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 March 31, 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.  YESxNO ̈
  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 o     NO
o
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):
 
 Large
accelerated filer  ̈       Accelerated
filer  ̈       Non-accelerated
filer  ̈       Smaller
reporting company x
 (Do not check if a smaller reporting
company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES  ̈    
NO x
 
 As of
May
1, 2009, 5,547,215
shares of Rocky Brands, Inc. common stock, no par value, were
outstanding.
  
  FORM
10-Q
 
 ROCKY
BRANDS, INC.
 
 TABLE
OF CONTENTS
 
 PAGE
                            NUMBERPART
      I.     FINANCIAL INFORMATIONItem
      1.
                          Financial
      StatementsCondensed
      Consolidated Balance Sheets March 31, 2009 and 2008 (Unaudited), and
      December 31, 2008
                          
                          3Condensed
      Consolidated Statements of Operations for the Three Months Ended March
      31, 2009 and 2008 (Unaudited)
                          
                          4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended March
      31, 2009 and 2008 (Unaudited)
                          
                          5Notes
      to Interim Unaudited Condensed Consolidated Financial
      Statements
                          
                          6
      –15Item
      2.
                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          16
      – 20Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          21Item
      4.
                          Controls
      and Procedures
                          
                          21PART
      II.    OTHER INFORMATIONItem
      1.
                          Legal
      Proceedings
                          
                          22Item
      1A.
                          Risk
      Factors
                          
                          22Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          22Item
      3.
                          Defaults
      Upon Senior Securities
                          
                          22Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          
                          22Item
      5.
                          Other
      Information
                          
                          22Item
      6.
                          Exhibits
                          
                          22SIGNATURE
                          
                          23
  2
  PART
I - FINANCIAL INFORMATION
 ITEM
1 - FINANCIAL STATEMENTS
 
 ROCKY
BRANDS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 March 31, 2009
                                            
                                            
                                            December 31, 2008
                                            
                                            
                                            March 31, 2008(Unaudited)
                                            
                                            
                                            
                                            
                                            
                                            (Unaudited)ASSETS:CURRENT
      ASSETS:Cash
      and cash equivalents
                                            
                                            $
                                            3,321,903
                                            
                                            
                                            $
                                            4,311,313
                                            
                                            
                                            $
                                            4,407,629Trade
      receivables – net
                                            
                                            
                                            47,488,146
                                            
                                            
                                            
                                            60,133,493
                                            
                                            
                                            
                                            56,189,187Other
      receivables
                                            
                                            
                                            1,806,231
                                            
                                            
                                            
                                            1,394,235
                                            
                                            
                                            
                                            947,296Inventories
                                            
                                            
                                            78,432,082
                                            
                                            
                                            
                                            70,302,174
                                            
                                            
                                            
                                            79,841,429Deferred
      income taxes
                                            
                                            
                                            2,167,966
                                            
                                            
                                            
                                            2,167,966
                                            
                                            
                                            
                                            1,952,536Income
      tax receivable
                                            
                                            
                                            1,440,697
                                            
                                            
                                            
                                            75,481
                                            
                                            
                                            
                                            607,910Prepaid
      expenses
                                            
                                            
                                            2,137,625
                                            
                                            
                                            
                                            1,455,158
                                            
                                            
                                            
                                            2,549,752Total
      current assets
                                            
                                            
                                            136,794,650
                                            
                                            
                                            
                                            139,839,820
                                            
                                            
                                            
                                            146,495,739FIXED
      ASSETS – net
                                            
                                            
                                            24,316,954
                                            
                                            
                                            
                                            23,549,319
                                            
                                            
                                            
                                            23,943,273IDENTIFIED
      INTANGIBLES
                                            
                                            
                                            30,883,011
                                            
                                            
                                            
                                            31,020,478
                                            
                                            
                                            
                                            36,361,267OTHER
      ASSETS
                                            
                                            
                                            4,005,577
                                            
                                            
                                            
