Weyco (WEYS) 10-Q 2006 Q3 Quarterly report

FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D. C.  20549

(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, 2006
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number     0-9068
WEYCO GROUP, INC.
(Exact name of registrant as specified in its charter)

WISCONSIN	39-0702200
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
333 W. Estabrook Boulevard P. O. Box 1188 Milwaukee, Wisconsin	53201
(Address of principal executive offices)	(Zip Code)
(414) 908-1600
(Registrant’s telephone number, including area code)

          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  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.

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o No  x

As of October 31, 2006 the following shares were outstanding:

Common Stock, $1.00 par value	9,089,706	Shares
Class B Common Stock, $1.00 par value	2,586,887	Shares

PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements.

The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities  and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.

WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

	September 30, 2006		December 31, 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,299,953	$	22,780,913
Marketable securities, at amortized cost		815,030		875,317
Accounts receivable, net		34,985,077		27,843,048
Inventories		47,039,922		38,548,602
Deferred income tax benefits		1,661,788		1,174,235
Prepaid expenses and other current assets		819,341		1,424,858
Total current assets		90,621,111		92,646,973
MARKETABLE SECURITIES, at amortized cost		41,996,669		30,290,089
OTHER ASSETS		15,062,053		14,252,604
PLANT AND EQUIPMENT		44,578,858		42,283,678
Less – Accumulated depreciation		16,481,462		14,842,916
		28,097,396		27,440,762
TRADEMARK		10,867,969		10,867,969
	$	186,645,198	$	175,498,397
LIABILITIES & SHAREHOLDERS’ INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings	$	11,602,566	$	9,552,504
Accounts payable		8,288,311		12,222,907
Dividend payable		1,052,693		810,241
Accrued liabilities		7,482,685		6,106,107
Accrued income taxes		570,445		1,221,423
Total current liabilities		28,996,700		29,913,182
LONG-TERM PENSION LIABILITY		3,850,063		3,672,312
DEFERRED INCOME TAX LIABILITIES		5,980,146		5,344,702
SHAREHOLDERS’ INVESTMENT:
Common stock		9,088,312		8,979,243
Class B common stock		2,588,281		2,595,031
Capital in excess of par value		6,213,679		3,437,697
Reinvested earnings		129,570,619		121,334,722
Accumulated other comprehensive income		357,398		221,508
Total shareholders’ investment		147,818,289		136,568,201
	$	186,645,198	$	175,498,397

The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements.

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WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE PERIODS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)

	Three Months ended September 30,						Nine Months ended September  30,
	2006			2005			2006			2005
NET SALES	$	56,084,718		$	55,218,588		$	160,484,367		$	157,795,446
COST OF SALES		35,484,325			35,607,712			101,391,210			101,607,480
Gross earnings		20,600,393			19,610,876			59,093,157			56,187,966
SELLING AND ADMINISTRATIVE EXPENSES		12,744,934			11,959,191			37,547,263			35,524,839
Earnings from operations		7,855,459			7,651,685			21,545,894			20,663,127
INTEREST INCOME		488,670			298,428			1,468,378			710,964
INTEREST EXPENSE		(145,271	)		(87,051	)		(442,565	)		(237,018	)
OTHER INCOME (EXPENSE), net		(5,720	)		4,260			(2,248	)		(25,788	)
Earnings before provision for income taxes		8,193,138			7,867,322			22,569,459			21,111,285
PROVISION FOR INCOME TAXES		3,025,000			3,045,000			8,450,000			8,060,000
Net earnings	$	5,168,138		$	4,822,322		$	14,119,459		$	13,051,285
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		11,675,238			11,575,788			11,621,084			11,555,307
Diluted		12,098,045			11,992,330			12,031,126			11,973,913
EARNINGS PER SHARE
Basic	$	.44		$	.42		$	1.21		$	1.13
Diluted	$	.43		$	.40		$	1.17		$	1.09
CASH DIVIDENDS PER SHARE	$	.09		$	.07		$	.25		$	.195

The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements.

