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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 þ For the quarterly period ended June 26, 2004 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 001-31309 PHOENIX FOOTWEAR GROUP, INC. 
 Delaware
    
    15-0327010(State or Other Jurisdiction of
Incorporation or Organization)
    
    IRS Employer
Identification No.)5759 Fleet Street, Suite 220, Carlsbad,
California
    
    92008(Address of Principal Executive Offices)
    
    (Zip Code)
 (760) 602-9688 
 
 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   þ       No   o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   o       No   þ Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. CLASS
    
    OUTSTANDING AT JULY 21, 2004Common, $0.01 par value
    
    
    7,851,060




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements and Notes to Financial Statements Consolidated Condensed Balance Sheets as of June 26,
2004 (unaudited) and December 27, 2003
    
    
    3Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 26, 2004 and June 28, 2003
(unaudited)
    
    
    4Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 26, 2004 and June 28, 2003 (unaudited)
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    27EXHIBIT 10.6EXHIBIT 10.7EXHIBIT 10.8EXHIBIT 10.9EXHIBIT 10.10EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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##### Table of Contents



PART I: FINANCIAL INFORMATION 
 Item 1. Consolidated Condensed Financial Statements PHOENIX FOOTWEAR GROUP, INC. 
 CONSOLIDATED CONDENSED BALANCE SHEETS June 26,
    
    December 27,2004
    
    2003(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    
    
    
    $
    1,058,000Accounts receivable (less allowances of $758,000 in 2004 and $1,026,000 in 2003)
    
    
    9,267,000
    
    
    
    8,083,000Inventories-net
    
    
    12,407,000
    
    
    
    12,717,000Other receivable
    
    
    695,000
    
    
    
    530,000Prepaid income tax
    
    
    783,000
    
    
    
    Other current assets
    
    
    2,297,000
    
    
    
    803,000Total current assets
    
    
    25,449,000
    
    
    
    23,191,000PLANT AND
EQUIPMENT  Net
    
    
    1,899,000
    
    
    
    1,623,000OTHER ASSETS:Other assets
 net
    
    
    72,000
    
    
    
    115,000Goodwill
    
    
    5,190,000
    
    
    
    5,178,000Unamortizable intangibles
    
    
    3,820,000
    
    
    
    3,820,000Intangible assets, net
    
    
    1,663,000
    
    
    
    1,766,000Other receivable
    
    
    189,000
    
    
    
    718,000Total other assets
    
    
    10,934,000
    
    
    
    11,597,000TOTAL ASSETS
    
    $
    38,282,000
    
    
    $
    36,411,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    5,365,000
    
    
    $
    4,782,000Accrued expenses
    
    
    1,019,000
    
    
    
    1,077,000Contingent liability
    
    
    1,942,000
    
    
    
    1,942,000Notes
payable  current
    
    
    1,656,000
    
    
    
    1,661,000Deferred income tax
    
    
    195,000
    
    
    
    195,000Income taxes payable
    
    
    
    
    
    
    111,000Total current liabilities
    
    
    10,177,000
    
    
    
    9,768,000OTHER LIABILITIES:Notes
payable  noncurrent
    
    
    3,737,000
    
    
    
    4,941,000Note payable, line of credit
    
    
    5,200,000
    
    
    
    5,480,000Deferred income tax liability
    
    
    1,235,000
    
    
    
    1,235,000Total other liabilities
    
    
    10,172,000
    
    
    
    11,656,000Total liabilities
    
    
    20,349,000
    
    
    
    21,424,000STOCKHOLDERS EQUITY:Common
stock, $.01 par value  50,000,000 shares authorized; 5,155,000 and 5,061,000
shares issued in 2004 and 2003, respectively
    
    
    52,000
    
    
    
    51,000Additional paid-in-capital
    
    
    12,062,000
    
    
    
    11,190,000Retained earnings
    
    
    7,199,000
    
    
    
    5,320,00019,313,000
    
    
    
    16,561,000Less: Treasury stock at cost, 500,000 and 603,000 shares in 2004 and 2003, respectively
    
    
    (1,380,000
    )
    
    
    (1,574,000
    )Total stockholders equity
    
    
    17,933,000
    
    
    
    14,987,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    38,282,000
    
    
    $
    36,411,000
 See notes to consolidated condensed financial statements. 3




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PHOENIX FOOTWEAR GROUP, INC. 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Ended
    
    Six Months EndedJune 26,
    
    June 28,
    
    June 26,
    
    June 28,2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    13,876,000
    
    
    $
    7,552,000
    
    
    $
    32,514,000
    
    
    $
    16,759,000COST OF GOODS SOLD
    
    
    7,587,000
    
    
    
    4,365,000
    
    
    
    18,079,000
    
    
    
    9,552,000GROSS PROFIT
    
    
    6,289,000
    
    
    
    3,187,000
    
    
    
    14,435,000
    
    
    
    7,207,000OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    5,021,000
    
    
    
    2,601,000
    
    
    
    10,832,000
    
    
    
    5,454,000Other
expenses  net
    
    
    26,000
    
    
    
    939,000
    
    
    
    60,000
    
    
    
    1,415,000Total operating expenses
    
    
    5,047,000
    
    
    
    3,540,000
    
    
    
    10,892,000
    
    
    
    6,869,000OPERATING INCOME (LOSS)
    
    
    1,242,000
    
    
    
    (353,000
    )
    
    
    3,543,000
    
    
    
    338,000INTEREST EXPENSE
    
    
    134,000
    
    
    
    386,000
    
    
    
    304,000
    
    
    
    452,000EARNINGS (LOSS) BEFORE INCOME TAXES
    
    
    1,108,000
    
    
    
    (739,000
    )
    
    
    3,239,000
    
    
    
    (114,000
    )INCOME TAX PROVISION (BENEFIT)
    
    
    465,000
    
    
    
    (51,000
    )
    
    
    1,360,000
    
    
    
    199,000NET EARNINGS (LOSS)
    
    $
    643,000
    
    
    $
    (688,000
    )
    
    $
    1,879,000
    
    
    $
    (313,000
    )NET EARNINGS
(LOSS) PER SHARE (Note 5)Basic
    
    $
    .14
    
    
    $
    (.19
    )
    
    $
    .41
    
    
    $
    (.08
    )Diluted
    
    $
    .12
    
    
    $
    (.19
    )
    
    $
    .36
    
    
    $
    (.08
    )SHARES OUTSTANDING:Basic
    
    
    4,628,987
    
    
    
    3,690,279
    
    
    
    4,580,134
    
    
    
    3,682,387Diluted
    
    
    5,321,659
    
    
    
    3,690,279
    
    
    
    5,221,499
    
    
    
    3,682,387
 See notes to consolidated financial statements. 4




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PHOENIX FOOTWEAR GROUP, INC. 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months EndedJune 26,
    
    June 28,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings (loss)
    
    $
    1,879,000
    
    
    $
    (313,000
    )Adjustments to reconcile net earnings to net cash provided (used) by operating activities:Depreciation and amortization
    
    
    364,000
    
    
    
    98,000Allocation of shares in defined contribution plan
    
    
    854,000
    
    
    
    402,000Loss on sale of property and equipment
    
    
    
    
    
    
    8,000Changes in assets and liabilities:(Increase) decrease in:Accounts receivable  net
    
    
    (1,167,000
    )
    
    
    41,000Inventories  net
    
    
    310,000
    
    
    
    (1,826,000
    )Other current receivable
    
    
    (165,000
    )
    
    
    (228,000
    )Prepaid income tax
    
    
    (783,000
    )
    
    
    Other current assets
    
    
    (1,494,000
    )
    
    
    (501,000
    )Other noncurrent assets
    
    
    572,000
    
    
    
    554,000Increase (decrease) in:Accounts payable
    
    
    535,000
    
    
    
    780,000Accrued expenses
    
    
    (70,000
    )
    
    
    (80,000
    )Liability to former stockholders
    
    
    
    
    
    
    (1,806,000
    )Income taxes payable
    
    
    (111,000
    )
    
    
    89,000Net cash provided (used) by operating activities
    
    
    724,000
    
    
    
    (2,782,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of equipment
    
    
    (554,000
    )
    
    
    (93,000
    )Proceeds from disposal of property and equipment
    
    
    
    
    
    
    457,000Net cash (used) provided by investing activities
    
    
    (554,000
    )
    
    
    364,000CASH FLOWS FROM FINANCING ACTIVITIES:Net (payments) borrowings on note payable-line of credit
    
    
    (280,000
    )
    
    
    2,580,000Repayments of notes payable
    
    
    (1,209,000
    )
    
    
    (750,000
    )Bank overdraft
    
    
    48,000
    
    
    
    Issuance of common stock
    
    
    313,000
    
    
    
    52,000Purchases of treasury stock
    
    
    (100,000
    )
    
    
    (201,000
    )Net cash (used) provided by financing activities
    
    
    (1,228,000
    )
    
    
    1,681,000NET DECREASE IN CASH
    
    
    (1,058,000
    )
    
    
    (737,000
    )CASH  Beginning of period
    
    
    1,058,000
    
    
    
    1,265,000CASH  End of period
    
    $
    
    
    
    $
    528,000SUPPLEMENTAL
CASH FLOW INFORMATION Cash paid during the period for:Interest
    
    $
    311,000
    
    
    $
    735,000Income taxes
    
    $
    2,255,000
    
    
    $
    64,000
 See notes to consolidated condensed financial statements. 5




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PHOENIX FOOTWEAR GROUP, INC. 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Description of Business and Summary of Significant Accounting Policies 1. Basis of Presentation The accompanying unaudited consolidated condensed financial statements of
Phoenix Footwear Group, Inc. (the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments which are of a normal recurring
nature, necessary for fair presentation have been included in the accompanying
financial statements. These financial statements should be read in conjunction
with the consolidated financial statements and notes included in the Companys
Annual Report on Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended December 27, 2003. The results of operations for the
three and six months ended June 26, 2004, or for any other interim period, are
not necessarily indicative of the results that may be expected for the full
year. On May 22, 2003, the Board of Directors authorized a two-for-one stock split
which became effective on June 12, 2003. All references in these consolidated
financial statements and notes related to numbers of shares and per share
amounts have been restated to reflect the effect of the stock split. Principles of Consolidation The consolidated financial statements consist of Phoenix Footwear Group, Inc.
and its wholly owned subsidiaries, Penobscot Shoe Company (Penobscot), H.S.
Trask & Co (Trask) and Royal Robbins, Inc. (Robbins). Intercompany accounts
and transactions have been eliminated in consolidation. Accounting Period Effective January 1, 2003, the Company changed its year-end to a fiscal year
that is the 52- or 53-week period ending the Saturday nearest to December 31st.
The second quarters consisted of the 13 weeks ended
June 26, 2004 and June 28, 2003.  2.
    
    Goodwill and Intangible Assets Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As a result of adopting SFAS No. 142, the Companys
goodwill and certain intangible assets are no longer amortized, but are subject
to an annual impairment test. Impairment would be examined more frequently if
certain indicators are encountered. The Company determined that there was no
impairment of goodwill to be recorded during the quarter ended June 26, 2004.
The following sets forth the intangible assets by major asset class: June 26, 2004
    
    December 27, 2003UsefulLife
    
    
    
    
    
    Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net Book(Years)
    
    Gross
    
    Amortization
    
    Value
    
    Gross
    
    Amortization
    
    ValueNon-amortizing:Trademarks and tradenames (1)
    
    
    
    
    
    $
    3,820,000
    
    
    $
    
    
    
    $
    3,820,000
    
    
    $
    3,820,000
    
    
    $
    
    
    
    $
    3,820,000Amortizing:Customer lists
    
    
    5-13
    
    
    
    1,513,000
    
    
    
    112,000
    
    
    
    1,401,000
    
    
    
    1,513,000
    
    
    
    43,000
    
    
    
    1,470,000Other
    
    
    2-5
    
    
    
    311,000
    
    
    
    49,000
    
    
    
    262,000
    
    
    
    311,000
    
    
    
    15,000
    
    
    
    296,000Total intangible assets
    
    
    
    
    
    $
    1,824,000
    
    
    $
    161,000
    
    
    $
    1,663,000
    
    
    $
    1,824,000
    
    
    $
    58,000
    
    
    $
    1,766,000
   (1)
    
    Acquired through acquisition transactions. 6




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Intangible assets with definite lives are amortized using the
straight-line method over periods ranging from 2 to 13 years. During the three
and six month periods ended June 26, 2004 aggregate amortization expense was
approximately $52,000 and $103,000, respectively. During both the three and
six month periods ended June 28, 2003 aggregate amortization expense was -0-,
respectively. Amortization expense related to intangible assets at June 26,
2004 in each of the next five fiscal years and beyond is expected to be
incurred as follows: Remainder of 2004
    
    $
    103,0002005
    
    
    205,0002006
    
    
    196,0002007
    
    
    196,0002008
    
    
    181,0002009
    
    
    129,000Thereafter
    
    
    653,000$
    1,663,000
 Changes in goodwill during the quarter ended June 26, 2004 related to
additional professional fees incurred in connection with our fiscal 2003
acquisitions.  3.
    