                                            2,452,501
                                            
                                            
                                            
                                            2,599,981TOTAL
      ASSETS
                                            
                                            $
                                            196,000,192
                                            
                                            
                                            $
                                            196,862,118
                                            
                                            
                                            $
                                            209,400,260LIABILITIES
      AND SHAREHOLDERS' EQUITY:CURRENT
      LIABILITIES:Accounts
      payable
                                            
                                            $
                                            10,443,348
                                            
                                            
                                            $
                                            9,869,948
                                            
                                            
                                            $
                                            12,801,456Current
      maturities – long term debt
                                            
                                            
                                            488,271
                                            
                                            
                                            
                                            480,723
                                            
                                            
                                            
                                            331,411Accrued
      expenses:Salaries
      and wages
                                            
                                            
                                            805,303
                                            
                                            
                                            
                                            480,500
                                            
                                            
                                            
                                            575,071Co-op
      advertising
                                            
                                            
                                            411,053
                                            
                                            
                                            
                                            636,408
                                            
                                            
                                            
                                            229,706Interest
                                            
                                            
                                            1,598,394
                                            
                                            
                                            
                                            451,434
                                            
                                            
                                            
                                            1,636,196Taxes
      - other
                                            
                                            
                                            508,430
                                            
                                            
                                            
                                            641,670
                                            
                                            
                                            
                                            807,557Commissions
                                            
                                            
                                            366,481
                                            
                                            
                                            
                                            387,242
                                            
                                            
                                            
                                            454,462Other
                                            
                                            
                                            2,195,492
                                            
                                            
                                            
                                            2,306,105
                                            
                                            
                                            
                                            2,964,539Total
      current liabilities
                                            
                                            
                                            16,816,772
                                            
                                            
                                            
                                            15,254,030
                                            
                                            
                                            
                                            19,800,398LONG
      TERM DEBT – less current maturities
                                            
                                            
                                            85,710,049
                                            
                                            
                                            
                                            87,258,939
                                            
                                            
                                            
                                            93,768,649DEFERRED
      INCOME TAXES
                                            
                                            
                                            9,438,921
                                            
                                            
                                            
                                            9,438,921
                                            
                                            
                                            
                                            12,951,828DEFERRED
      PENSION LIABILITY
                                            
                                            
                                            3,802,236
                                            
                                            
                                            
                                            3,743,552
                                            
                                            
                                            
                                            970,507DEFERRED
      LIABILITIES
                                            
                                            
                                            193,518
                                            
                                            
                                            
                                            216,920
                                            
                                            
                                            
                                            246,699TOTAL
      LIABILITIES
                                            
                                            
                                            115,961,496
                                            
                                            
                                            
                                            115,912,362
                                            
                                            
                                            
                                            127,738,081COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Common
      stock, no par value;25,000,000
      shares authorized; issued and outstanding March 31, 2009 - 5,547,215;
      December 31, 2008 - 5,516,898 and March 31, 2008 -
      5,508,278
                                            
                                            
                                            54,380,256
                                            
                                            
                                            
                                            54,250,064
                                            
                                            
                                            
                                            54,144,545Accumulated
      other comprehensive loss
                                            
                                            
                                            (3,142,331
                                            )
                                            
                                            
                                            (3,222,215
                                            )
                                            
                                            
                                            (1,538,049
                                            )Retained
      earnings
                                            
                                            
                                            28,800,771
                                            
                                            
                                            
                                            29,921,907
                                            
                                            
                                            
                                            29,055,683Total
      shareholders' equity
                                            
                                            
                                            80,038,696
                                            
                                            
                                            
                                            80,949,756
                                            
                                            
                                            
                                            81,662,179TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                            
                                            $
                                            196,000,192
                                            
                                            
                                            $
                                            196,862,118
                                            
                                            
                                            $
                                            209,400,260
 
 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
                    March 31,2009
                  