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WEYCO GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)

	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	14,119,459		$	13,051,285
Adjustments to reconcile net earnings to net cash provided by operating activities –
Depreciation		1,604,725			1,693,347
Amortization		54,613			35,566
Deferred income taxes		147,891			507,444
Pension contribution		(1,000,000	)		—
Pension expense		894,753			663,453
Gain (loss) on sale of assets		13			(1,642	)
Increase in cash surrender value of life insurance		(376,605	)		(333,000	)
Changes in operating assets and liabilities -
Accounts receivable		(7,142,029	)		(6,416,573	)
Inventories		(8,491,320	)		11,021,966
Prepaids and other current assets		617,670			807,958
Accounts payable		(3,934,596	)		2,315,548
Accrued liabilities and other		1,333,778			(2,406,293	)
Accrued income taxes		(650,978	)		753,994
Net cash (used for) provided by operating activities		(2,822,626	)		21,693,053
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities		(17,813,020	)		(17,615,427	)
Proceeds from maturities of marketable securities		6,112,114			3,029,703
Purchase of plant and equipment		(2,245,677	)		(1,086,860	)
Proceeds from sales of plant and equipment		996			4,587
Net cash used for investing activities		(13,945,587	)		(15,667,997	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid		(2,665,206	)		(2,074,017	)
Shares purchased and retired		(3,124,644	)		(1,423,656	)
Proceeds from stock options exercised		1,828,579			1,722,494
Net draws (repayments) under revolving credit agreement		2,050,062			(1,875,404	)
Income tax benefit from the exercise of stock options		1,198,462			—
Net cash used for financing activities		(712,747	)		(3,650,583	)
Net (decrease) increase in cash and cash equivalents		(17,480,960	)		2,374,473
CASH AND CASH EQUIVALENTS at beginning of period	$	22,780,913		$	10,514,707
CASH AND CASH EQUIVALENTS at end of period	$	5,299,953		$	12,889,180
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds	$	7,638,064		$	6,848,616
Interest paid	$	443,781		$	232,071

The accompanying notes to consolidated condensed financial statements are an integral part of these financial statements.

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NOTES:

1.	Financial Statements
	In the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial information have been made.  The results of operations for the three months or nine months ended September 30, 2006, are not necessarily indicative of results for the full year.
2.	Earnings Per Share
	The following table sets forth the computation of earnings per share and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Numerator:
Net Earnings	$	5,168,138	$	4,822,322	$	14,119,459	$	13,051,285
Denominator:
Basic weighted average shares		11,675,238		11,575,788		11,621,084		11,555,307
Effect of dilutive securities:
Employee stock options		422,807		416,542		410,042		418,606
Diluted weighted average shares		12,098,045		11,992,330		12,031,126		11,973,913
Basic earnings per share	$	.44	$	.42	$	1.21	$	1.13
Diluted earnings per share	$	.43	$	.40	$	1.17	$	1.09

	Diluted weighted average shares outstanding for the quarter and nine months ended September 30, 2006 and 2005 included all outstanding options, as none were antidilutive.
3.	Employee Retirement Plans
	The components of the Company’s net periodic pension cost were:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Benefits earned during the period	$	216,000		$	195,000		$	648,000		$	587,000
Interest cost on projected benefit obligation		425,000			396,000			1,277,000			1,188,000
Expected return on plan assets		(478,000	)		(478,000	)		(1,434,000	)		(1,434,000	)
Net amortization and deferral		135,000			107,000			404,000			322,000
Net pension expense	$	298,000		$	220,000		$	895,000		$	663,000

On September 6, 2006, the Company contributed $1 million to its defined benefit pension plan.

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4.

Segment Information

The Company continues to operate in two operating segments: wholesale distribution and retail sales of men’s footwear, which also constitute its reportable segments.  None of the Company’s operating segments were aggregated in determining the Company’s reportable segments.  The chief operating decision maker, the Company’s Chief Executive Officer, evaluates the performance of its segments based on earnings from operations and accordingly, interest income, interest expense and other income or expense are not allocated to the segments.  Summarized segment data for the three and nine months ended September 30, 2006 and 2005 was:

