UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


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


For the
quarterly period ended September 30, 2009


OR


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


For the
transition period from 
to ______________________





Commission
file number:  0-21026





ROCKY
BRANDS, INC.


(Exact
name of registrant as specified in its charter)





Ohio
              
              31-1364046(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)





39
E. Canal Street, Nelsonville, Ohio 45764


(Address
of Principal Executive Offices, Including Zip Code)





(740)
753-1951


(Registrant’s
Telephone Number, Including Area Code)





Not
Applicable


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  YES x NO
 ̈





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





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





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





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





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









FORM
10-Q





ROCKY
BRANDS, INC.





TABLE
OF CONTENTS


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


2


PART
I - FINANCIAL INFORMATION


ITEM
1 - FINANCIAL STATEMENTS





ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





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





See notes
to the interim unaudited condensed consolidated financial
statements.


3


ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





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





See notes
to the interim unaudited condensed consolidated financial
statements.


4


ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





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





See notes
to the interim unaudited condensed consolidated financial
statements.


5


ROCKY
BRANDS, INC.


AND
SUBSIDIARIES





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





1.
            INTERIM
      FINANCIAL REPORTING





In the
opinion of management, the accompanying interim unaudited condensed consolidated
financial statements reflect all adjustments that are necessary for a fair
presentation of the financial results.  All such adjustments reflected
in the unaudited interim condensed consolidated financial statements are
considered to be of a normal and recurring nature. The results of the operations
for the three-month and nine-month periods ended September 30, 2009 and 2008 are
not necessarily indicative of the results to be expected for the whole
year.  Accordingly, these unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in our Annual Report on Form 10-K for the
year ended December 31, 2008.





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





The
components of total comprehensive income are shown below:




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


2.
            TRADE
      RECEIVABLES





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


6


3.
            INVENTORIES





Inventories
are comprised of the following:





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





4.
            SUPPLEMENTAL
      CASH FLOW INFORMATION





Supplemental
cash flow information is as follows:





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





7


5.
            PER
      SHARE INFORMATION





Basic
earnings per share (“EPS”) is computed by dividing net income applicable to
common shareholders by the weighted average number of common shares outstanding
during each period.  The diluted earnings per share computation
includes common share equivalents, when dilutive.  There are no
adjustments to net income necessary in the calculation of basic and diluted
earnings per share.





A
reconciliation of the shares used in the basic and diluted income per common
share computation for the three-month and nine-month periods ended September 30,
2009 and 2008 is as follows:





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





6.
            RECENT
      FINANCIAL ACCOUNTING STANDARDS





Recently
adopted accounting standards





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




8




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





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





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





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




9




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





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





Accounting
standards not yet adopted





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





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





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




10




7.
            INCOME
      TAXES




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





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





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





11




8.
            INTANGIBLE
      ASSETS





A
schedule of intangible assets is as follows:





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





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





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





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





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





2010
                    
                    $
                    43,4672011
                    
                    
                    42,0872012
                    
                    
                    42,0872013
                    
                    
                    42,0872014
                    
                    
                    42,087




12




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




9.
            CAPITAL
      STOCK





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





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





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





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




13




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





10.
            RETIREMENT
      PLANS





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





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





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


14


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





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





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





11.
            SEGMENT
      INFORMATION





We have
identified three reportable segments:  Wholesale, Retail and
Military.  Wholesale includes sales of footwear and accessories to
several classifications of retailers, including sporting goods stores, outdoor
specialty stores, mail order catalogs, independent retailers, mass merchants,
retail uniform stores, and specialty safety shoe stores.  Retail
includes all sales from our stores and all sales in our Lehigh division, which
includes sales via shoemobiles to individual customers.  Military
includes sales to the U.S. Military.  The following is a summary of
segment results for the Wholesale, Retail, and Military segments.





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





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





15


12.
            LONG-TERM
      DEBT





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





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





13.
            FINANCIAL
      INSTRUMENTS





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





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





September
      30, 2009Carrying
                    
                    
                    FairAmount
                    
                    
                    ValueDebtLong-term
      debt and current maturities
                    
                    $
                    83,444,233
                    
                    
                    $
                    78,956,766





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





14.
            RECLASSIFICATIONS





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




16




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





RESULTS
OF OPERATIONS





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





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





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





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





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




17




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





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





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




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





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





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




18




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





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





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




Liquidity
and Capital Resources





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





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





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




19




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





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





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





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





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





Inflation





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




20




Critical
Accounting Policies and Estimates





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





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




Our
management believes the following critical accounting policies are most
important to the portrayal of our financial condition and results of operations
and require more significant judgments and estimates in the preparation of our
interim condensed consolidated financial statements.





Revenue
recognition





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





Accounts
receivable allowances





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





Sales
returns and allowances





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





Inventories





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




21




Intangible
assets





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





Pension
benefits





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





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





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





Income
taxes





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




22


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





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




23


ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There
have been no material changes since December 31, 2008.




ITEM
4 – CONTROLS AND PROCEDURES





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





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





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





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




24


PART
II — OTHER INFORMATION





ITEM
1 - LEGAL PROCEEDINGS





None





ITEM
1A - RISK FACTORS





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





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





None





ITEM
3 - DEFAULTS UPON SENIOR SECURITIES





None





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





None




ITEM
5 - OTHER INFORMATION





None





ITEM
6 - EXHIBITS





EXHIBIT
                
                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


SIGNATURE





Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





Rocky
      Brands, Inc.Date:  
      October 30, 2009
              /s/ James E.
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