                  
                  2008NET
      SALES
                  
                  $
                  50,064,561
                  
                  
                  $
                  60,484,716COST
      OF GOODS SOLD
                  
                  
                  29,972,073
                  
                  
                  
                  34,535,051GROSS
      MARGIN
                  
                  
                  20,092,488
                  
                  
                  
                  25,949,665SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  19,946,128
                  
                  
                  
                  23,061,487INCOME
      FROM OPERATIONS
                  
                  
                  146,360
                  
                  
                  
                  2,888,178OTHER
      INCOME AND (EXPENSES):Interest
      expense, net
                  
                  
                  (1,773,930
                  )
                  
                  
                  (2,406,671
                  )Other
      – net
                  
                  
                  (124,566
                  )
                  
                  
                  (18,592
                  )Total
      other - net
                  
                  
                  (1,898,496
                  )
                  
                  
                  (2,425,263
                  )(LOSS)
      INCOME BEFORE INCOME TAXES
                  
                  
                  (1,752,136
                  )
                  
                  
                  462,915INCOME
      TAX (BENEFIT) EXPENSE
                  
                  
                  (631,000
                  )
                  
                  
                  162,000NET
      (LOSS) INCOME
                  
                  $
                  (1,121,136
                  )
                  
                  $
                  300,915NET
      (LOSS) INCOME PER SHAREBasic
                  
                  $
                  (0.20
                  )
                  
                  $
                  0.05Diluted
                  
                  $
                  (0.20
                  )
                  
                  $
                  0.05WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGBasic
                  
                  
                  5,546,541
                  
                  
                  
                  5,507,839Diluted
                  
                  
                  5,546,541
                  
                  
                  
                  5,526,479
 
 See notes
to the interim unaudited condensed consolidated financial
statements.
  4
  ROCKY
BRANDS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 Three Months Ended
                            March 31,2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                          
                          $
                          (1,121,136
                          )
                          
                          $
                          300,915Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                          
                          
                          1,583,101
                          
                          
                          
                          1,495,827Deferred
      compensation and other
                          
                          
                          115,166
                          
                          
                          
                          50,241Loss
      (gain) on disposal of fixed assets
                          
                          
                          73
                          
                          
                          
                          (38,334
                          )Stock
      compensation expense
                          
                          
                          130,192
                          
                          
                          
                          146,584Change
      in assets and liabilitiesReceivables
                          
                          
                          12,233,351
                          
                          
                          
                          9,469,316Inventories
                          
                          
                          (8,129,908
                          )
                          
                          
                          (4,437,765
                          )Other
      current assets
                          
                          
                          (2,047,683
                          )
                          
                          
                          (210,797
                          )Other
      assets
                          
                          
                          (40,576
                          )
                          
                          
                          (315,942
                          )Accounts
      payable
                          
                          
                          640,846
                          
                          
                          
                          914,624Accrued
      and other liabilities
                          
                          
                          981,794
                          
                          
                          
                          730,411Net
      cash provided by operating activities
                          
                          
                          4,345,220
                          
                          
                          
                          8,105,080CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
                          
                          
                          (2,277,623
                          )
                          
                          
                          (810,887
                          )Investment
      in trademarks and patents
                          
                          
                          (7,804
                          )
                          
                          
                          (17,937
                          )Proceeds
      from sale of fixed assets
                          
                          
                          4,639
                          
                          
                          
                          38,461Net
      cash used in investing activities
                          
                          
                          (2,280,788
                          )
                          
                          
                          (790,363
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from revolving credit facility
                          
                          
                          61,113,849
                          
                          
                          
                          62,497,654Repayments
      of revolving credit facility
                          
                          
                          (62,537,792
                          )
                          
                          
                          (71,863,957
                          )Repayments
      of long-term debt
                          
                          
                          (117,399
                          )
                          
                          
                          (78,669
                          )Debt
      financing costs
                          
                          
                          (1,512,500
                          )
                          