	Wholesale Distribution		Retail		Total
Three Months Ended September 30
2006
Product sales	$	48,472,000	$	6,697,000	$	55,169,000
Licensing revenues		916,000		—		916,000
Net sales		49,388,000		6,697,000		56,085,000
Earnings from operations		7,086,000		769,000		7,855,000
2005
Product sales	$	48,264,000	$	6,036,000	$	54,300,000
Licensing revenues		919,000		—		919,000
Net sales		49,183,000		6,036,000		55,219,000
Earnings from operations		6,823,000		829,000		7,652,000
Nine Months Ended September 30
2006
Product sales	$	137,143,000	$	20,416,000	$	157,559,000
Licensing revenues		2,925,000		—		2,925,000
Net sales		140,068,000		20,416,000		160,484,000
Earnings from operations		18,763,000		2,783,000		21,546,000
2005
Product sales	$	135,376,000	$	19,316,000	$	154,692,000
Licensing revenues		3,103,000		—		3,103,000
Net sales		138,479,000		19,316,000		157,795,000
Earnings from operations		17,503,000		3,160,000		20,663,000

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5.	Stock-Based Compensation Plans
	Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” (SFAS 123(R)) using the modified prospective method. This method requires that companies recognize compensation expense for new grants and the unvested portion of prior grants at their fair value on the grant date and recognize this expense over the requisite service period for awards expected to vest.  The results for prior year periods have not been restated.  No stock-based employee compensation expense has been charged against income in the nine month period ended September 30, 2006, as there were no stock options granted during this period, and all of the Company’s stock options granted prior to the effective date were 100% vested at the effective date.  The Company’s policy is to estimate the fair market value of each option granted on the date of grant using the Black-Scholes option pricing model and record the compensation expense on a straight-line basis over the vesting period.  The Company issues new common stock to satisfy stock option exercises.
	The following table illustrates the effect on quarterly net earnings per share for the three and nine month periods ended September 30, 2005, as if the fair value based method of SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied for all outstanding unvested awards for periods prior to the adoption of SFAS 123(R):

	Three Months ended September 30, 2005		Nine Months ended September 30, 2005
Net earnings, as reported	$	4,822,322	$	13,051,285
Deduct:  Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		269,853		453,890
Pro forma net income	$	4,552,469	$	12,597,395
Earnings per share
Basic - as reported	$	.42	$	1.13
Basic - pro forma.	$	.39	$	1.09
Diluted - as reported	$	.40	$	1.09
Diluted - pro forma	$	.38	$	1.05

At September 30, 2006, the Company had two stock option plans: the 1997 Stock Option Plan and the 2005 Equity Incentive Plan.  Under the plans, options to purchase common stock were granted to officers and key employees at prices not less than the fair market value of the common stock on the date of the grant.  Most options expire ten years from the grant date, with the exception of certain incentive stock options, which expire five years from the grant date.  As of September 30, 2006, there were 798,750 shares remaining available for stock option grants under the 2005 Equity Incentive Plan.

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The following table summarizes the stock option activity under the Company’s plans for the nine-month period ended September 30, 2006:

	Shares			Weighted Average Exercise Price		Wtd. Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2005		1,537,048		$	11.44
Exercised		(251,058	)	$	7.28
Outstanding at September 30, 2006		1,285,990		$	12.25		5.27	$	13,008,136

All of the outstanding stock options at September 30, 2006 were exercisable.

The following table summarizes stock option activity for the three- and nine-month periods ended September 30, 2006 and 2005:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Total intrinsic value of stock options exercised	$	875,935	$	318,460	$	3,072,980	$	1,965,258
Cash received from stock option exercises	$	633,090	$	419,245	$	1,828,579	$	1,722,494
Income tax benefit from the exercise of stock options	$	341,614	$	127,384	$	1,198,462	$	786,103
Total fair value of stock options vested	$	—	$	441,780	$	—	$	744,098

6.	Comprehensive Income
	Comprehensive income for the three- and nine-months ended September 30, 2006 and 2005 was as follows:

	Three Months Ended  September 30,				Nine Months ended September 30,
	2006		2005		2006		2005
Net earnings	$	5,168,138	$	4,822,322	$	14,119,459	$	13,051,285
Foreign currency translation adjustments		31,664		54,090		135,890		(162,384	)
Total comprehensive income	$	5,199,802	$	4,876,412	$	14,255,349	$	12,888,901

The components of Accumulated Other Comprehensive Income as recorded on the  accompanying balance sheets were as follows:

	September 30, 2006		December 31, 2005
Foreign currency translation adjustments	$	357,398	$	221,508