    Accounts Payable. Accounts payable at June 26, 2004 includes a cash overdraft amount of $48,000.  4.
    
    Stock-Based Compensation The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its stock-based compensation. Under APB Opinion No. 25,
compensation expense is recognized when the market price of the stock
underlying an award on the date of grant exceeds any related exercise price. No
employee stock-based compensation expense was recorded for the quarters or six
month periods ended June 26, 2004 and June 28, 2003. Pro forma information
regarding net earnings and earnings per share as required by SFAS No. 123, and
SFAS No. 148 are as follows: Three Months Ended
    
    Six Months EndedJune 26,
    
    June 28,
    
    June 26,
    
    June 28,2004
    
    2003
    
    2004
    
    2003Net earnings (loss), as reported
    
    $
    643,000
    
    
    $
    (688,000
    )
    
    $
    1,879,000
    
    
    $
    (313,000
    )Deduct: Total stock-based
employee
compensation expense determined
under fair
value based method for all
awards, net of
related tax effects
    
    
    (192,000
    )
    
    
    (82,000
    )
    
    
    (383,000
    )
    
    
    (165,000
    )Pro forma net earnings (loss)
    
    $
    451,000
    
    
    $
    (770,000
    )
    
    $
    1,496,000
    
    
    $
    478,000Earnings (loss) per common share:Basic  as reported
    
    $
    0.14
    
    
    $
    (0.19
    )
    
    $
    0.41
    
    
    $
    (0.08
    )Basic  pro forma
    
    $
    0.10
    
    
    $
    (0.13
    )
    
    $
    0.33
    
    
    $
    (0.21
    )Diluted  as reported
    
    $
    0.12
    
    
    $
    (0.19
    )
    
    $
    0.36
    
    
    $
    (0.08
    )Diluted  pro forma
    
    $
    0.08
    
    
    $
    (0.13
    )
    
    $
    0.29
    
    
    $
    (0.21
    )
 The pro forma amounts reflected above may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense as the options vest and additional options may be granted in future
years. The weighted average fair value of the stock options granted
was $7.10 and $2.35 for the quarters ended June 26, 2004 and June 28, 2003, respectively
and was $5.63 and $2.04 for the six months ended June 26, 2004 and June 28,
2003, respectively. The fair value of employee stock options was estimated at
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: 7




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Three Months Ended
    
    Six Months EndedJune 26,
    
    June 28,
    
    June 26,
    
    June 28,2004
    
    2003
    
    2004
    
    2003Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    39.81
    %
    
    
    38.61
    %
    
    
    39.81
    %
    
    
    38.61
    %Risk free interest rates
    
    
    4.73
    %
    
    
    3.57
    %
    
    
    4.73
    %
    
    
    3.57
    %Expected lives
    
    10 years
    
    10 years
    
    10 years
    
    10 years
 The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimates, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of grants under the Companys employee
stock-based compensation plans.  5.
    
    Per Share Data In addition to shares outstanding held by the public, the Companys defined
contribution 401(k) savings plan held approximately 500,000 shares as of June
26, 2004, which were issued during 2001 in connection with the termination of
the Companys defined benefit pension plan. These shares, while eligible to
vote, are classified as treasury stock and therefore are not outstanding for
purpose of determining per share earnings until the time that such shares are
allocated to employee accounts. This allocation is occurring over a seven-year
period which commenced in 2002. During the first quarter of 2004, approximately
114,000 shares were allocated to the defined contribution 401(k) savings plan.
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding for the period.
Diluted net earnings per share is calculated by dividing net earnings (loss)
and the effect of assumed conversions by the weighted average number of common
and, when applicable, potential common shares outstanding during the period. A
reconciliation of the numerators and denominators of basic and diluted earnings
(loss) per share is presented below. Three Months Ended
    
    Six Months EndedJune 26, 2004
    
    June 28, 2003
    
    June 26, 2004
    
    June 28, 2003Basic net earnings (loss) per share:Net earnings (loss)
    
    $
    643,000
    
    
    $
    (688,000
    )
    
    $
    1,879,000
    
    
    $
    (313,000
    )Weighted average common shares outstanding
    
    
    4,628,987
    
    
    
    3,690,279
    
    
    
    4,580,134
    
    
    
    3,682,387Basic net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.19
    )
    
    $
    0.41
    
    
    $
    (0.08
    )Diluted net earnings (loss) per share:Net earnings (loss)
    
    $
    643,000
    
    
    $
    (688,000
    )
    
    $
    1,879,000
    
    
    $
    (313,000
    )Weighted average common shares outstanding
    
    
    4,628,987
    
    
    
    3,690,279
    
    
    
    4,580,134
    
    
    
    3,682,387Effect of stock options outstanding
    
    
    692,672
    
    
    
    
    
    
    
    641,365
    
    
    
    Weighted average common and potential
common shares outstanding
    
    
    5,321,659
    
    
    
    3,690,279
    
    
    
    5,221,499
    
    
    
    3,682,387Diluted net earnings (loss) per share
    
    $
    0.12
    
    
    $
    (0.19
    )
    
    $
    0.36
    
    
    $
    (0.08
    )
  6.
    
    Debt The Company has a loan agreement which consists of a revolving line of credit
(revolver) and a term loan facility in the amount of $6.8 million. Under the
terms of the agreement, the borrowing base for the revolver is based on certain
balances of accounts receivable and inventory, as defined in the agreement. As
of June 26, 2004 the maximum credit amount under the revolver is $15.0 million
during the months of June through the following January and $18.0 million
during the months of February through the following May, reduced by a $2.0
million amortized term loan and outstanding letters of credit. The revolver
expires on June 30, 2005 and has an interest rate of LIBOR plus 2.75%, or the
prime rate plus .25%. At June 26, 2004, LIBOR with a 90-day maturity was 1.59%
and the prime rate was 4.25%. Effective June 30, 2004, the interest rate ranges
from LIBOR plus 175 to 300 basis points depending on the level of the Companys
debt to earnings ratio. The revolver is secured by accounts receivable,
inventory and equipment. The term loans, which are subject to similar interest
rate changes as the revolver, are payable through 2008 and are also secured by
account receivables, inventory and equipment. The term loans bear interest at a
rate as selected by us, equal to LIBOR plus 3.00%, or the prime rate
plus .375%. 8




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Subsequent to June 26, 2004 and in connection with our acquisition of
Altama Delta Corporation (Altama), (see Note 8) we received a commitment from
our bank to increase our existing credit facility to a maximum of $33.4 million
and to extend the maturity date until June 30, 2006. We closed this amended
credit facility concurrently with the completion of the Altama acquisition and
the secondary offering. The new facility includes an $18.0 million revolving
line of credit and $15.4 million in term loans, including a new $10.0 million
term loan which will be repayable in equal monthly installments maturing in
July 2009. Our obligations under our amended credit facility are
secured by Altamas assets and Altamas common stock. The line of credit and
the note payable to the bank contain certain financial covenants relative to
average borrowed funds to earnings ratio, net earnings, current ratio, and cash
flow coverage. In addition, the payment or declaration of dividends and
distributions is restricted. After December 31, 2005, the Company is permitted
to pay dividends on its common stock as long as it is not in default and doing
so would not cause a default, and as long as its average borrowed funds to
EBITDA ratio, as defined in the amended credit agreement, is no greater than 2
to 1. Long-term debt as of June 26, 2004 and December 27, 2003 consisted of the
following: 2004
    
    2003Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at LIBOR plus 275
basis points
    
    $
    5,000,000
    
    
    $
    5,000,000Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at Prime plus .25%
    
    
    200,000
    
    
    
    480,000Term loan payable to bank in
annual installments of $750,000
through 2006, interest due monthly
at LIBOR plus 300 basis points
    
    
    1,500,000
    
    
    
    2,250,000Term loan payable to bank in
quarterly installments of $150,000
through 2008, interest due monthly
at LIBOR plus 300 basis points
    
    
    2,550,000
    
    
    
    2,850,000Term loan payable to bank in
monthly installments of $25,000
through 2008, interest due monthly
at LIBOR plus 300 basis points
    
    
    1,325,000
    
    
    
    1,475,000Note payable to financial
institution; collateralized by
vehicle; interest at 0%; principal
payable $493 monthly; remaining
principal balance due July 2007
    
    
    18,000
    
    
    
    21,000Note payable to financial
institution; collateralized by
vehicle; interest at 4.9%;
principal payable $574 monthly;
remaining principal balance due
May 2004
    
    
    
    
    
    
    3,000Note payable to financial
institution; collateralized by
vehicle; interest at 6.9%;
principal payable $551 monthly;
remaining principal balance due
May 2004
    
    
    
    
    
    
    3,00010,593,000
    
    
    
    12,082,000Less: current portion
    
    
    1,656,000
    
    
    
    1,661,000Noncurrent portion
    
    $
    8,937,000
    
    
    $
    10,421,000
 The aggregate principal payments of notes payable are as follows: 2004
    
    
    $
    1,656,0002005
    
    
    
    5,878,0002006
    
    
    
    1,656,0002007
    
    
    
    903,0002008
    
    
    
    500,000Total
    
    
    
    
    
    $
    10,593,000
  7.
    
    Other expenses  net Other
expenses  net, of $26,000 and $60,000 for the quarter and six month
periods ended June 26, 2004, respectively, consists primarily of expenses
incurred in connection with non-capitalizable acquisition activities. The prior
year quarter expense of $939,000 and $1.4 million for the quarter and six month
periods ended June 28, 2003, respectively, consisted primarily of costs
associated with the dissenting Penobscot stockholders settlement and of costs
associated with the relocation of the Companys corporate headquarters from Old
Town, Maine to Carlsbad, California. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, the relocation costs have been recorded as incurred at
their fair values for the quarter and six months ended June 28, 2003.  8.
    