                          
                          -Net
      cash used in financing activities
                          
                          
                          (3,053,842
                          )
                          
                          
                          (9,444,972
                          )DECREASE
      IN CASH AND CASH EQUIVALENTS
                          
                          
                          (989,410
                          )
                          
                          
                          (2,130,255
                          )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                          
                          
                          4,311,313
                          
                          
                          
                          6,537,884CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                          
                          $
                          3,321,903
                          
                          
                          $
                          4,407,629
 
 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 PERIOD ENDED MARCH 31, 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 period ended March 31, 2009 and 2008 are not necessarily
indicative of the results to be expected for the whole
year.  Accordingly, these condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2008.
 
 The
components of total comprehensive (loss) income are shown below:
  (Unaudited)Three Months EndedMarch 31,2009
              
              
              2008Net
      (loss) income
              
              $
              (1,121,136
              )
              
              $
              300,915Other
      comprehensive income:Amortization
      of unrecognized transition obligation, service cost and net
      loss
              
              
              79,884
              
              
              
              40,032Total
      comprehensive (loss) income
              
              $
              (1,041,252
              )
              
              $
              340,947
 
 2.           TRADE
RECEIVABLES
 
 Trade
receivables are presented net of the related allowance for uncollectible
accounts of approximately $2,335,000, $2,026,000 and $1,363,000 at March 31,
2009, December 31, 2008 and March 31, 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:
  March 31,
                              
                              
                              December 31,
                              
                              
                              March 31,2009
                              
                              
                              2008
                              
                              
                              2008(Unaudited)
                              
                              
                              
                              
                              
                              (Unaudited)Raw
      materials
                              
                              $
                              9,034,852
                              
                              
                              $
                              7,311,837
                              
                              
                              $
                              7,462,809Work-in-process
                              
                              
                              706,941
                              
                              
                              
                              351,951
                              
                              
                              
                              741,731Finished
      goods
                              
                              
                              68,769,089
                              
                              
                              
                              62,676,986
                              
                              
                              
                              71,781,889Reserve
      for obsolescence or lower of cost or market
                              
                              
                              (78,800
                              )
                              
                              
                              (38,600
                              )
                              
                              
                              (145,000
                              )Total
                              
                              $
                              78,432,082
                              
                              
                              $
                              70,302,174
                              
                              
                              $
                              79,841,429
 
 4.           SUPPLEMENTAL
CASH FLOW INFORMATION
 
 Supplemental
cash flow information, including cash paid for interest and Federal, state and
local income taxes, net of refunds, was as follows:
 
 (Unaudited)Three Months Ended
                        March 31,2009
                      
                      
                      2008Interest
                      
                      $
                      457,156
                      
                      
                      $
                      1,117,351Federal,
      state and local income taxes
                      
                      $
                      742,471
                      
                      
                      $
                      49,965Fixed
      asset purchases in accounts payable
                      
                      $
                      45,296
                      
                      
                      $
                      34,096
 
  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 period ended March 31, 2009 and 2008 is as
follows:
 
 (Unaudited)Three Months Ended
                            March 31,2009
                          
                          
                          2008Weighted
      average shares outstanding
                          
                          
                          5,546,541
                          
                          
                          
                          5,507,839Dilutive
      stock options
                          
                          
                          -
                          
                          
                          
                          18,640Dilutive
      weighted average shares outstanding
                          
                          
                          5,546,541
                          
                          
                          
                          5,526,479Anti-dilutive
      stock options/weighted average shares outstanding
                          
                          
                          416,690
                          
                          
                          