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7.	New Accounting Pronouncements
	In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48).  This Interpretation clarifies the accounting and disclosures for uncertainty in tax positions.  FIN 48 provides that the tax effects from an uncertain tax position can be recognized in the Company’s financial statements only if the position is more likely than not of being sustained on audit, based on the technical merits of the position.  The provisions of FIN 48 will be effective for the Company January 1, 2007.  The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.
	In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R)”. SFAS No. 158 requires recognition of the over funded or under funded status of a defined benefit pension plan as an asset or a liability on the balance sheet and recognition of the changes in that funded status in the year in which changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year end balance sheet.  Our use of a year end measurement date for all pension plans will not change. SFAS No. 158 is effective for financial statements issued for fiscal years ending after December 15, 2006.  The Company is currently assessing the impact SFAS No. 158 will have on its consolidated financial statements upon adoption of the statement on December 31, 2006.
	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements.  SFAS No. 157 will be effective for fiscal years ended after November 14, 2007, the Company’s 2008 fiscal year.  The Company is assessing the impact the adoption of SFAS No. 157 will have on its consolidated financial statements.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The Company is a distributor of men’s casual, dress and fashion shoes under the Florsheim, Nunn Bush, Nunn Bush NXXT, Brass Boot, Stacy Adams and SAO by Stacy Adams brand names.  Inventory is purchased from third party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars. The Company’s products are sold to shoe specialty stores, department stores and clothing retailers primarily in North America, with some distribution in Europe.  The Company also has a retail division, which as of September 30, 2006, consisted of 34 Company-owned retail stores in the United States, four in Europe and an Internet business.  Sales in retail outlets are made directly to consumers by Company employees.  The Company also has licensing agreements with third parties who sell its branded shoes overseas, as well as licensing agreements with apparel and accessory manufacturers in the United States.  As such, the Company’s results are primarily impacted by the economic conditions and the retail environment in the United States.

Overall, net earnings in the third quarter of 2006 were $5.2 million, or $.43 per diluted share compared with $4.8 million, or $.40 per diluted share in the same period of 2005.  For the nine months ended September 30, 2006, net earnings were $14.1 million, or $1.17 per diluted share compared with $13.1 million, or $1.09 per diluted share in 2005.  A detailed analysis of operating results follows.

RESULTS OF OPERATIONS

Consolidated net sales in the third quarter of 2006 were $56.1 million, up from $55.2 million in the prior year.  For the nine months ended September 30, 2006, consolidated net sales increased to $160.5 million from $157.8 million in 2005.  Sales in the Company’s wholesale division for the three- and nine-month periods ended September 30, 2006 and 2005 were as follows:

	Wholesale Division Sales
	Three Months ended September 30,							Nine Months ended September 30,
	2006		2005		% change			2006		2005		% change
Stacy Adams	$	14,507,809	$	13,988,398		3.7	%	$	42,410,963	$	41,466,069		2.3	%
Nunn Bush		17,303,367		18,807,589		-8.0	%		50,423,995		52,442,425		-3.8	%
Florsheim		15,272,440		14,262,812		7.1	%		40,562,138		38,239,495		6.1	%
Foreign		1,387,974		1,205,188		15.2	%		3,746,322		3,227,729		16.1	%
Total Wholesale	$	48,471,590	$	48,263,987		0.4	%	$	137,143,418	$	135,375,718		1.3	%
Licensing		916,198		919,022		-0.3	%		2,925,071		3,103,389		-5.7	%
Total Wholesale Division	$	49,387,788	$	49,183,009		0.4	%	$	140,068,489	$	138,479,107		1.1	%

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The acquisition of one of the Company’s significant customers by another retailer in 2005 resulted in some loss of sales volume at Nunn Bush and Florsheim in 2006.  The acquiring company decided not to go forward with either the Nunn Bush or Florsheim product lines in its stores.  Sales to this customer were down $3.1 million and $6.1 million for the current quarter and nine months, respectively.  Total sales to this customer in 2005 were approximately $12 million.  The Company expects to lose a total of approximately $9.2 million in sales volume during 2006 due to the loss of this customer.

The sales increase at Stacy Adams was attributable to growth in several categories of footwear within the brand, including high fashion, contemporary and casual styles.  Quarterly and year-to-date sales in the Stacy Adams division were somewhat offset by a decline in sales of the SAO sub-brand this year.