    Subsequent events On July 19, 2004, the Company purchased all of the outstanding capital
stock of Altama Delta Corporation (Altama) for approximately $38.0 million,
plus an earnout payment of $2.0 million that is subject to Altama meeting
certain sales requirements. As 9




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##### Table of Contents



part of the transaction, the Company refinanced Altamas indebtedness of
approximately $1.7 million. Payment of the purchase price at closing was made
by delivery of $35.5 million in cash, and 196,967 shares of our common stock
valued at $2.5 million based on the average closing price during the 20 trading
days ending on the second-to-last trading day prior to the closing of the
acquisition. The stock purchase agreement for the acquisition requires Altamas sole
shareholder and President and Chief Executive Officer, W. Whitlow Wyatt, and
the Company to indemnify each other for various liabilities arising under the
agreement, subject to various limitations and conditions. At the closing, Mr.
Wyatt deposited into escrow for 18 months the shares we issued to him in the
acquisition to secure his indemnification and other obligations under the stock
purchase agreement. Absent an event of default under the terms of the escrow
agreement, Mr. Wyatt will have voting rights with respect to the shares while
held in escrow. If an event of default occurs, the escrow agent will have
voting rights with respect to the shares while held in escrow. Under the terms of the stock purchase agreement, the Company agreed to pay
Mr. Wyatt $2.0 million in consideration for a five-year covenant-not-to-compete
and other restrictive covenants. The Company also entered into a two-year
consulting agreement with Mr. Wyatt which provides for an annual consulting fee
of $100,000. Additionally, subject to specified conditions, the Company granted
to Mr. Wyatt one demand registration, exercisable between 180 days and three
years after the acquisition closing, and unlimited piggyback registration
rights for registration statements the Company files with the SEC during the
three years following the closing except in limited circumstances. On July 13, 2004, the SEC declared effective the Companys registration
statement, which the Company filed on Form S-2 under the Securities Act of 1933
in connection with a follow-on offering of its common stock. Under this
registration statement, the Company registered 2,875,000 shares of its common
stock, including 375,000 shares subject to the underwriters over-allotment
options (none of which have been exercised as of August 5, 2004), with a public
offering price of $12.50 per share. On July 19, 2004, the Company completed
the offering, issuing 2,500,000 shares at the $12.50 per share offering price,
resulting in net proceeds to the Company, after deducting the underwriters fees
and transaction costs, of approximately $28.5 million. The Company used these
net proceeds and approximately $10.0 million of additional borrowings under its
amended credit facility to finance the $35.5 million cash portion of the
purchase price for the Altama acquisition, to refinance Altamas funded
indebtedness and to pay related fees and expenses. On July 19, 2004,
in connection with the Altama acquisition the Company
increased its existing credit facility to a maximum of $33.4 million. The new
facility includes an $18.0 million revolving line of credit with a maturity
date of June 30, 2006 and $15.4 million in term loans, including a new $10.0
million term loan which will be repayable in equal monthly installments
maturing in July 2009. The Companys obligations under the amended credit
facility are secured by Altamas assets and Altamas common
stock. The borrowing base for the revolver under the Companys current credit
facility, as with the prior credit facility, is based on certain balances of
accounts receivable and inventory, as defined in the agreement. Future uses of
proceeds of the revolving credit facility are restricted to funding our working
capital requirements and capital expenditures. The amended credit facility
contains a security agreement and covenants that are similar to those of the
prior credit facility. The amended credit facility also contains a covenant
that requires us each fiscal year to prepay our new $10.0 million term loan to
the bank in the amount of 50% of our adjusted cash flow, as defined in the
amended credit agreement, up to a maximum of $1.5 million, if our borrowed
funds for a fiscal year, as defined in the amended credit agreement, are
greater than two times our earnings. It also restricts our ability to pay
dividends. After December 31, 2005, we will be permitted to pay dividends on
our common stock as long as we are not in default and doing so would not cause
a default, and as long as our average borrowed funds to EBITDA ratio, as
defined in the amended credit agreement, is no greater than 2 to 1. Our credit
facility contains covenants that restrict, among other things, our ability to
incur additional indebtedness, pay dividends, create certain liens and make
acquisitions. It also contains certain financial maintenance covenants, which,
among other things, specify capital expenditure limits, a maximum average
borrowed funds to EBITDA ratio, current ratios and minimum cash flow coverage
ratio and net earnings requirements. If we violate any of these covenants, or
violate any other provision of our existing lending arrangement, our credit
agreement provides that our lender has the right to accelerate repayment of all
amounts outstanding under the agreement and/or to commence foreclosure
proceedings on our assets. We were in compliance with all covenants under our
existing credit facility at December 27, 2003 and remain so as of June 26,
2004. On June 15, 2004, the Company hired Richard E. White as its new Chief
Executive Officer. Prior to joining the Company, and since 2002, Mr. White was
a consultant to trade associations. From 1999 to 2002, he served as President
and Chief Executive Officer of Reed Exhibitions North America, the largest
business-to-business event organizing company in North America. From 1997 to
1999, Mr. White was General Manager, Subsidiary Brands, of three of Nike Inc.s
four subsidiary companies, including Cole Haan and Bauer-Nike Hockey. Mr.
White was employed for fifteen years by Major League Baseball Properties, Inc.
and served as President and Chief Executive Officer for seven of those years.
Mr. White entered into a three-year employment agreement with the Company.
James Riedman, who previously acted as both our Chairman of the Board and Chief
Executive Officer, will remain Chairman of the Board. In connection with the Companys acquisition of Royal Robbins, it agreed
to pay as part of the purchase price potential earnout cash payments equal to
25% of the gross profit of the Royal Robbins product lines for the 12-month
periods ending May 31, 2004 and 2005, respectively, so long as minimum
thresholds are achieved by the acquired business during these periods. On June
30, 2004 the Company paid $2.0 million which represented the first earnout
payment earned for the 12-month period ended May 31, 2004. 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the historical
consolidated financial statements and the related notes and the other financial
information included herein and in the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year ended
December 27, 2003. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of any
number of factors, including those set forth under Risk Factors below. In this presentation the Company discusses pro forma organic net sales
growth, which is a non-GAAP financial measure of reported sales based on our
pro forma net sales for the second quarter and the first six months of fiscal
2003. Management believes that discussing pro forma organic net sales growth provides a better understanding
of the Companys net sales performance and trends than reported revenue because
it allows for more meaningful comparisons of current-period revenue to that of
prior periods on a comparable basis. SEC rules require supplemental
explanation and reconciliation, which are provided at  Results of
Operations  Fiscal Quarter Ended June 26, 2004 Compared to Fiscal Quarter Ended
June 28, 2003  Reconciliation, and 
Results of Operations  Fiscal Six Month
Period Ended June 26, 2004 Compared to Fiscal Six Month Period Ended June 28,
2003  Reconciliation. References to our fiscal 2002 refer to our fiscal year
ended December 31, 2002, references to our fiscal 2003 refer to our fiscal
year ended December 27, 2003, and references to our fiscal 2004 refer to our
fiscal year ending January 1, 2005. Overview We are a mens and womens footwear and apparel company. We design,
develop and market branded dress and casual footwear and apparel. We sell over
100 different styles of footwear and over 250 different styles of apparel
products. By emphasizing traditional style, quality and fit, we believe we can
better maintain a loyal consumer following that is less susceptible to
fluctuations due to changing fashion trends and consumer preferences. As a
result, a significant number of our product styles carry over from
year-to-year. In addition, our design and product development teams seek to
create and introduce new products and styles that complement these longstanding
core products, are consistent with our brand images and meet our high quality
standards. We believe our brands have significant potential for growth through
increases in product assortment, brand extensions and expansion of our retail
channels. We intend to continue our previously announced acquisition program and
pursue acquisitions of sustainable niche brands in the footwear and apparel
industry that we believe could complement or expand our business, or augment
our market coverage. We seek companies or product lines that we believe have
consistent historical cash flow and brand growth potential and can be purchased
at a reasonable price. We also may acquire businesses that we feel could
provide us with important relationships or otherwise offer us growth
opportunities. We plan to fund our future acquisitions through bank financing,
seller debt or equity financing and public or private equity financing.
Although we are actively seeking acquisitions, as of the date of this Quarterly
Report on Form 10-Q we have no agreements with respect to any such
acquisitions, and there can be no assurance that we will be able to identify
and acquire such businesses or obtain necessary financing on favorable terms. As part of this program, on July 19, 2004 we acquired Altama Delta
Corporation, a provider of combat and uniform boots to the military and
commercial markets under its Altama brand. During the last two quarters of
fiscal 2003, we acquired H.S. Trask & Co., a mens footwear company, and Royal
Robbins, Inc., an apparel company. These acquisitions added to our portfolio of brands, diversified our
product offerings and customer base and provided a base for significant
additional revenues in the future. Since making our 2003 acquisitions, we have
been able to further integrate their operations with our infrastructure and
take advantage of duplicative overhead and operational inefficiencies. We
expect to also integrate the operations and infrastructure of Altama and take
advantage of duplicative overhead and operational inefficiencies. The increase
in revenues and operating expenses during the second quarter and six months
ended June 26, 2004 as compared to the prior year period primarily relates to
our newly acquired brands. On July 13, 2004, the SEC declared effective our registration statement,
which we filed on Form S-2 under the Securities Act of 1933 in connection with
a follow-on offering of our common stock. Under this registration statement,
we registered 2,875,000 shares of common stock, including 375,000 shares
subject to the underwriters over-allotment options (none of which have been
exercised as of August 5, 2004), with a public offering price of $12.50 per
share. On July 19, 2004, we completed the offering, issuing 2,500,000 shares
at the $12.50 per share offering price, resulting in net proceeds, after
deducting the underwriters fees and transaction costs, of approximately $28.5
million. We used these net proceeds and approximately $10.0 million of
additional borrowings under our amended credit facility to finance the $35.5
million cash portion of the purchase price for the Altama acquisition, to
refinance 11




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Altamas funded indebtedness and to pay related fees and expenses. The
over-allotment options which we granted to the underwriters in the offering
expire on August 30, 2004. On July 19, 2004, in connection with the Altama acquisition we increased
our existing credit facility to a maximum of $33.4 million and extended the
maturity date until June 30, 2006. The new facility includes an $18.0 million
revolving line of credit and $15.4 million in term loans, including a new $10.0
million term loan. Altama Acquisition In acquiring Altama, we purchased all of its outstanding capital stock for
approximately $38.0 million, plus an earnout payment of $2.0 million that is
subject to Altama meeting certain sales requirements. As part of the
transaction, we refinanced Altamas indebtedness of approximately $1.7 million.
Payment of the purchase price at closing was made by delivery of $35.5 million
in cash, and 196,967 shares of common stock valued at $2.5 million. Under the terms of the stock purchase agreement, we agreed to pay Mr.
Wyatt $2.0 million in consideration for a five-year covenant-not-to-compete and
other restrictive covenants. We also entered into a two-year consulting
agreement with Mr. Wyatt which provides for an annual consulting fee of
$100,000. Altama has manufactured military footwear for the U.S. Department of
Defense, or DoD, for 35 consecutive years. Altama also produces a commercial
line of high-performance combat boots for civilian use that are marketed
through domestic wholesale channels to serve various retailers such as
Army/Navy surplus stores, military catalogs and independent outdoor/ sporting
goods stores and to international wholesalers serving the military and other
needs of foreign governments and foreign civilian markets. Altamas net sales
for the fiscal year ended September 27, 2003 were $31.6 million, consisting of
65% military sales and 35% commercial sales. Altamas business generates lower gross margins than ours historically has
generated. In fiscal 2003, Altamas gross margin percentage was 25%, and ours
was 43%. Therefore, we expect that the acquisition will cause our gross margin
to be lower in the future. However, Altamas selling, general and
administrative expenses as a percentage of net sales in fiscal 2003 was
significantly lower than ours. Therefore, we do not expect that our overall
operating margin will significantly change as a result of the acquisition. As a result of its DoD business, Altama has different working capital
requirements and lower inventory risks than we do. For its DoD business, Altama
produces its inventory only upon receipt of orders under specific contracts.
After completion of the manufacturing process, DoD orders are reviewed for
quality assurance, and upon approval Altama bills the DoD. Altamas accounts
receivable days with DoD orders at April 3, 2004 was 51. In addition to
assuming little, if any, inventory risk, Altama has significantly fewer days
receivable outstanding. Results of Operations The following table sets forth selected consolidated operating results for
each of the quarterly and six month periods indicated and for each of the last two fiscal
years, presented as a percentage of net sales. Fiscal Year Ended
    
    Quarter Ended
    
    Six Months EndedDecember 31,
    
    December 27,
    
    June 28,
    
    June 26,
    
    June 28,
    
    June 26,2002
    
    2003
    
    2003
    
    2004
    
    2003
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of goods sold
    
    
    62
    %
    
    
    57
    %
    
    
    58
    %
    
    
    55
    %
    
    
    57
    %
    
    
    56
    %Gross profit
    
    
    38
    %
    
    
    43
    %
    
    
    42
    %
    
    
    45
    %
    
    
    43
    %
    
    
    44
    %Operating expenses and other expenses  net
    
    
    28
    %
    
    
    36
    %
    
    
    47
    %
    
    
    36
    %
    
    
    41
    %
    
    
    33
    %Operating income (loss)
    
