ROCKY BRANDS, INC. (Form: 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2009

¨	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. Employer
Incorporation or Organization)		Identification No.)

39 E. Canal Street, Nelsonville, Ohio 45764

(Address of Principal Executive Offices, Including Zip Code)

(740) 753-1951

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

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

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

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting 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 October 28, 2009, 5, 554 ,465 shares of Rocky Brands, Inc. common stock, no par value, were outstanding.

FORM 10-Q

ROCKY BRANDS, INC.

TABLE OF CONTENTS

		PAGE
		NUMBER
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets September 30, 2009 and 2008 (Unaudited), and December 31, 2008	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited)	5

	Notes to Interim Unaudited Condensed Consolidated Financial Statements for the Three-Month and Nine-Month Periods Ended September 30, 2009 and 2008	6 –16

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17 – 23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 5.	Other Information	25

Item 6.	Exhibits	25

SIGNATURE		26

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ROCKY BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2009			December 31, 2008			September 30, 2008
	(Unaudited)						(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents	$	4,002,909		$	4,311,313		$	4,332,477
Trade receivables – net		58,296,661			60,133,493			72,654,591
Other receivables		1,598,829			1,394,235			1,289,396
Inventories		68,065,444			70,302,174			83,320,590
Deferred income taxes		2,173,391			2,167,966			1,978,946
Prepaid and refundable income taxes		247,011			75,481			-
Prepaid expenses		1,323,115			1,455,158			2,366,859
Total current assets		135,707,360			139,839,820			165,942,859
FIXED ASSETS – net		23,132,489			23,549,319			24,254,455
IDENTIFIED INTANGIBLES		30,627,527			31,020,478			36,044,132
OTHER ASSETS		3,304,123			2,452,501			2,154,179
TOTAL ASSETS	$	192,771,499		$	196,862,118		$	228,395,625

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable	$	7,683,778		$	9,869,948		$	14,492,182
Current maturities – long term debt		503,841			480,723			464,846
Accrued expenses:
Salaries and wages		1,161,324			480,500			1,043,421
Co-op advertising		795,147			636,408			673,703
Interest		1,648,116			451,434			1,870,687
Income taxes payable		-			-			96,666
Taxes - other		387,817			641,670			612,445
Commissions		341,903			387,242			463,735
Other		2,041,371			2,306,105			2,928,714
Total current liabilities		14,563,297			15,254,030			22,646,399
LONG TERM DEBT – less current maturities		82,940,392			87,258,939			107,115,967
DEFERRED INCOME TAXES		9,558,761			9,438,921			12,569,600
DEFERRED PENSION LIABILITY		3,919,603			3,743,552			967,930
DEFERRED LIABILITIES		197,010			216,920			202,096
TOTAL LIABILITIES		111,179,063			115,912,362			143,501,992
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized; issued and outstanding September 30, 2009 - 5,547,215; December 31, 2008 - 5,516,898 and September 30, 2008 - 5,508,398		54,387,752			54,250,064			54,193,211
Accumulated other comprehensive loss		(2,982,564	)		(3,222,215	)		(1,462,344	)
Retained earnings		30,187,248			29,921,907			32,162,766
Total shareholders' equity		81,592,436			80,949,756			84,893,633
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	192,771,499		$	196,862,118		$	228,395,625

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
NET SALES	$	66,572,437		$	72,500,603		$	167,825,613		$	193,492,740

COST OF GOODS SOLD		41,856,651			45,414,533			105,299,667			116,060,912

GROSS MARGIN		24,715,786			27,086,070			62,525,946			77,431,828

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		18,576,780			21,961,032			56,642,081			65,897,978

INCOME FROM OPERATIONS		6,139,006			5,125,038			5,883,865			11,533,850

OTHER INCOME AND (EXPENSES):
Interest expense, net		(1,955,485	)		(2,285,051	)		(5,665,905	)		(7,101,237	)
Other – net		224,442			34,254			257,899			31,385
Total other - net		(1,731,043	)		(2,250,797	)		(5,408,006	)		(7,069,852	)

INCOME BEFORE INCOME TAXES		4,407,963			2,874,241			475,859			4,463,998

INCOME TAX EXPENSE		1,626,518			500,000			210,518			1,056,000

NET INCOME	$	2,781,445		$	2,374,241		$	265,341		$	3,407,998

NET INCOME PER SHARE
Basic	$	0.50		$	0.43		$	0.05		$	0.62
Diluted	$	0.50		$	0.43		$	0.05		$	0.62

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic		5,547,215			5,508,398			5,546,993			5,508,252
Diluted		5,547,215			5,512,634			5,546,993			5,518,138