                          290,464
 
 6.           RECENT
FINANCIAL ACCOUNTING STANDARDS
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. In February 2008, the FASB
issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No.
157” (“FSP FAS 157-2”).  FSP FAS 157-2 defers implementation of SFAS
157 for certain non-financial assets and non-financial
liabilities.  SFAS 157 is effective for financial assets and
liabilities in fiscal years beginning after November 15, 2007 and for
non-financial assets and liabilities in fiscal years beginning after March 15,
2008. We have evaluated the impact of the provisions applicable to our financial
assets and liabilities and have determined that there will not be a material
impact on our consolidated financial statements.  The aspects that
have been deferred by FSP FAS 157-2 pertaining to non-financial assets and
non-financial liabilities will be effective for us beginning January 1,
2009.  The adoption of FSP FAS 157-2 in 2009 did not have a material
effect on our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”).  SFAS 141R replaces SFAS 141, “Business
Combinations.”  The objective of SFAS 141R is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects.  SFAS 141R establishes principles and
requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase
option; and c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first reporting period beginning on or after December 15, 2008.  Early
adoption of SFAS 141R is prohibited.  The adoption of SFAS 141R in
2009 did not have a material effect on our consolidated financial
statements.
  8
  In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”).   The objective of SFAS 160 is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing certain
accounting and reporting standards that address:  the ownership
interests in subsidiaries held by parties other than the parent; the amount of
net income attributable to the parent and non-controlling interest; changes in
the parent’s ownership interest; and any retained non-controlling equity
investment in a deconsolidated subsidiary.  SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  Early adoption of SFAS 160 is
prohibited.  The adoption of SFAS 160 in 2009 did not have a material
effect on our consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB No. 133” (“SFAS
161”).  SFAS 161 intends to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance and cash flows.  SFAS 161 also
requires disclosure about an entity’s strategy and objectives for using
derivatives, the fair values of derivative instruments and their related gains
and losses.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption.  The
adoption of SFAS 161R in 2009 did not have a material effect on our consolidated
financial statements.
 
 In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employer's Disclosures about
Postretirement Benefit Plan Assets” ("FSP FAS 132(R)-1").  FSP FAS
132(R)-1 requires enhanced disclosures about plan assets currently required by
SFAS No. 132, as revised, Employer's Disclosures about Pensions and Other
Postretirement Benefits. FSP FAS 132(R)-1 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. FSP FAS
132(R)-1 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 FSP FAS 132(R)-1 on our consolidated financial
statement disclosures.
 
 In April
2009, the FASB issued FASB Staff Position FAS-157-4, “Determining Whether a
Market Is Not Active and a Transaction Is Not Distressed” (“FSP FAS
157-4”).  FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS
157.  FSP FAS 157-4 provides additional authoritative guidance in
determining whether a market is active or inactive and whether a transaction is
distressed.  FSP FAS 157-4 is applicable to all assets and liabilities
(i.e. financial and nonfinancial) and will require enhanced
disclosures.  FSP FAS 157-4 is required to be adopted no later than
the periods ending after June 15, 2009.  We are currently assessing
the potential impact of the adoption of FSP FAS 157-4 on our consolidated
financial statement disclosures.
  9
  In April
2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”) and
(“FSP FAS 124-2”).  FSP FAS 115-2 and FSP FAS 124-2 provide 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.  FSP FAS 115-2 and FSP FAS 124-2 are required to be
adopted no later than the periods ending after June 15, 2009.  We are
currently assessing the potential impact of the adoption of FSP FAS 115-2 on our
consolidated financial statement disclosures.
 
 In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”) and
(“APB 28-1”).  FSP FAS 107-1 amends FASB Statement No. 107,
“Disclosures about Fair Value of Financial Instruments”, to require disclosures
about fair value of financial instruments in interim as well as in annual
financial statements and amends APB Opinion No. 28 “Interim Financial
Reporting”, to require those disclosures in interim financial
statements.    FSP FAS 107-1 and APB 28-1 are required to be
adopted no later than the periods ending after June 15, 2009.  We are
currently assessing the potential impact of the adoption of FSP FAS 107-1 on our
consolidated financial statement disclosures.
  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 2007 for Puerto Rico.  We do not believe there
will be any material changes in our unrecognized tax positions over the next 12
months.
 