    
    10
    %
    
    
    7
    %
    
    
    (5
    %)
    
    
    9
    %
    
    
    2
    %
    
    
    11
    %Interest expense
    
    
    2
    %
    
    
    2
    %
    
    
    5
    %
    
    
    1
    %
    
    
    3
    %
    
    
    1
    %Earnings (loss) before income taxes
    
    
    8
    %
    
    
    5
    %
    
    
    (10
    %)
    
    
    8
    %
    
    
    (1
    %)
    
    
    10
    %Income tax provision (benefit)
    
    
    3
    %
    
    
    3
    %
    
    
    (1
    %)
    
    
    3
    %
    
    
    1
    %
    
    
    4
    %Net earnings (loss)
    
    
    5
    %
    
    
    2
    %
    
    
    (9
    %)
    
    
    5
    %
    
    
    (2
    %)
    
    
    6
    %
 12




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Fiscal Quarter Ended June 26, 2004 Compared to Fiscal Quarter Ended June 28, 2003. Net Sales Net sales for the second quarter ended June 26, 2004 increased $6.3
million or 83.7%, increasing to $13.9 million from $7.6 million for the second
quarter of 2003. Of this increase $5.9 million is attributable to acquired
brand revenue associated with the H.S. Trask®, Ducks Unlimited®, and Royal
Robbins® brand acquisitions which occurred during the second half of 2003.
Giving effect to these acquisitions as if they occurred on January 1, 2003, the
Companys brands on a combined basis experienced flat year-over-year pro forma
organic net sales growth based on $13.9 million in pro forma net sales for the
second quarter period ended June 28, 2003. Net sales for the Companys
Trotters®, SoftWalk®, and Royal Robbins® brands increased 11.2% during the
current quarter as compared to pro forma net sales for the prior year quarter,
primarily associated with continued strong acceptance of these brands
spring/summer product lines at retail. This sales percentage increase was
offset by decreased sales from the Companys H.S. Trask® and Ducks Unlimited®
brands as compared to the prior year quarters pro forma net sales, resulting
from a sourcing restructuring and product repositioning program which was
completed during the current quarter. In addition, a portion of the current
quarter sales included new designs and products that we developed during fiscal
2003 and during the current fiscal quarter of 2004. We expect to continue this
level of investment in product design and development throughout the remainder
of fiscal 2004. Gross Profit Gross profit for the second quarter of fiscal 2004 increased 97% to $6.3
million as compared to $3.2 million for the comparable prior year period. Gross
margin as a percentage of net sales increased to 45.3% compared to 42.2% in the
prior year quarter. The increase in gross profit was primarily related to
increased sales from the addition of the H.S. Trask®, Ducks Unlimited®, and
Royal Robbins® product lines and an improved product sales mix among our new
and prior brands. Operating Expenses Selling, general and administrative expenses were $5.0 million, or 36% of
net sales, for the second quarter of fiscal 2004 as compared to $2.6 million or
34% of net sales for the second quarter of fiscal 2003. This dollar increase
was primarily related to increased operating costs associated with supporting a
higher sales volume, our recently acquired brands and increased sales, design
and management compensation expenses. Our Other expenses  net was $26,000 for the second quarter of fiscal
2004 and consisted primarily of expenses incurred in connection with
non-capitalizable acquisition activities. Our Other expenses  net of
$939,000 for the second quarter of fiscal 2003 consisted primarily of costs
associated with the settlement of the dissenting stockholders litigation and
relocation of the Companys corporate headquarters from Old Town, Maine to
Carlsbad, California. Interest Expense Interest expense for the second quarter of fiscal 2004 was $134,000 as
compared to $386,000 in the comparable prior year period. Interest expense for
the second quarter of 2003 included an interest charge of $346,000 related to
the dissenting stockholders litigation. Excluding the dissenting stockholders
interest charge, interest expense increased $94,000 from the prior year quarter
total of $40,000. The increase in interest expense during 2004 was a result of
increased indebtedness incurred to fund our two acquisitions in the second half
of fiscal 2003. Income Tax Provision We recorded income tax expense for the second quarter of fiscal 2004 of
$465,000 as compared to a tax benefit of $51,000 for the comparable prior year
period. Our effective tax rates during the quarters ended June 26, 2004 and
June 28, 2003 were 42% and 40%, respectively. Approximately $611,000 of the
dissenting stockholders litigation settlement paid in the second quarter of
2003 was not tax deductible. The increased effective tax rate for fiscal 2004
reflects our current operations, corporate structure and asset base. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities, for financial reporting purposes,
and the amounts used for income tax purposes. Net Earnings Our net
earnings for the second quarter of fiscal 2004 were $643,000 as
compared to a net loss of $688,000 for the second quarter of fiscal
2003 and our net earnings per diluted
share were $0.12 for the second quarter of 2004 as compared to a net loss of
$0.19 per diluted share for the second quarter of fiscal 2003. This
improvement is primarily due to the absence of litigation settlement
and relocation costs which were incurred during the second quarter of
2003 and the Companys increased net sales from the fiscal 2003 acquisitions, along
with successful integration of these new brands and our continuing
expense reduction efforts. 13




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and sourcing. Reconciliation The non-GAAP financial measure of pro forma organic net sales growth discussed
above under the heading   Results of Operations  Fiscal Quarter Ended June
26, 2004 Compared to Fiscal Quarter June 28, 2003  Net Sales, and elsewhere
in this report, does not replace the presentation of Phoenix Footwears GAAP
financial results and does not necessarily reflect the actual financial results
of the combined companies for the periods presented. In our measure of pro
forma net sales, we have included unaudited prior year period net sales of H.S.
Trask and Royal Robbins. This information is provided to present the combined
companies results as if they were combined during the second quarter of fiscal
2003. The sales figures for these acquisitions are internally prepared and
unaudited, and have not been reviewed by our independent accountants. A
reconciliation of the non-GAAP financial measures contained in this report to
the most comparable GAAP measures is as follows: Unaudited Pro Forma NetSalesfor the Three Months EndedJune 28, 2003(in thousands)Phoenix Footwear Group, Inc. (Actual)
    
    $
    7,552Acquired Brands (H.S. Trask & Co., Royal Robbins, Inc.)
    
    
    6,367Net Sales
    
    $
    13,919
 Fiscal Six Month Period Ended June 26, 2004 Compared to Fiscal Six Month Period Ended June 28, 2003. Net Sales Net sales for the six months ended June 26, 2004 increased $15.8 million
or 94.0%, increasing to $32.5 million from $16.8 million for the six months
ended June 28, 2003. Of this increase $14.2 million is attributable to acquired
brand revenue associated with the H.S. Trask®, Ducks Unlimited®, and Royal
Robbins® brand acquisitions which occurred during the second half of fiscal 2003.
Giving effect to these acquisitions as if they occurred on January 1, 2003, the
Companys brands on a combined basis generated $1.7 million in pro forma
organic net sales growth for the six months ended June 26, 2004 or 5.6%, based
on $30.8 million in pro forma net sales for the six months ended
June 28, 2003. Net sales for the Companys Trotters®, SoftWalk®, and Royal Robbins® brands
increased 11.7% during the six month period ended June 26, 2004 as compared to
pro forma net sales for the prior year period. This sales percentage increase
was offset by decreased sales from the Companys H.S. Trask® and Ducks
Unlimited® brands as compared to the prior year periods pro forma net sales
resulting from a sourcing restructuring and product repositioning program which
was completed during the second quarter of fiscal 2004. In addition, a portion of our
sales for this period included new designs that we developed in fiscal 2003 and
year-to-date in fiscal 2004. We expect to continue this level of investment in product
design and development throughout fiscal 2004. Gross Profit Gross profit for the six months ended June 26, 2004 was $14.4 million or 44.4%
of net sales as compared to $7.2 million or 43.0% of net sales in the same
period of 2003. The increase in gross profit was primarily related to our 2003
brand acquisitions and an improved product sales mix among our new and prior
brands. Operating Expenses Selling, general and administrative expenses as a percentage of net sales
were 33% or $10.8 million for the six months ended June 26, 2004 versus 32% or
$5.5 million for the comparable prior year period. This dollar increase was
primarily related to increased operating costs associated with supporting a
higher sales volume, our recently acquired brands and increased sales, design
and management compensation expense. Our Other expenses  net was $60,000 for the six months ended June 26,
2004 and consisted primarily of expenses incurred in connection with
non-capitalizable acquisition activities. Our Other expenses  net of $1.4
million for the comparable six month period in fiscal 2003 consisted primarily
of costs associated with the settlement of the dissenting stockholders
litigation, relocation of the Companys corporate headquarters from Old Town,
Maine to Carlsbad, California and the discontinued Antigua Enterprises 14




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acquisition effort. Interest Expense Interest expense for the six month period ended June 26, 2004 was $304,000
as compared to $452,000 in the comparable prior year period. Interest expense
for the six months ended June 28, 2003 included an interest charge of $376,000
related to the dissenting stockholders litigation. Excluding the dissenting
stockholders interest charge, interest expense increased $228,000 from the
prior year period total of $76,000. The increase in interest expense during
2004 was a result of increased indebtedness incurred to fund our two
acquisitions in the second half of fiscal 2003. Income Tax Provision We recorded income tax expense for the six months ended June 26, 2004 of
$1.4 million as compared to $199,000 for the comparable prior year period. Our
effective tax rates during the six month periods ended June 26, 2004 and June
28, 2003 were 42% and 40%, respectively. Approximately $611,000 of the
dissenting stockholders litigation settlement paid during the first six months
of fiscal 2003 was not tax deductible. The increased effective tax rate for
fiscal 2004 reflects our current operations, corporate structure and asset
base. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities, for
financial reporting purposes, and the amounts used for income tax purposes. Net Earnings Our net earnings for the six months ended June 26, 2004 were $1.9 million
as compared to a net loss of $313,000 for the six months ended
June 28, 2003 and our net earnings per
diluted share were $0.36 for the six months ended June 26, 2004 as compared to
a net loss of $0.08 per diluted share for the same period of fiscal 2003. This improvement
is primarily due to the absence of litigation settlement, relocation
and acquisition expenses which were incurred during the
six months ended June 28, 2003 and the Companys increased net sales from our fiscal 2003
acquisitions, along with successful integration of these new brands
and our continuing expense reduction efforts. Reconciliation The
non-GAAP financial measure of pro forma organic net sales growth discussed
above under the heading  Results of Operations  Fiscal Six Month Period
Ended June 26, 2004 Compared to Fiscal Six Month Period Ended
June 28, 2003 
Net Sales, and elsewhere in this report, does not replace the presentation of
Phoenix Footwears GAAP financial results and does not necessarily reflect the
actual financial results of the combined companies for the periods presented.
In our measure of pro forma net sales, we have included unaudited prior year
period net sales of H.S. Trask and Royal Robbins. This information is provided
to present the combined companies results as if they were combined during the
six month period ended June 28, 2003. The sales figures for these acquisitions
are internally prepared and unaudited, and have not been reviewed by our
independent accountants. A reconciliation of the non-GAAP financial measures
contained in this report to the most comparable GAAP measures is as follows: Unaudited Pro Forma NetSalesfor the Six Months EndedJune 28, 2003(in thousands)Phoenix Footwear Group, Inc. (Actual)
    
    $
    16,759Acquired Brands (H.S. Trask & Co., Royal Robbins, Inc.)
    
    
    14,044Net Sales
    
    $
    30,803
 15




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Seasonal and Quarterly Fluctuations

The following sets forth our net sales and income (loss) from operations
summary operating results for the quarterly periods indicated (in thousands).