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	265,341		$	3,407,998
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		4,772,894			4,712,408
Deferred compensation and other		395,792			78,766
Deferred income taxes		114,415			(408,638	)
Loss (gain) on disposal of fixed assets		7,169			(35,739	)
Stock compensation expense		137,688			195,251
Change in assets and liabilities
Receivables		1,632,238			(7,338,188	)
Inventories		2,236,730			(7,916,926	)
Other current assets		(39,487	)		580,006
Other assets		660,878			129,860
Accounts payable		(2,140,244	)		2,136,570
Accrued and other liabilities		1,472,318			1,752,250

Net cash provided by (used in) operating activities		9,515,732			(2,706,382	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(3,997,487	)		(3,561,205	)
Investment in trademarks and patents		(43,777	)		(33,938	)
Proceeds from sale of fixed assets		25,058			60,336

Net cash used in investing activities		(4,016,206	)		(3,534,807	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility		165,575,147			192,663,254
Repayments of revolving credit facility		(169,512,854	)		(188,714,331	)
Proceeds from long-term debt		-			355,398
Debt financing costs		(1,512,500	)		-
Repayments of long-term debt		(357,723	)		(268,539	)

Net cash (used in) provided by financing activities		(5,807,930	)		4,035,782

DECREASE IN CASH AND CASH EQUIVALENTS		(308,404	)		(2,205,407	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		4,311,313			6,537,884

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	4,002,909		$	4,332,477

See notes to the interim unaudited condensed consolidated financial statements.

ROCKY BRANDS, INC.

AND SUBSIDIARIES

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

1.	INTERIM FINANCIAL REPORTING

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

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

The components of total comprehensive income are shown below:

	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Net income	$	2,781,445	$	2,734,241	$	265,341	$	3,407,998
Other comprehensive income:
Amortization of unrecognized transition obligation, service cost and net gain		79,884		37,852		239,651		115,737
Total comprehensive income	$	2,861,329	$	2,772,093	$	504,992	$	3,523,735

2.	TRADE RECEIVABLES

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

3.	INVENTORIES

Inventories are comprised of the following:

	September 30,			December 31,			September 30,
	2009			2008			2008
	(Unaudited)						(Unaudited)

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

4.	SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows:

	(Unaudited)
	Nine Months Ended
	September 30,
	2009		2008

Interest	$	3,921,125	$	5,249,383

Federal, state and local income taxes, net of refunds	$	269,546	$	647,200

Fixed asset purchases in accounts payable	$	66,816	$	502,874

5.	PER SHARE INFORMATION

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

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

	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Weighted average shares outstanding		5,547,215		5,508,278		5,546,993		5,508,132

Dilutive stock options		-		4,236		-		9,886

Dilutive weighted average shares outstanding		5,547,215		5,512,514		5,546,993		5,518,018

Anti-dilutive stock options/weighted average shares outstanding		377,054		409,249		398,947		338,749

6.	RECENT FINANCIAL ACCOUNTING STANDARDS

Recently adopted accounting standards

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

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

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

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

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

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

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

Accounting standards not yet adopted

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

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

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

7.	INCOME TAXES

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

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

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

8.	INTANGIBLE ASSETS

A schedule of intangible assets is as follows:

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

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

	Gross		Accumulated		Carrying
September 30, 2008 (unaudited)	Amount		Amortization		Amount
Trademarks:
Wholesale	$	28,278,595	$	150,940	$	28,127,655
Retail		6,900,000		-		6,900,000
Patents		2,303,989		1,537,513		766,476
Customer relationships		1,000,000		750,000		250,000
Total Identified Intangibles	$	38,482,584	$	2,438,453	$	36,044,131

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

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

2010	$	43,467
2011		42,087
2012		42,087
2013		42,087
2014		42,087

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

9.	CAPITAL STOCK

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

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

	Shares			Weighted Average Exercise Price
Options outstanding at January 1, 2009		435,801		$	15.88
Issued		-			-
Exercised		-			-
Forfeited		(63,801	)	$	8.34
Options outstanding at September 30, 2009		372,000		$	17.18

Options exercisable at:
January 1, 2009		412,051		$	15.80
September 30, 2009		368,250		$	17.20

Unvested options at January 1, 2009		23,750		$	17.27
Granted		-			-
Vested		(8,750	)	$	22.87
Forfeited		(11,250	)	$	13.87
Unvested options at September 30, 2009		3,750		$	14.40

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

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

10.	RETIREMENT PLANS

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

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

	(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

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

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			2008

Discount 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