 Our
policy is to recognize interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. As of the date of adoption of FIN
48, accrued interest or penalties were not material, and no such expenses were
recognized during the quarter.
 
 We
provided for income taxes at estimated effective tax rates of 36% and 35% for
the three-month period ended March 31, 2009 and 2008,
respectively.
  10
  8.           INTANGIBLE
ASSETS
 
 A
schedule of intangible assets is as follows:
 Gross
                                  
                                  
                                  Accumulated
                                  
                                  
                                  CarryingMarch 31, 2009 (unaudited)
                                  
                                  Amount
                                  
                                  
                                  Amortization
                                  
                                  
                                  AmountTrademarks:Wholesale
                                  
                                  $
                                  27,243,578
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  27,243,578Retail
                                  
                                  
                                  2,900,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,900,000Patents
                                  
                                  
                                  2,317,345
                                  
                                  
                                  
                                  1,727,912
                                  
                                  
                                  
                                  589,433Customer
      relationships
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  850,000
                                  
                                  
                                  
                                  150,000Total
      Identified Intangibles
                                  
                                  $
                                  33,460,923
                                  
                                  
                                  $
                                  2,577,912
                                  
                                  
                                  $
                                  30,883,011Gross
                                  
                                  
                                  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
                                  
                                  
                                  $
                                  31,020,478Gross
                                  
                                  
                                  Accumulated
                                  
                                  
                                  CarryingMarch 31, 2008 (unaudited)
                                  
                                  Amount
                                  
                                  
                                  Amortization
                                  
                                  
                                  AmountTrademarks:Wholesale
                                  
                                  $
                                  28,278,596
                                  
                                  
                                  $
                                  107,814
                                  
                                  
                                  $
                                  28,170,782Retail
                                  
                                  
                                  6,900,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,900,000Patents
                                  
                                  
                                  2,287,988
                                  
                                  
                                  
                                  1,347,503
                                  
                                  
                                  
                                  940,485Customer
      relationships
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  650,000
                                  
                                  
                                  
                                  350,000Total
      Identified Intangibles
                                  
                                  $
                                  38,466,584
                                  
                                  
                                  $
                                  2,105,317
                                  
                                  
                                  $
                                  36,361,267
 
 Amortization
expense for intangible assets was $145,271 and $166,361 for the three months
ended March 31, 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
                    
                    $
                    41,0692011
                    
                    
                    39,6892012
                    
                    
                    39,6892013
                    
                    
                    39,6892014
                    
                    
                    39,689
  11
  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 March
31, 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 March 31, 2009:
 
 Shares
                                              
                                              
                                              Weighted
                                                Average
                                                Exercise
                                                PriceOptions
      outstanding at January 1, 2009
                                              
                                              
                                              435,801
                                              
                                              
                                              $
                                              15.88Issued
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Exercised
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Forfeited
                                              
                                              
                                              (24,500
                                              )
                                              
                                              $
                                              7.13Options
      outstanding at March 31, 2009
                                              
                                              
                                              411,301
                                              
                                              
                                              $
                                              16.40Options
      exercisable at:January
      1, 2009
                                              
                                              
                                              412,051
                                              
                                              
                                              $
                                              15.80March
      31, 2009
                                              
                                              
                                              400,051
                                              
                                              
                                              $
                                              16.45Unvested
      options at January 1, 2009
                                              
                                              
                                              23,750
                                              
                                              
                                              $
                                              17.27Granted
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Vested
                                              
                                              
                                              (5,000
                                              )
                                              
                                              $
                                              29.22Forfeited
                                              
                                              
                                              (7,500
                                              )
                                              
                                              $
                                              13.61Unvested
      options at March 31, 2009
                                              
                                              
                                              11,250
                                              
                                              
                                              $
                                              14.40
 
 During
the three-month period ended March 31, 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.
  12
  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)
                        Three
      Months Ended
                        March
      31,2009
                      