Fiscal 2003First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterNet sales
    
    $
    9,207
    
    
    $
    7,552
    
    
    $
    11,002
    
    
    $
    11,316Income (loss) from operations
    
    $
    691
    
    
    $
    (353
    )
    
    $
    1,714
    
    
    $
    495


Fiscal 2004First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterNet sales
    
    $
    18,638
    
    
    $
    13,876
    
    
    
    
    
    
    
    Income from operations
    
    $
    2,301
    
    
    $
    1,242
    
    
    
    
    
    
    
    


Our quarterly results of operations have fluctuated, and we expect will
continue to fluctuate in the future, as a result of seasonal
variances. Notwithstanding the effects of our acquisition activity, net
sales and income from operations in our first and third quarters typically are
stronger than in our second and fourth quarters.

Liquidity and Capital Resources

Our primary liquidity requirements have continued to include debt service,
capital expenditures, working capital needs and financing for acquisitions. We
have historically met these liquidity needs with cash flows from operations,
borrowings under our credit facility, seller financing in acquisitions and
equity issuances.

During the first six months of fiscal 2004, the Company had a $24.8
million credit facility with Manufacturers and Traders Trust Company (M&T),
which was comprised of an $18.0 million revolving line of credit (revolver)
and a term loan facility in the amount of $6.8 million. On July 19, 2004, the
Company increased its borrowing capacity under the credit facility with M&T to
a maximum of $33.4 million and extended the maturity date until June 30, 2006
in connection with its acquisition of Altama Delta Corporation. The new
facility is comprised of an $18.0 million revolving line of credit and $15.4
million in term loans, including a new $10.0 million term loan repayable in
equal monthly installments maturing in July 2009. As of June 26, 2004 the
maximum credit amount under the revolver is $15.0 million during the months of
June through the following January and $18.0 million during the months of
February through the following May, reduced by a $2.0 million amortized term
loan and outstanding letters of credit. The revolver has an interest rate of LIBOR
plus 2.75%, or the prime rate plus .25%. At
June 26, 2004, LIBOR with a 90-day maturity was 1.59% and the prime rate was
4.25%.

The borrowing base for the revolver under the Companys current credit
facility, as with the prior credit facility, is based on certain balances of
accounts receivable and inventory, as defined in the agreement. Future uses of
proceeds of the revolving credit facility are restricted to funding our working
capital requirements and capital expenditures. The amended credit facility
contains a security agreement and covenants that are similar to those of the
prior credit facility. The amended credit facility also contains a covenant
that requires us each fiscal year to prepay our new $10.0 million term loan to
the bank in the amount of 50% of our adjusted cash flow, as defined in the
amended credit agreement, up to a maximum of $1.5 million, if our borrowed
funds for a fiscal year, as defined in the amended credit agreement, are
greater than two times our earnings. It also restricts our ability to pay
dividends. After December 31, 2005, we will be permitted to pay dividends on
our common stock as long as we are not in default and doing so would not cause
a default, and as long as our average borrowed funds to EBITDA ratio, as
defined in the amended credit agreement, is no greater than 2 to 1. Our credit
facility contains covenants that restrict, among other things, our ability to
incur additional indebtedness, pay dividends, create certain liens and make
acquisitions. It also contains certain financial maintenance covenants, which,
among other things, specify capital expenditure limits, a maximum average
borrowed funds to EBITDA ratio, current ratios and minimum cash flow coverage
ratio and net earnings requirements. If we violate any of these covenants, or
violate any other provision of our existing lending arrangement, our credit
agreement provides that our lender has the right to accelerate repayment of all
amounts outstanding under the agreement and/or to commence foreclosure
proceedings on our assets. We were in compliance with all covenants under our
existing credit facility at December 27, 2003 and remain so as of June 26,
2004.

The outstanding balances for the revolving credit facility and our term
loans at June 26, 2004 were $5.2 million and $5.4 million, respectively. The
available borrowing capacity under the revolving credit facility, net of
outstanding letters of credit of $3.3 million, was approximately $900,000 at
June 26, 2004. On our first term loan, $1.5 million remained to be paid as of
June 26, 2004 in two remaining consecutive $750,000 installments due on the
first day of May in each subsequent year. On our second term loan, $2.5 million
remained to be paid as of June 26, 2004 in 17 remaining consecutive quarterly
$150,000 installments, due on May 1, August 1, November 1 and February 1 of
each year. On our third term loan, $1.3 million remained to be paid as of June
26, 2004 in 53 remaining monthly $25,000 installments due on the first day of
each month.

As of July 24, 2004, the outstanding balances for the revolving credit
facility and our term loans were $7.7 million and $15.3 million, respectively.
The available borrowing capacity under the revolving credit facility, net of
outstanding letters of credit of $2.7 million, was approximately $4.2 million
at July 24, 2004. On our first term loan, $1.5 million remained to be paid as
of July 24,

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2004 in two remaining consecutive $750,000 installments due on the first day of
May in each subsequent year. On our second term loan, $2.5 million remained to
be paid as of July 24, 2004 in 17 remaining consecutive quarterly $150,000
installments, due on May 1, August 1, November 1 and February 1 of each year.
On our third term loan, $1.3 million remained to be paid as of July 24, 2004 in
52 remaining monthly $25,000 installments due on the first day of each month.
On our new term loan, $10.0 million remained to be paid as of July 24, 2004 in
60 remaining monthly $166,667 installments due on the first day of each month. Cash Flows Provided (Used) By Operations.During the six months ended
June 26, 2004, our net cash provided by operations was $724,000 and during the
six months ended June 28, 2003, our net cash used by operations was $2.8
million. The increase in cash provided by operations was primarily due to the
increase in net earnings related to increased sales, a reduction in
inventories and the absence of litigation settlement payments. These
amounts were partially offset by
increases in accounts receivable and other current assets. Working capital at the end of the second quarter of fiscal 2004 was
approximately $15.2 million, compared to approximately $13.4 million at the end
of fiscal 2003. The improvement in working capital at the end of the second
quarter of fiscal 2004 compared to the end of fiscal 2003 was due primarily to
the impact of our fiscal 2003 acquisitions. These acquisitions result in
increases in short and long term debt and increased accounts receivable
balances. Our current ratio, the relationship of current assets to current
liabilities, increased to 2.50 at the end of the second quarter of fiscal 2004
from 2.37 at the end of fiscal 2003 due primarily to our fiscal 2003
acquisitions. Accounts receivable days increased from 76 days at the end of
fiscal 2003 to 80 days at the end of the second quarter of fiscal 2004,
reflective of extended payment terms and a lower ratio of direct consumer sales
associated with our H.S. Trask brand. Investing Activities.In the six months ended June 26, 2004, our cash used
in investing activities totaled $554,000 compared to cash provided by investing
activities in the comparable period of fiscal 2003 of $364,000. During the six
months ended June 26, 2004 cash used in investing activities was primarily due
to purchases of equipment. Cash provided by investing activities in the
comparable period of fiscal 2003 consisted mostly of net proceeds from the
disposal of property and equipment. For the remainder of the current fiscal year, we anticipate capital
expenditures of approximately $50,000, which will consist generally of new
computer equipment. This amount also includes capital
expenditures that Altamas business will require for the remainder of fiscal
2004, primarily for equipment upgrades. The actual amount of capital
expenditures for fiscal 2004 may differ from this estimate, largely depending
on acquisitions we may complete or unforeseen needs to replace existing assets. Financing Activities.For the six months ended June 26, 2004, our net cash
used by financing activities was $1.2 million compared to cash provided by
financing activities of $1.7 million for the comparable period of fiscal 2003.
The cash used in the current year period was primarily due to net payments made
on our revolving line of credit and notes payable combined with the repurchase
of common stock from our 401(k) plan upon the election of terminated plan
participants, partially offset by cash received from stock option exercises.
Additionally, the Company incurred a $48,000 bank overdraft during
the current year period related to the timing of cash receipts and
disbursements. Cash provided by financing activities in the comparable prior year period
relates primarily to net borrowings made on our revolving line of credit used
to pay the dissenting stockholders settlement expenses, partially offset by the
repurchase of common stock from our 401(k) plan upon the election of terminated
plan participants. Our ability to generate sufficient cash to fund our operations depends
generally on the results of our operations and the availability of financing.
Our management believes that cash flows from operations in conjunction with the
available borrowing capacity under our amended credit facility, net of
outstanding letters of credit, of approximately $4.2 million at July 24, 2004,
will be sufficient for the foreseeable future to fund operations, meet debt
service and contingent earnout payment requirements and fund capital
expenditures other than future acquisitions. Contractual Obligations In the Annual Report on Form 10-K for the year ended December 27, 2003
under the heading Contractual Obligations, we outlined certain of our
contractual obligations as described therein. For the quarter ended June 26,
2004, there have been no material changes in the contractual obligations
specified. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements other than operating leases. We
do not believe that these operating leases are material to our current or
future financial condition, results of operations, liquidity, capital resources
or capital expenditures. We are exposed to interest rate changes primarily as a result of our line
of credit and long-term debt, which we use to maintain 17




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liquidity and to fund capital expenditures and expansion. Our market risk
exposure with respect to this debt is to changes in the prime rate in the
U.S. and changes in LIBOR. Our revolving line of credit and our term loans
provide for interest on outstanding borrowings at rates tied to the prime rate
or, at our election, tied to LIBOR. At December 27, 2003 and June 26, 2004, we
had $12.1 million and $10.6 million, respectively, in outstanding borrowings
under our credit facility. A 1.0% increase in interest rates on our current
borrowings would have had a $106,000 impact on income before income taxes. We
do not enter into derivative or interest rate transactions for speculative
purposes. Critical Accounting Policies: As of June 26, 2004, the Companys consolidated critical accounting
policies and estimates have not changed materially from those set forth in the
Annual Report on Form 10-K for the year ended December 27, 2003. CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q and the Securities and Exchange
Commission filings that are incorporated by reference into this report contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend
that these forward-looking statements be subject to the safe harbors created by
those sections. These forward-looking statements include, but are not limited to,
statements relating to our anticipated financial performance, business
prospects, new developments, new merchandising strategies and similar matters,
and/or statements preceded by, followed by or that include the words
believes, could, expects, anticipates, estimates, intends, plans,
projects, seeks, or similar expressions. We have based these
forward-looking statements on our current expectations and projections about
future events, based on the information currently available to us. These
forward-looking statements are subject to risks, uncertainties and assumptions,
that may affect the operations, performance, development and results of our
business, including those described below. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
stated, or if no date is stated, as of the date of this Quarterly Report on
Form 10-Q. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason except as required under applicable law. In light of
these risks, uncertainties and assumptions, the forward-looking events
discussed in this Quarterly Report on Form 10-Q may not occur. Investors should also be aware that while we do, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any material non-public information or other confidential commercial
information. Accordingly, investors should not assume that we agree with any
statement or report issued by any analyst irrespective of the content of the
statement or report. Furthermore, we have a policy against publishing financial forecasts or
projections issued by others or confirming financial forecasts, or projections
issued by others. Thus, to the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not
the responsibility of the Company. Risk Factors Our acquisitions or acquisition efforts, which are important to our growth, may
not be successful, which may limit our growth or adversely affect our results
of operations and financial condition Acquisitions have been an important part of our development to date.
During fiscal 2003, we acquired Royal Robbins and H.S. Trask. On July 19,
2004, we acquired Altama. As part of our business strategy, we intend to make
additional acquisitions in the footwear and apparel industry that we feel could
complement or expand our business, augment our market coverage, provide us with
important relationships or otherwise offer us growth opportunities. If we
identify an appropriate acquisition candidate, we may not be able to negotiate
successfully the terms of or finance the acquisition. Unsuccessful acquisition
efforts, such as our attempted acquisition of Antigua Enterprises Inc. last
year, may result in significant additional expenses that would not otherwise be
incurred. In fiscal 2003, we incurred $285,000 of such costs. In addition, we
cannot assure you that we will be able to integrate the operations of our
acquisitions without encountering difficulties, including unanticipated costs,
possible difficulty in retaining customers and supplier or manufacturing
relationships, failure to retain key employees, the diversion of management
attention or failure to integrate our information and accounting systems.
Following an acquisition, we may not realize the revenues and cost savings that
we expect to achieve or that would justify the acquisition investment, and we
may incur costs in excess of what we anticipate. These circumstances could
adversely affect our results of operations or financial condition. 18