Quarterly sales in the Nunn Bush division were down this year compared with last year due to $1.8 million of lost sales to the customer discussed above.  Sales to this customer were down $3.7 million for the nine-month period ended September 30, 2006.  For both the quarter and year-to-date, some of the lost business has been made up with other accounts.

In the current quarter, Florsheim sales were up 7.1%, despite the loss of $1.3 million in sales to the major customer (discussed above).  Florsheim sales for the first nine months of 2006 were up 6.1% compared with last year, despite the loss of approximately $2.4 million in sales from the major customer and the loss of approximately $2.1 million in sales of the FLS sub-brand following the Company’s decision last year to discontinue FLS in the United States.  Management believes this growth, despite the volume loss, reflects the positive reaction to the brand’s evolution this year to more casual and contemporary styles in the line.  In total, the discontinuation of FLS will cost the Company approximately $2.5 million in sales volume during 2006 compared with 2005.

Retail net sales in the current quarter were up approximately 11% to $6.7 million from $6.0 million in the prior year.  Year-to-date sales in the retail division increased to $20.4 million this year from $19.3 million last year.  The quarter and year-to-date increases were primarily attributable to five additional stores at September 30, 2006 compared with September 30, 2005.  Same store sales in the three- and nine-month periods ended September 30, 2006 were up 6% and 2%, respectively, compared with the same periods in the prior year.  The Company continues to evaluate new store locations in the United States.

Overall gross earnings as a percent of net sales for the three months ended September 30, 2006 was 36.7% compared with 35.5% in the prior year period.  Wholesale gross earnings as a percent of net sales for the quarter was 31.6% in 2006, up from 30.5% in 2005.  Gross earnings as a percent of net sales in the retail division was 65.1% in the third quarter of 2006 compared with 65.5% in 2005.  

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Overall gross earnings as a percent of net sales for the nine months ended September 30, 2006 was 36.8% compared with 35.6% in 2005.  Wholesale gross earnings as a percent of net sales for the nine months ended September 30 was 31.2% in 2006 and 30.0% in 2005.   Retail gross earnings as a percent of net sales for the first nine months of this year was 65.4% and 64.7% last year.  The increase in wholesale margins for the three and nine months ended September 30, 2006 was primarily the result of higher margins on new footwear, favorable purchase prices on selected product from our manufacturers, and the impact of fewer closeout sales this season.

The Company’s cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs).  Distribution costs for the three-month periods ended September 30, 2006 and 2005, were $1,596,000 and $1,498,000, respectively.  The Company’s distribution costs to date in 2006 and 2005 were $4,769,000 and $4,561,000, respectively.  The Company includes these costs in selling and administrative expenses.  Therefore, the Company’s gross earnings may not be comparable to other companies, as some companies may include distribution costs in cost of sales. 

The Company’s selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs, rent and depreciation. In the current quarter, selling and administrative expenses as a percent of net sales were 22.7% versus 21.7% in 2005.  Wholesale selling and administrative expenses as a percent of net wholesale sales were 18.9% in 2006 and 18.3% in 2005.  Retail selling and administrative expenses as a percent of net sales were 53.6% in 2006 and 51.7% in 2005. 

For the nine months ended September 30, selling and administrative expenses as a percent of net sales were 23.4% in 2006 versus 22.5% in 2005.  Wholesale selling and administrative expenses as a percent of net wholesale sales to date were 19.7% in 2006 and 19.3% in 2005.  Retail selling and administrative expenses as a percent of net sales increased to 51.8% in 2006 from 48.3% in 2005.  The increase in retail expenses as a percent of sales for both the third quarter and first nine months of 2006 was due to higher expenses in relation to sales in the  new stores, as well as increased costs associated with lease renewals at some existing stores.

Interest income in the third quarter and first nine months of 2006 was up over last year $190,000 and $757,000, respectively, due to higher interest earned on municipal bonds and cash.  Interest expense in the three and nine months ended September 30, 2006 was up $58,000 and $206,000, respectively, over last year.  The higher interest expense this year was due to higher interest rates on commercial paper in 2006 compared with 2005.