                      
                      2008Service
      cost
                      
                      $
                      28,843
                      
                      
                      $
                      26,963Interest
                      
                      
                      151,454
                      
                      
                      
                      143,062Expected
      return on assets
                      
                      
                      (121,614
                      )
                      
                      
                      (171,313
                      )Amortization
      of unrecognized net gain or loss
                      
                      
                      61,786
                      
                      
                      
                      17,326Amortization
      of unrecognized transition obligation
                      
                      
                      18,098
                      
                      
                      
                      21,361Amortization
      of unrecognized prior service cost
                      
                      
                      -
                      
                      
                      
                      1,345Net
      pension cost
                      
                      $
                      138,567
                      
                      
                      $
                      38,744
 
 
 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.
  13
  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)Three
      Months EndedMarch
      31,2009
                                      
                                      
                                      2008NET
      SALES:Wholesale
                                      
                                      $
                                      36,029,908
                                      
                                      
                                      $
                                      39,736,327Retail
                                      
                                      
                                      13,712,294
                                      
                                      
                                      
                                      18,905,932Military
                                      
                                      
                                      322,359
                                      
                                      
                                      
                                      1,842,457Total
      Net Sales
                                      
                                      $
                                      50,064,561
                                      
                                      
                                      $
                                      60,484,716GROSS
      MARGIN:Wholesale
                                      
                                      $
                                      13,304,288
                                      
                                      
                                      $
                                      16,274,494Retail
                                      
                                      
                                      6,766,486
                                      
                                      
                                      
                                      9,491,572Military
                                      
                                      
                                      21,714
                                      
                                      
                                      
                                      183,629Total
      Gross Margin
                                      
                                      $
                                      20,092,488
                                      
                                      
                                      $
                                      25,949,695
 
 Segment
asset information is not prepared or used to assess segment
performance.
 
 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 March 31, 2009, we were in compliance
with these restrictive covenants.
  14
  13.          FINANCIAL
INSTRUMENTS
 
 In 2008,
we adopted the provisions of SFAS 157, “Fair Value Measurements” (“SFAS 157”)
related to our financial assets and liabilities.  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:
 
 2009Carrying
                                          
                                          
                                          FairAmount
                                          
                                          
                                          ValueDebtLong-term
      debt and current maturities
                                          
                                          $
                                          86,198,320
                                          
                                          
                                          $
                                          82,239,038
 
 We
estimated the fair value of debt using market quotes and calculations based on
market rates.
 
 14.          RECLASSIFICATIONS
 
 Certain
amounts in the March 31, 2008 consolidated financial statements have been
reclassified to conform to the current period’s presentation.
  15
  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
                      March 31,2009
                    
                    
                    2008Net
      Sales
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      Of Goods Sold
                    
                    
                    59.9
                    %
                    
                    
                    57.1
                    %Gross
      Margin
                    
                    
                    40.1
                    %
                    
                    
                    42.9
                    %Selling,
      General and Administrative Expenses
                    
                    
                    39.8
                    %
                    
                    
                    38.1
                    %Income
      From Operations
                    
                    
                    0.3
                    %
                    
                    
                    4.8
                    %
 
 Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
 
 Net sales.  Net
sales for the three months ended March 31, 2009 were $50.1 million compared to
$60.5 million for the same period in 2008.  Wholesale sales for the
three months ended March 31, 2009 were $36.0 million compared to $39.7 million
for the same period in 2008.  The $3.7 million decrease in wholesale
sales was the result of decreased sales in the majority of our footwear
categories and apparel.  Retail sales for the three months ended March
31, 2009 were $13.7 million compared to $18.9 million for the same period in
2008.  The $5.2 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 to help
lower costs. Military segment sales for the three months ended March 31, 2009,
were $0.3 million, compared to $1.8 million in the same period in
2008.  Shipments in 2009 were under the $6.4 million contract issued
in July 2007.
 