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Our future success depends on our ability to respond to changing consumer
preferences and fashion trends and to develop and commercialize new products
successfully Our principal business is the design, development and marketing of
footwear and apparel. Although our focus is on traditional and sustainable
niche brands, our brands may still be subject to rapidly changing consumer
preferences and fashion trends. For example, in fiscal 2002, our Trotters brand
experienced decreased retail acceptance of certain styles, which adversely
affected our net sales. Accordingly, we must identify and interpret fashion
trends and respond in a timely manner. Demand for and market acceptance of new
products, such as our H.S. Trask womens and Strol brands, are uncertain, and
achieving market acceptance for new products generally requires substantial
product development and marketing efforts and expenditures. Any failure on our
part to regularly develop innovative products and update core products could
limit our ability to differentiate and appropriately price our products,
adversely affect retail and consumer acceptance of our products, and limit
sales growth. Each of these risks could adversely affect our results of
operations or financial condition. We face intense competition, including competition from companies with greater
resources than ours, and if we are unable to compete effectively with these
companies, our market share may decline and our business and stock price could
be harmed We face intense competition in the footwear and apparel industry from
other companies, such as Brown Shoe Company, which markets the Naturalizer®
brand, and Columbia Sportswear Company®. Many of our competitors have greater
financial, distribution or marketing resources, as well as greater brand
awareness. In addition, the overall availability of overseas manufacturing
opportunities and capacity allow for the introduction of competitors with new
products. Moreover, new companies may enter the markets in which we compete,
further increasing competition in the footwear and apparel industry. We believe that our ability to compete successfully depends on a number of
factors, including anticipating and responding to changing consumer demands in
a timely manner, maintaining brand reputation and authenticity, developing high
quality products that appeal to consumers, appropriately pricing our products,
providing strong and effective marketing support, ensuring product availability
and maintaining and effectively assessing our distribution channels, as well as
many other factors beyond our control. Due to these factors within and beyond
our control, we may not be able to compete successfully in the future.
Increased competition may result in price reductions, reduced profit margins,
loss of market share, and an inability to generate cash flows that are
sufficient to maintain or expand our development and marketing of new products,
each of which would adversely affect the trading price of our common stock. A large portion of our sales are to a relatively small group of customers with
whom we do not have long-term purchase orders, therefore the loss of any one or
more of these customers could adversely affect our business Ten major customers represented approximately 39% of net sales in fiscal
2003; and most of these same customers represented 34% of net sales in fiscal
2002 and 38% of net sales in fiscal 2001. Sales to any one customer in fiscal
2003, 2002 and 2001 did not exceed 10% of our net sales, except for Dillards
department stores, which accounted for 11%, 12% and 11% of our net sales in
fiscal 2003, 2002 and 2001, respectively. Although we have long-term
relationships with many of our customers, our customers do not have a
contractual obligation to purchase our products, and we cannot be certain that
we will be able to retain our existing major customers. The retail industry can
be uncertain due to changing customer buying patterns and consumer preferences,
and customer financial instability. These factors could cause us to lose one or
more of these customers, which could adversely affect our business. In addition, majority of sales in our Altama brand have been with a single
customer, the Defense Support Center Philadelphia, or DSCP, an agency of the
DoD. In Altamas fiscal year ended September 27 2003, over 60% of its net
sales were with the DoD, which could represent over 30% of our net sales on a
combined basis. Even though Altamas level of business with this customer has
grown over the past few years, due largely to increased deployment of armed
forces, there is no certainty that this will continue after our proposed
acquisition. Material reductions in the level of orders from the DoD would harm
our operating results and deprive us of the benefits that we expect to receive
from the Altama acquisition. The financial instability of our customers could adversely affect our business
and result in reduced sales, profits and cash flows We sell much of our merchandise to major department stores and specialty
retailers across the U.S. and extend credit based on an evaluation of each
customers financial condition, usually without requiring collateral. However,
the financial difficulties of a customer could cause us to curtail business
with that customer. We may also assume more credit risk relating to that
customers receivables due us. Two of our customers constituted 20% of trade
accounts receivable outstanding at December 27, 2003. Our 19




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inability to collect on our trade accounts receivable from any of our major
customers could adversely affect our business or financial condition. Our ability to compete could be jeopardized if we are unable to protect our
intellectual property rights or if we are sued for intellectual property
infringement We believe that we derive a competitive advantage from our ownership of
the Trotters, SoftWalk, H.S. Trask, Royal Robbins and Altama trademarks, and
our patented footbed technology. In addition, we own and license other
trademarks that we utilize in marketing our products. We vigorously protect our
trademarks against infringement. We believe that our trademarks are generally
sufficient to permit us to carry on our business as presently conducted. We
cannot, however, know whether we will be able to secure trademark protection
for our intellectual property in the future or that protection will be adequate
for future products. Further, we face the risk of ineffective protection of
intellectual property rights in the countries where we source our products. We
cannot be sure that our activities do not and will not infringe on the
proprietary rights of others. If we are compelled to prosecute infringing
parties, defend our intellectual property, or defend ourselves from
intellectual property claims made by others, we may face significant expenses
and liability that could divert our managements attention and resources and
otherwise adversely affect our business or financial condition. Our international manufacturing operations are subject to the risks of doing
business abroad, which could affect our ability to manufacture our products in
international markets, obtain products from foreign suppliers or control the
costs of our products We currently rely on foreign sourcing of our products, other than most of
our military footwear. We believe that one of the key factors in our growth has
been our strong relationships with manufacturers capable of meeting our
requirements for quality and price in a timely fashion. We obtain our
foreign-sourced products primarily from independent third-party manufacturing
facilities located in Brazil, Asia and South America. As a result, we are
subject to the general risks of doing business outside the U.S., including,
without limitation, work stoppages, transportation delays and interruptions,
political instability, expropriation, nationalization, foreign currency
fluctuation, changing economic conditions, the imposition of tariffs, import
and export controls and other non-tariff barriers, and changes in local
government administration and governmental policies, and to factors such as the
short-term and long-term effects of severe acute respiratory syndrome, or SARS,
and the outbreak of avian influenza in China. Although a diverse domestic and
international industry exists for the kinds of merchandise sourced by us, there
can be no assurance that these factors will not adversely affect our business,
financial condition or results of operations. Our reliance on independent manufacturers for most of our products, with whom
we do not have long-term written agreements, could cause delay and damage
customer relationships In fiscal 2003, 13 manufacturers accounted for 100% of our footwear
volume. Following our recent acquisition of Altama, which in fiscal 2003
manufactured approximately 84% of the products it sold, we anticipate that
approximately 70% of our net sales could come from products sourced from third
party manufacturers. We do not have long-term written agreements with any of
our third-party manufacturers. As a result, any of these manufacturers may
unilaterally terminate their relationships with us at any time. Establishing
relationships with new manufacturers would require a significant amount of time
and would cause us to incur delays and additional expenses, which would also
adversely affect our business and results of operations. In addition, in the past, a manufacturers failure to ship products to us
in a timely manner or to meet the required quality standards has caused us to
miss the delivery date requirements of our customers for those items. This, in
turn, has caused, and may in the future cause, customers to cancel orders,
refuse to accept deliveries or demand reduced prices. This could adversely
affect our business and results of operation. Our results could be adversely affected by disruptions in the manufacturing
system for our Altama brand During fiscal 2003, Altamas manufacturing operations produced
approximately 84% of the products Altama sold. We expect that these products
could represent over 30% of our combined net sales. Any significant disruption
in those operations for any reason, such as power interruptions, fires,
hurricanes, war or other force majeure, could adversely affect our sales and
customer relationships and therefore adversely affect our business. If we are unable to replace revenues from sales to the DoD of products planned
to be discontinued, our net sales and our consolidated operating results would
be adversely affected 20




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Under our current contract with the DoD under our Altama brand, we
manufacture three models of mil-spec combat boots. One of these models, the
all-leather combat boot, is being discontinued by the DoD, in favor of a new
waterproof infantry combat boot. Altamas sales of the all-leather combat boot
to the DoD were $8.1 million and $2.9 million, representing approximately 40%
and 19% of Altamas net sales from sales to the DoD for fiscal 2003 and the six
months ended April 3, 2004, respectively. In March 2003, DSCP awarded contracts to supply the infantry combat boot.
To date, we have not been awarded a contract to produce the new infantry combat
boot. While there may be additional opportunities to bid on infantry combat
boot and other waterproof boot contracts in the future, particularly as the
U.S. Army transitions from the all-leather combat boot, our failure to be
awarded a contract in March 2003 may be a significant disadvantage in bidding
on future contracts. Furthermore, our ability to bid successfully for
waterproof boot contracts may depend on its ability to license waterproof
technology from suppliers qualified by the government. This would require that
our manufacturing process be certified for the use of such technology, and
there can be no assurance that we will obtain such certification. Consequently,
we anticipate that our net sales to the DoD will decline if we are not able to
obtain awards of contracts for infantry combat boots or any other new models or
increased percentages of awards for existing mil-spec boots it currently
manufactures. Doing business with the U.S. government entails many risks that could adversely
affect us through the early termination of our contracts or by interfering with
Altamas ability to obtain future government contracts Our contracts with the DoD under the Altama brand are subject to partial
or complete termination under specified circumstances including, but not
limited to, the following circumstances:  
    
    the convenience of the government;  
    
    the lack of funding; or  
    
    our actual or anticipated failure to perform our contractual
obligations. Additionally, there could be changes in government policies as a result of
election results or changes in political conditions or other factors that could
significantly affect the level of troop deployment. Any of these occurrences
could adversely affect the level of business we do with the DoD and,
consequently, our operating results. In addition, there is no certainty that
the DSCP will exercise renewal options on any contract we may have or that we
will be awarded future DSCP boot solicitations. Most boot contracts are for
multi-year periods. Therefore, a bidder not receiving an award from a
significant solicitation could be adversely affected for several years. The DSCP and other DoD agencies with which Altama may do business are also
subject to unique political and budgetary constraints and have special
contracting requirements that may affect the contract or Altamas ability to
obtain new government customers. These agencies often do not set their own
budgets and therefore have little control over the amount of money they can
spend. In addition, these agencies experience political pressure that may
dictate the manner in which they spend money. Due to political and budgetary
processes and other scheduling delays that frequently occur in the contract or
bidding process, some government agency orders may be canceled or substantially
delayed, and the receipt of revenues or payments may be substantially delayed. Government agencies have the power, based on financial difficulties or
investigations of their contractors, to deem contractors unsuitable for new
contract awards. Because Altama engages in the governmental contracting
business, it has been and will be subject to audits and may be subject to
investigation by governmental entities. Failure to comply with the terms of any
of Altamas government contracts could result in substantial civil and criminal
fines and penalties, as well as Altamas suspension from future government
contracts for a significant period of time, any of which could adversely affect
our business by requiring us to spend money to pay the fines and penalties and
prohibiting us from earning revenues from government contracts during the
suspension period. Furthermore, our failure to qualify as a small business under federal
regulations following the acquisition could reduce the likelihood of our
ability to received awards of future DoD contracts. Altama qualified as a small
business at the time of its bid for the current DoD contract. Small business
status, having less than 500 employees, is a factor that the DoD considers in
awarding its military boot contracts. Our combined employment with Altama could
exceed 500 employees in the future, which could adversely affect its ability to
obtain future contract awards. 21