The effective tax rate for the quarter ended September 30, 2006 and 2005 was 36.9% and 38.7%, respectively.  The effective tax rate for the nine months ended September 30, 2006 was 37.4% compared with 38.2% in the prior year.  The lower rates in the current year resulted from the higher interest income earned on municipal bonds which is tax-exempt, lowering the Company’s effective tax rate.

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LIQUIDITY & CAPITAL RESOURCES

The Company’s primary source of liquidity is its cash and short-term marketable securities, which aggregated approximately $6.1 million at September 30, 2006 as compared with $23.7 million at December 31, 2005. 

Net cash provided by operating activities to date in 2006 was $24.5 million lower than the same period in 2005 primarily due to the Company’s efforts in 2005 to reduce inventory levels which resulted in an unusually high amount of cash provided by operations in 2005.  In 2006, the Company built up inventory levels to accommodate  additional needs this year.  The Company also contributed $1 million to its defined benefit pension plan in 2006.

Cash used for investing activities decreased $1.7 million, mainly due to lower net purchases of marketable securities to date this year, as compared with 2005. 

Cash flows used for financing activities in 2006 decreased $2.9 million as compared with last year, primarily due to changes in net borrowings between periods.

As of September 30, 2006, the Company had a total of $50 million available under its borrowing facility, of which total borrowings were $11.6 million.  The facility includes one financial covenant which specifies a minimum level of net worth.  The Company was in compliance with the covenant at September 30, 2006.  The facility has a 364-day term and expires April 30, 2007. 

The Company will continue to evaluate the best uses for its free cash, including continued increased dividends, stock repurchases and acquisitions.  The Company currently has 1.4 million shares available under its previously announced buyback program.

The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business in 2006.

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FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to the Company’s outlook for the future.  These statements represent the Company’s reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially.  These factors could include significant adverse changes in the economic conditions affecting overseas suppliers or the men’s footwear markets served by the Company, as well as changes in interest rates, discount rates, or currency exchange rates. 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. 

Item 4.   Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed,  summarized and reported on a timely basis.  The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company’s disclosure controls and procedures as  defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”).  Based on such evaluation, such officers have concluded that, as of the Evaluation  Date, the Company’s disclosure controls and procedures are effective in bringing to their attention on a timely basis material information  relating to the Company required to be included in the Company’s periodic filings under the Exchange Act.  Such officers have also concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in accumulating and communicating information in a timely manner allowing timely decisions regarding required disclosures.

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal  quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

          None

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

In April 1998, the Company first authorized a stock repurchase program to purchase 1,500,000 shares of its common stock in open market transactions at prevailing prices.  In April 2000 and again in May 2001, the Company’s Board of Directors extended the stock repurchase program to cover the repurchase of 1,500,000 additional shares.  Therefore, 4,500,000 shares have been authorized  for repurchase since the program began.  The table below presents information pursuant to Item 703(a) of Regulation S-K regarding the repurchase of the Company’s Common Stock by the Company in the three-month period ended September 30, 2006.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of the Publicly Announced Program		Maximum Number of Shares that May Yet Be Purchased Under the Program
07/01/06  -  07/31/06		2,850	$	23.26		2,850		1,436,236
08/01/06  -  08/31/06		12,289	$	20.61		12,289		1,426,947
09/01/06  -  09/30/06		43,350	$	21.44		43,350		1,380,597
Total		58,489	$	21.36		58,489		1,380,597

Item 6.   Exhibits

          See the Exhibit Index included herewith for a listing of exhibits.

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SIGNATURES

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.

	WEYCO GROUP, INC.
Date  November 2, 2006	/s/ John  F. Wittkowske
	John F. Wittkowske
	Senior Vice President and
	Chief Financial Officer

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WEYCO GROUP, INC.
(THE “REGISTRANT”)
(COMMISSION FILE NO. 0-9068)

EXHIBIT INDEX
TO
CURRENT REPORT ON FORM 10-Q
DATE OF SEPTEMBER 30, 2006

EXHIBIT NUMBER	DESCRIPTION	INCORPORATED HEREIN BY REFERENCE TO	FILED HEREWITH
31.1	Certification of Chief Executive Officer		x
31.2	Certification of Chief Financial Officer		x
32.1	Section 906 Certification of Chief Executive Officer		x
32.2	Section 906 Certification of Chief Financial Officer		x

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