 Gross
margin.  Gross margin for the three months ended March 31, 2009
was $20.1 million, or 40.1% of net sales, compared to $25.9 million, or 42.9% of
net sales, in the same period last year.  Wholesale gross margin for
the three months ended March 31, 2009 was $13.3 million, or 36.9% of net sales,
compared to $16.3 million, or 41.0% of net sales, in the same period last
year.  The 410 basis point decrease reflects a decrease in sales price
per unit for competitive reasons, as well as an increase in manufacturing costs
from our company operated facilities.  Retail gross margin for the
three months ended March 31, 2009 was $6.8 million, or 49.3% of net sales,
compared to $9.5 million, or 50.2% of net sales, for the same period in
2008.  Military gross margin for the three months ended March 31, 2009
was less than $0.1 million, or 6.7% of net sales, compared to $0.2 million or
10.0% of net sales for the same period in 2008.
  16
  SG&A
expenses.  SG&A expenses were $19.9 million, or 39.8% of
net sales, for the three months ended March 31, 2009, compared to $23.1 million,
or 38.1% of net sales for the same period in 2008.  The net change
primarily reflects decreases in compensation and benefits expenses of $1.4
million, advertising expenses of $0.7 million, professional fees of $0.3
million, shipping expenses of $0.3 million and Lehigh mobile
store expenses of $0.3 million, partially offset by a $0.3 million increase
in bad debt expense.
 
 Interest
expense.  Interest expense was $1.8 million in the three months
ended March 31, 2009, compared to $2.4 million for the same period in the prior
year.  The decrease of $0.6 million resulted from a reduction in
average borrowings combined with lower interest rates compared to the same
period last year.
 
 Other income and expenses –
net. Other expenses were $0.1 million for the three months ended March
31, 2009 compared to less than $0.1 million for the same period in the prior
year.  The increase is the result of translation losses from the
strengthening of the U.S. Dollar versus the Canadian Dollar.
 
 Income
taxes.  Income tax benefit for the three months ended March 31,
2009 was $0.6 million, compared to income tax expense of $0.2 million for the
same period a year ago.  We provided for income taxes at effective tax
rates of 36%, our 2008 actual rate, and 35% for the three months ended March 31,
2009 and 2008, respectively.
 
 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 $2.2 million for the first
three months of 2009, compared to $0.8 million for the same period in 2008.
Capital expenditures for all of 2009 are anticipated to be approximately $4.0
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.
 
 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 March 31, 2009, we had $43.3 million in borrowings
under this facility and total capacity of $59.9 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 March 31, 2009, we were in compliance with these
restrictive covenants.
  17
  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 $4.3
million for the three months ended March 31, 2009, compared to $8.1 million in
the same period of 2008.  Cash provided by operating activities for
the three months ended March 31, 2009 and 2008 was primarily impacted by a
reduction in accounts receivable which was partially offset by the seasonal
buildup of inventory.
 
 Investing
Activities.  Cash used in investing activities was $2.3 million
for the three months ended March 31, 2009, compared to $0.8 million in the same
period of 2008.  Cash used in investing activities in 2009 reflects an
investment in property, plant and equipment of $2.3 million.  Our 2009
and 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 three
months ended March 31, 2009 was $3.1 million and reflects a decrease in net
borrowings under the revolving credit facility of $1.4 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 $0.1 million.  Cash used
in financing activities for the three months ended March 31, 2008 was $9.4
million and reflects a decrease in net borrowings under the revolving credit
facility of $9.3 million and repayments on long-term debt of $0.1
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.
 
 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.
  18
  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.
 
 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 is 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.  Based upon our
review, none of our intangibles were impaired as of March 31,
2009.
  19
  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 9, “Retirement Plans,”
to the unaudited condensed consolidated financial statements for the quarterly
period ended March 31, 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.
 
 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.
  20
  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 March 31,
2009, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
  21
  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.
  22
  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:  May
      4, 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.
  23