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The Altama brand has grown at significant rates over the past three years, and
there can be no assurance that our net sales growth under this brand will
continue at this rate In the last three fiscal years, Altamas net sales from sales to the
commercial market have grown significantly. This has contributed in part to
Altamas overall growth in net sales over that period. This growth has been due
in part to added customer demand, increased pricing and expansion of customers,
and in particular, higher international demand as the result of increasing
military and security personnel to fight the war on terrorism. There is no
assurance that this level of demand will continue or that we will be able to
achieve or maintain this level of growth in the commercial market after the
acquisition. We depend on our senior executives to develop and execute our strategic plan
and manage our operations, and if we are unable to retain them, our business
could be harmed Our future success depends upon the continued services of James Riedman,
our Chairman of the Board, who has played a key role in developing and
implementing our strategic plan. We also rely on Greg Tunney, our President and
Chief Operating Officer, to manage our overall operations. Our loss of any of
these individuals would harm us if we are unable to employ a suitable
replacement in a timely manner. We do not maintain key man insurance on Messrs.
Riedman or Tunney or any of our other senior executives. Fluctuations in the price, availability and quality of raw materials could
adversely affect our gross profit Fluctuations in the price, availability and quality of raw materials, such
as leather and bison hides, used to manufacture our products, could adversely
affect our cost of goods or our ability to meet our customers demands.
Although we do not expect our foreign manufacturing partners, or us in
manufacturing for our Altama brand, to have any difficulty in obtaining the
raw materials required for footwear production, certain sources may experience
some difficulty in obtaining raw materials. For example, in fiscal 2002, the
availability of leather decreased as a result of destruction of livestock due
to concerns about mad cow disease and hoof and mouth disease. We generally
do not enter into long-term purchase commitments. In the event of price
increases in these raw materials in the future, we may not be able to pass all
or a portion of these higher raw materials prices on to our customers, which
would adversely affect our gross profit. A decline in general economic conditions could lead to reduced consumer demand
for our products and could lead to a reduction in our net sales, and thus in
our ability to obtain credit In addition to consumer fashion preferences, consumer spending habits are
affected by, among other things, prevailing economic conditions, levels of
employment, salaries and wage rates, consumer confidence and consumer
perception of economic conditions. For example, in fiscal 2002 and fiscal 2003,
the U.S. economy, and more specifically the retail environment, experienced a
general slowdown, and adversely affected consumer spending habits, which we
believe contributed to the decline in the net sales of our Trotters brand that
fiscal year. Future slowdowns would likely cause us to delay or slow our
expansion plans and result in lower net sales than expected on a quarterly or
annual basis, which could lead to a reduction in our stockholders equity and
thus our ability to obtain credit as and when needed. Our recently completed acquisitions make evaluating our operating results
difficult given the significance of these acquisitions to our operations, and
our historical results do not give you an accurate indication of how we will
perform in the future Our historical results of operations do not give effect for a full fiscal
year to our 2003 acquisitions of H.S. Trask and Royal Robbins or our recent
Altama acquisition. Accordingly, our historical financial information does not
necessarily reflect what our financial position, operating results and cash
flows will be in the future as a result of these acquisitions, or give you an
accurate indication of how Phoenix Footwear, including the H.S. Trask, Royal
Robbins and Altama operations, will perform in the future. Additionally, we do not have experience in selling to the government,
which comprises a significant amount of Altamas net sales. We plan to continue
the employment of Altama employees who do have such experience. There can be no
assurance that any or all of the employees of Altama with this experience will
continue with us after the acquisition. The financing of any future acquisitions we make may result in dilution to your
stock ownership and/or could increase our leverage and our risk of defaulting
on our bank debt Our business strategy is to expand into new markets and enhance our
position in existing markets through acquisitions. In order to successfully
complete targeted acquisitions or to fund our other activities, we may issue
additional equity securities that could dilute 22




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your stock ownership. We may also incur additional debt if we acquire another
company, which could significantly increase our leverage and hence our risk of
default under our secured credit facility. For example, in financing our recent
Altama acquisition we issued 2,500,000 shares of our common stock in a
registered public offering, granted an over-allotment option to the co-managing
underwriters to purchase an additional 375,000 shares on or before August 30, 2004,
issued 196,967 shares of our common stock in a private placement to Altamas
sole shareholder and incurred approximately $10.0 million of additional debt
under our amended credit facility to pay the purchase price and to refinance
Altamas funded indebtedness. Defaults under our secured credit arrangement could result in a foreclosure on
our assets by our bank We have a $33.4 million secured credit facility with our bank. As of July
23, 2004, we had $23.0 million outstanding under this facility. In the future,
we may incur additional indebtedness in connection with other acquisitions or
for other purposes. All of our assets are pledged as collateral to secure our
bank debt. Our credit facility includes a number of covenants, including
financial covenants. If we default under our credit arrangement and are unable
to cure the default, obtain appropriate waivers or refinance the defaulted
debt, our bank could declare our debt to be immediately due and payable and
foreclose on our assets, which may result in a complete loss of your
investment. We may be required to recognize impairment charges that could adversely affect
our reported earnings in future periods Our business acquisitions typically result in goodwill and other
intangible assets. As of June 26, 2004, we had $9.0 million of goodwill and
unamortizable intangibles. We expect this figure to continue to increase with
additional acquisitions. Pursuant to generally accepted accounting principles,
we are required to perform impairment tests on our intangible assets annually
or at any time when events occur that could impact the value of our business.
Our determination of whether an impairment has occurred is based on a
comparison of each of our reporting units fair market value with its carrying
value. Significant and unanticipated changes could require a provision for
impairment in a future period that could adversely affect our reported earnings
in a period of such change. The exercise of outstanding stock options and warrants, and the allocation of
unallocated shares held by our401(k)plan, would cause dilution to our
stockholders ownership percentage and/or a reduction in earnings per diluted
share As of July 21, 2004, we had outstanding 7,851,060 shares of common stock,
including 478,513 unallocated shares held by our 401(k) plan, which despite the
fact they are outstanding for voting and other legal purposes, are classified
as treasury shares for financial statement reporting purposes and are not taken
into account in determining our earnings per share or earnings per diluted
share. The 478,513 unallocated shares will be allocated at the rate of
approximately 120,000 shares annually until they are fully allocated to the
accounts of plan participants. After each allocation these additional shares
will be included in the weighted average shares outstanding for purposes of
determining our earnings per share and earnings per diluted share. In addition,
as of that date, we had outstanding options and warrants to purchase 1,551,261 shares at
exercise prices ranging from $1.725 to $15.00 per share. The exercise of all
or part of these options or warrants would cause our stockholders to experience
a dilution in their percentage ownership for legal purposes. The charge to earnings from the compensation to employees under our employee
retirement plan could adversely affect the value of your investment in our
common stock As of July 21, 2004, our 401(k) plan held 478,513 unallocated shares of
our common stock, which constituted approximately 9% of our outstanding shares
as of that date. Under the terms of the plan, approximately 120,000 of these
shares will be allocated to plan participants in February of each year until
fully allocated. We are required to record an expense for compensation based on
the market value of the amount allocated to employees each year. For fiscal
2002 and 2003, we recorded expenses for this allocation of $237,000 and
$402,000, respectively, and for fiscal 2004 we expect to record $852,000 in
expenses for this allocation. As our stock price increases, we must take a
higher charge for this allocation and thereby decrease our reported earnings.
This could adversely affect the value of your investment in our common stock. We are controlled by a principal stockholder who may exert significant control
over us and our significant corporate decisions in a manner adverse to your
personal investment objectives, which could depress the market value of our
stock James R. Riedman, our Chairman of the Board, is the largest beneficial
owner of our stock. Through his personal holdings and shares over which he is
deemed to have beneficial ownership held by Riedman Corporation (of which he is
a shareholder, President and a director), our employee retirement plan, his
children, and an affiliated entity, he beneficially owned approximately 29.4%
of our outstanding shares as of July 21, 2004. Mr. Riedman also has beneficial
ownership of shares underlying options which, if exercised, 23




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would increase his percentage beneficial ownership to approximately 33.1% as of
July 21, 2004. Through this beneficial ownership, Mr. Riedman can direct our
affairs and significantly influence the election or removal of our directors
and the outcome of all matters submitted to a vote of our stockholders,
including amendments to our certificate of incorporation and bylaws and
approval of mergers or sales of substantially all of our assets. The interest
of our principal stockholder may conflict with interests of other stockholders.
This concentration of ownership may also harm the market price of our common
stock by, among other things:  
    
    delaying, deferring or preventing a change in control of our company;  
    
    impeding a merger, consolidation, takeover or other business
combination involving our company;  
    
    causing us to enter into transactions or agreements that are not in the
best interests of all stockholders; or  
    
    discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company. Our inventory levels may exceed our actual needs, which could adversely affect
our operating results by requiring us to make inventory write-downs If we order more product than we are able to sell, we could be required to
write-down this inventory, adversely affecting our margins and in turn, our
operating results. This could occur as the result of change in customer order
patterns, general sales activity, orders subject to cancellation by customers,
misforecasting and consumer demand. Write-downs of inventory could adversely
affect our gross profit and operating results. Our financial results may fluctuate from quarter to quarter as a result of
seasonality in our business, and if we fail to meet expectations, the price of
our common stock may fluctuate The footwear and apparel industry generally, and our business
specifically, are characterized by seasonality in net sales and results of
operations. Our business is seasonal, with the first and third quarters
generally having stronger sales and operating results than the other two
quarters. These events could cause the price of our common stock to fluctuate. Delaware law, our charter documents and agreements with our executives may
impede or discourage a takeover, even if a takeover would be in the interest of
our stockholders We are a Delaware corporation, and the anti-takeover provisions of
Delaware law impose various impediments to the ability of a third-party to
acquire control of us, even if a change in control would be beneficial to our
existing stockholders. In addition, our board of directors has the power,
without stockholders approval, to designate the terms of one or more series of
preferred stock and issue shares of preferred stock, which could be used
defensively if a takeover is threatened. All options issued under our stock
option plans automatically vest upon a change in control unless otherwise
determined by the compensation committee. In addition, several of our executive
officers have employment agreements that provide for significant payments on a
change in control. These factors and provisions in our certificate of
incorporation and bylaws could impede a merger, takeover or other business
combination involving us or discourage a potential acquirer from making a
tender offer for our common stock or reduce our ability to achieve a premium in
such sale, which could limit the market value of our common stock and prevent
you from maximizing the return on your investment. Shares of our common stock eligible for public sale could cause the market
price of our stock to drop, even if our business is doing well Sales of a substantial number of shares of our common stock in the public
market, or the perception that these sales could occur, could adversely affect
the market price for our common stock. As of July 21, 2004, there were
7,851,060 shares of our common stock outstanding. Of our currently outstanding
shares of common stock, 4,504,239 shares will be freely tradable without
restriction or further registration under federal securities laws. This does
not include 375,000 shares that are issuable upon exercise on or before August
30, 2004 of an over-allotment option we granted to our co-managing underwriters
in our recent follow-on public offering and would be also be freely tradable
upon exercise. The remaining 3,346,821 shares are held by our affiliates or
were issued in a private placement and are considered restricted or control
securities and are subject to the trading restrictions of Rule 144 under the
Securities Act of 1933, as amended, or the Securities Act. These securities
cannot be sold unless they are registered under the Securities Act or unless an
exemption from registration is otherwise available. 24




