
    $
    77,948,976
    
    
    $
    87,710,315
 Included in raw materials, at December 31, 2006 and September 30, 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 and finalized the ultimate
settlement of the contract in June 2007. As a result of this settlement and other
third-party sales, the value of the raw material inventory was realized. In addition, the
settlement provided for a reimbursement of expenses incurred in prior periods. This
reimbursement is recognized as a reduction of cost of goods sold of approximately $0.7
million and $0.5 million in the first and second quarters of 2007, respectively.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 30,2007
    
    
    2006Interest
    
    $
    5,970,000
    
    
    $
    7,375,000Federal, state and local income taxes
    
    $
    (991,000
    )
    
    $
    1,711,000Fixed asset purchases in accounts payable
    
    $
    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 months and nine months ended September 30, 2007 and 2006 is as
follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Weighted average
shares outstanding
    
    
    5,484,923
    
    
    
    5,400,647
    
    
    
    5,472,233
    
    
    
    5,386,254Diluted stock options
    
    
    109,784
    
    
    
    152,381
    
    
    
    118,646
    
    
    
    202,362Diluted weighted average
shares outstanding
    
    
    5,594,707
    
    
    
    5,553,028
    
    
    
    5,590,879
    
    
    
    5,588,616Anti-diluted weighted average
shares outstanding
    
    
    270,707
    
    
    
    257,375
    
    
    
    270,707
    
    
    
    186,267
 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),
which 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. The adoption of EITF
06-3 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 ending after December
15, 2008. We utilize a measurement date of September 30th and will be required to change
that measurement date 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 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 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 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 an estimated effective tax rate of 37% for the three-month
and nine-month periods ended September 30, 2007 and 2006. 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, 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
 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
    
    
    CarryingSeptember 30, 2006 (unaudited)
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks:Wholesale
    
    $
    28,933,009
    
    
    
    
    
    
    $
    28,933,009Retail
    
    
    6,900,000
    
    
    
    
    
    
    
    6,900,000Patents
    
    
    2,268,828
    
    
    $
    781,302
    
    
    
    1,487,526Customer relationships
    
    
    1,000,000
    
    
    
    350,000
    
    
    
    650,000Total Identified Intangibles
    
    $
    39,101,837
    
    
    $
    1,131,302
    
    
    $
    37,970,535
 Amortization expense for intangible assets was $166,108 and $143,600 for the three months ended September
30, 2007 and 2006, respectively and $497,825 and $430,385 for the nine months ended September 30, 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 for the years ended December 31,:
 2008
    
    $
    664,5402009
    
    
    664,5352010
    
    
    124,4522011
    
    
    123,0722012
    
    
    123,072
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##### Table of Contents



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 September 30, 2007, we were authorized to issue
approximately 484,000 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, 2007 through
September 30, 2007:
 WeightedAverageExerciseShares
    
    
    PriceOptions outstanding at January 1, 2007
    
    
    536,176
    
    
    $
    14.33Issued
    
    
    15,000
    
    
    
    14.40Exercised
    
    
    (63,500
    )
    
    
    5.86Forfeited
    
    
    (11,375
    )
    
    
    21.41Options outstanding at September 30, 2007
    
    
    476,301
    
    
    $
    15.24Options exercisable at:January 1, 2007
    
    
    443,426
    
    
    $
    13.39September 30, 2007
    
    
    425,739
    
    
    $
    14.85Unvested options at January 1, 2007
    
    
    92,750
    
    
    $
    18.81Granted
    
    
    15,000
    
    
    
    14.40Vested
    
    
    (45,792
    )
    
    
    17.01Forfeited
    
    
    (11,375
    )
    
    
    21.41Unvested options at September 30, 2007
    
    
    50,583
    
    
    $
    18.55
 During the nine-month period ended September 30, 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 of the shares on the grant date. The
shares are fully vested but cannot be sold for one year. We also issued 15,000 options with
a grant date fair value of $7.82 per share.
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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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    26,298
    
    
    $
    18,925
    
    
    $
    78,895
    
    
    $
    254,245Interest
    
    
    139,507
    
    
    
    97,768
    
    
    
    418,520
    
    
    
    324,468Expected return on assets
    
    
    (179,239
    )
    
    
    (148,558
    )
    
    
    (537,717
    )
    
    
    (494,442
    )Amortization of unrecognized
transition obligation
    
    
    2,691
    
    
    
    2,018
    
    
    
    8,073
    
    
    
    8,113Amortization of unrecognized
prior service cost
    
    
    22,882
    
    
    
    16,755
    
    
    
    68,646
    
    
    
    67,358Curtailment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    393,787Net pension cost
    
    $
    12,139
    
    
    $
    (13,092
    )
    
    $
    36,417
    
    
    $
    553,529
 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 plans were as follows:
 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)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NET SALES:Wholesale
    
    $
    64,106,769
    
    
    $
    63,363,200
    
    
    $
    150,574,407
    
    
    $
    147,063,730Retail
    
    
    18,201,778
    
    
    
    14,563,625
    
    
    
    51,751,898
    
    
    
    44,787,799Military
    
    
    
    
    
    
    187,900
    
    
    
    436,930
    
    
    
    1,088,865Total Net Sales
    
    $
    82,308,547
    
    
    $
    78,114,725
    
    
    $
    202,763,235
    
    
    $
    192,940,394GROSS MARGIN:Wholesale
    
    $
    20,036,008
    
    
    $
    24,413,169
    
    
    $
    51,316,794
    
    
    $
    57,034,411Retail
    
    
    9,242,516
    
    
    
    7,671,123
    
    
    
    26,663,477
    
    
    
    23,907,141Military
    
    
    
    
    
    
    31,898
    
    
    
    1,305,393
    *
    
    
    163,887Total Gross Margin
    
    $
    29,278,524
    
    
    $
    32,116,190
    
    
    $
    79,285,664
    
    
    $
    81,105,439
 
 *
    
    The gross margin for the nine-month period ended September 30, 2007 includes a
reduction of cost of goods sold from the reimbursement of contract related expenses
incurred in prior periods of $1.2 million. 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.
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Interest expense for the second quarters of 2007 and 2006 includes charges of approximately
$0.8 million and $0.4 million, respectively, which represent the accelerated amortization of
deferred financing costs related to the early refinancing of its loan agreements.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, 2007, 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 30,2007
    
    2006
    
    2007
    
    2006Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost Of Goods Sold
    
    
    64.4
    %
    
    
    58.9
    %
    
    
    60.9
    %
    
    
    58.0
    %Gross Margin
    
    
    35.6
    %
    
    
    41.1
    %
    
    
    39.1
    %
    
    
    42.0
    %Selling, General and
Administrative Expenses
    
    
    30.5
    %
    
    
    28.9
    %
    
    
    34.6
    %
    
    
    33.8
    %Income From Operations
    
    
    5.1
    %
    
    
    12.2
    %
    
    
    4.5
    %
    
    
    8.2
    %
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Net sales.
 Gross margin.
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SG&A expenses.
 Interest expense.
 Income taxes.
 Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Net sales.
 Gross margin.
 SG&A expenses.
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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
  20




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Intangible assets
  Pension benefits
   Income taxes
  21




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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
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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.
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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. 25




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SIGNATURE
  Rocky Brands, Inc.Date: October 26, 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. 26