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Of the restricted shares, 699,980 shares have been registered for resale
pursuant to our obligations to former H.S. Trask stockholders, and we are
required to keep those shares registered until August 7, 2004, subject to
permitted blackout and required extension periods. On July 19, 2004, we
exercised our right to declare a blackout period for 30 days, extending our
registration obligation to October 1, 2004. We also have in effect registration
statements on Form S-8 covering 1,500,000 shares of common stock, under our
2001 Long-Term Incentive Plan, 1,007,261 shares of which are subject to
previously granted options and the remainder of which are available for future
awards under that plan. Our principal stockholders, James Riedman and Riedman Corporation, who
beneficially own in the aggregate 2,305,565 shares of our common stock and
vested options to acquire an additional 437,862 shares, have demand
registration rights covering 1,152,710 of the shares they beneficially own. In
connection with our recent Altama acquisition, we entered into a registration
rights agreement with Altamas sole shareholder for 196,967 shares issued in a
private placement to him in connection with the acquisition. The registration
rights agreement will grant to Altamas sole shareholder, subject to certain
conditions, one demand registration exercisable between 180 days and three
years after the acquisition closing and unlimited piggyback registration rights
for registration statements we file with the SEC during the three years
following the closing except in limited circumstances. Significant resales of these shares could cause the market price of our
common stock to decline regardless of the performance of our business. These
sales also might make it difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. Our stock price has increased significantly during the past 12 months and may
fluctuate or decline in the future, which could result in litigation against us
and significant losses for investors Our stock price has increased significantly during the past 12 months and
in the future may not continue to increase at the same rate or may decline.
This may occur in response to a number of factors, including the following:  
    
    the failure of our quarterly operating results or those of similarly
situated companies to meet expectations;  
    
    adverse developments in the footwear or apparel markets and the
worldwide economy;  
    
    changes in interest rates;  
    
    our failure to meet investors expectations;  
    
    changes in accounting principles;  
    
    sales of common stock by existing stockholders or holders of options;  
    
    announcements of key developments by our competitors;  
    
    the reaction of markets to announcements and developments involving our
company, including future acquisitions and related financing activities; and  
    
    natural disasters, riots, wars, geopolitical events or other
developments affecting us or our competitors. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed
to interest rate changes primarily as a result of our revolver and long-term debt under our credit facility, which we use
to maintain liquidity and to fund capital expenditures and expansion. Our
market risk exposure with respect to this debt is to changes in the prime
rate in the U.S. and changes in LIBOR. Our revolver and our term loans provide
for interest on outstanding borrowings at rates tied to the prime rate or, at
our election, tied to LIBOR. At December 27, 2003 and June 26, 2004, we had
$12.1 million and $10.6 million, respectively, in outstanding borrowings under
our credit facility. A 1.0% increase in interest rates on our current
borrowings would have had a $106,000 impact on income before income taxes. We do not have
any foreign currency risk. We do
not enter into any of these transactions for speculative purposes. 
 25




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Item 4. Controls and Procedures An evaluation was performed under the supervision of the Companys
management, including the Chief Executive Officer or CEO, and Chief
Financial Officer or CFO, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures, (as defined in
Securities Exchange Act of 1934 (the Exchange Act) Rules 13a-15(e) and
15-d-15(e),) as of the end of the period covered by this report. Based on that
evaluation, the Companys management, including the CEO and CFO, concluded that
the Companys disclosure controls and procedures were effective to provide
reasonable assurance that information we are required to disclose in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. Notwithstanding the foregoing, there can be no assurance that the
Companys disclosure controls and procedures will detect or uncover all
failures of persons within the Company and its consolidated subsidiaries to
disclose material information otherwise required to be set forth in the
Companys periodic reports. There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can
only provide reasonable, not absolute, assurance of achieving their control
objectives. There has been no change in the Companys internal controls over financial
reporting that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting. 26




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Part II  Other Information 
 Item 1. Legal Proceedings On
June 21, 2004, we filed a lawsuit against Mark Tucker, Inc.,
Sears, Roebuck and Co., Saks Incorporated, Saks & Company, and
Saks Fifth Avenue Enterprises, Inc. for infringement of our patent
relating to the insole construction for our SoftWalk brand
footwear. The suit was commenced in the United States District Court
for the Southern District of California, and alleges that the
defendants made and sold products in the United States that infringe
our United States patent No. 6,675,501. We are requesting
injunctive relief and the payment of damages and attorneys fees. Item 4. Submission of Matters to a Vote of Security Holders We held our Annual Meeting of Stockholders on May 11, 2004. At the
meeting, the following nominees were elected as directors to hold office
until the Annual Meeting of Stockholders to be held in 2005, and until his
successor is elected and shall qualify: Nominee
    
    Votes For
    
    Votes WithheldJohn C. Kratzer
    
    
    4,281,409
    
    
    
    4,764Steven M. DePerrior
    
    
    4,226,255
    
    
    
    59,918Gregory M. Harden
    
    
    4,280,357
    
    
    
    5,816Wilhelm Pfander
    
    
    4,249,409
    
    
    
    36,764Frederick R. Port
    
    
    4,281,457
    
    
    
    4,716John M. Robbins
    
    
    4,281,457
    
    
    
    4,716Richard E. White
    
    
    4,281,457
    
    
    
    4,716James R. Reidman
    
    
    4,279,657
    
    
    
    6,516Greg A. Tunney
    
    
    4,280,323
    
    
    
    5,850
 The proposal to amend the 2001 Long-Term Incentive Plan to increase the
number of shares of Common Stock which can be awarded thereunder from
1,000,000 to 1,500,000 was ratified. The voting for the proposal was as
follows: For  2,858,889
    
    Against  180,632
    
    Abstain  12,804
 
 Item 6. Exhibits and Reports on Form 8-K:  a)
    
    Exhibits required by Item 601 of Regulation S-KExhibit 2.1  Stock Purchase Agreement by and among Phoenix Footwear
Group, Inc., W. Whitlow Wyatt and Altama Delta Corporation dated June
15, 2004, (incorporated by reference to the Current Report on Form
8-K for June 15, 2004 by Phoenix Footwear Group, Inc. (SEC File No.
001-31309)) (Exhibits and schedules have been omitted pursuant to
Item 601(b)(2) of Regulation S-K, but a copy will be furnished
supplementary to the Securities and Exchange Commission upon request)Exhibit 10.1  Employment Agreement by and between Phoenix Footwear
Group, Inc. and Richard E. White, dated June 15, 2004 (incorporated
by reference to Exhibit No. 10.18 to the Phoenix Footwear Group, Inc.
Registration Statement on Form S-2, Amendment No. 1 (File No.
333-114109) filed on June 16, 2004, as amended)Exhibit 10.2  Form Indemnity Agreement by and between Phoenix
Footwear Group, Inc. and the directors and executive officers of the
Company (incorporated by reference to Exhibit No. 10.19 to the
Phoenix Footwear Group, Inc. Registration Statement on Form S-2,
Amendment No. 1 (File No. 333-114109) filed on June 16, 2004, as
amended)Exhibit 10.3  Lock-Up Agreement executed by Riedman Corporation
dated May 19, 2004 (incorporated by reference to Exhibit No. 10.25 to
the Phoenix Footwear Group, Inc. Registration Statement on Form S-2,
Amendment No. 1 (File No. 333-114109) filed on June 16, 2004, as
amended)Exhibit 10.4  Lock-Up Agreement executed by the Retirement Committee
of the Phoenix Footwear Group, Inc. (formerly Daniel Green Company)
Retirement Savings Partnership Plan dated June 10, 2004
(incorporated by reference to Exhibit No. 10.26 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 10.5  Form Lock-Up Agreement executed by the directors,
officers and certain principal shareholders of Phoenix Footwear
Group, Inc. (incorporated by reference to Exhibit No. 10.27 to the
Phoenix Footwear Group, Inc. Registration Statement on Form S-2,
Amendment No. 1 (File No. 333-114109) filed on June 16, 2004, as
amended) 27




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Exhibit 10.6  Registration Rights Agreement by and between Phoenix
Footwear Group, Inc., and W. Whitlow Wyatt, dated July 19, 2004Exhibit 10.7  Escrow Agreement by and among Phoenix Footwear Group,
Inc., W. Whitlow Wyatt and Escrow Agent, dated July 19, 2004Exhibit 10.8  Consulting Agreement by and among Phoenix Footwear
Group, Inc., and W. Whitlow Wyatt, dated July 19, 2004Exhibit 10.9  Non-Competition and Confidentiality Agreement by and
among Phoenix Footwear Group, Inc., and W. Whitlow Wyatt, dated July
19, 2004Exhibit 10.10  Third Amended and Restated Revolving Credit and Term
Loan Agreement By and Between Phoenix Footwear Group, Inc. and
Manufacturers and Traders Trust Company, dated July 19, 2004Exhibit 10.11  Letter Agreement by and between Altama Delta
Corporation and Ro-Search, Incorporated dated September 13, 1984, as
amended (incorporated by reference to Exhibit No. 10.28 to the
Phoenix Footwear Group, Inc. Registration Statement on Form S-2,
Amendment No. 1 (File No. 333-114109) filed on June 16, 2004, as
amended)Exhibit 10.12  Award/Contract by and between the Defense Supply
Center Philadelphia and Altama Delta Corporation dated September 30,
2003 (incorporated by reference to Exhibit No. 10.29 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 31.1  Section 302 Certification of Chief Executive OfficerExhibit 31.2  Section 302 Certification of Chief Financial OfficerExhibit 32.1  Section 906 Certification of Chief Executive Officer
and Chief Financial Officerb)
    
    Forms 8-K  1)
    
    On June 16, 2004, the Company filed a report on Form 8-K
announcing that it intended to increase the size of its proposed
registered follow-on public offering of common stock to approximately
2,500,000 shares and expected to grant the
co-managing underwriters an over-allotment option to purchase up to an
additional 375,000 shares from the Company.2)
    
    On June 15, 2004, the Company filed a report on Form 8-K
announcing the appointment of Richard E. White as the Companys Chief
Executive Officer, effective June 15, 2004.3)
    
    On June 15, 2004, the Company filed a report on Form 8-K
announcing the execution of a definitive stock purchase agreement to
purchase all of the outstanding capital stock of Altama Delta
Corporation.4)
    
    On April 20, 2004, the Company filed a report on Form 8-K
announcing its first quarter 2004 operating results. 28




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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. PHOENIX FOOTWEAR GROUP, INC.Date: August 6, 2004
    /s/ Richard E. WhiteRichard E. WhiteChief Executive Officer Date: August 6, 2004
    /s/ Kenneth E. WolfKenneth E. WolfChief Financial Officer 29




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EXHIBIT INDEX ExhibitNo.
    
    Description of ExhibitExhibit 2.1
    
    Stock Purchase Agreement by and among Phoenix Footwear Group,
Inc., W. Whitlow Wyatt and Altama Delta Corporation dated June 15,
2004, (incorporated by reference to the Current Report on Form 8-K
for June 15, 2004 by Phoenix Footwear Group, Inc. (SEC File No.
001-31309)) (Exhibits and schedules have been omitted pursuant to
Item 601(b)(2) of Regulation S-K, but a copy will be furnished
supplementary to the Securities and Exchange Commission upon
request)Exhibit 10.1
    
    Employment Agreement by and between Phoenix Footwear Group, Inc.
and Richard E. White, dated June 15, 2004 (incorporated by
reference to Exhibit No. 10.18 to the Phoenix Footwear Group, Inc.
Registration Statement on Form S-2, Amendment No. 1 (File
No. 333-114109) filed on June 16, 2004, as amended)Exhibit 10.2
    
    Form Indemnity Agreement by and between Phoenix Footwear Group,
Inc. and the directors and executive officers of the Company
(incorporated by reference to Exhibit No. 10.19 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 10.3
    
    Lock-Up Agreement executed by Riedman Corporation dated May 19,
2004 (incorporated by reference to Exhibit No. 10.25 to the
Phoenix Footwear Group, Inc. Registration Statement on Form S-2,
Amendment No. 1 (File No. 333-114109) filed on June 16, 2004, as
amended)Exhibit 10.4
    
    Lock-Up Agreement executed by the Retirement Committee of the
Phoenix Footwear Group, Inc. (formerly Daniel Green Company)
Retirement Savings Partnership Plan dated June 10, 2004
(incorporated by reference to Exhibit No. 10.26 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 10.5
    
    Form Lock-Up Agreement executed by the directors, officers and
certain principal shareholders of Phoenix Footwear Group, Inc.
(incorporated by reference to Exhibit No. 10.27 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 10.6
    
    Registration Rights Agreement by and between Phoenix Footwear
Group, Inc., and W. Whitlow Wyatt, dated July 19, 2004Exhibit 10.7
    
    Escrow Agreement by and among Phoenix Footwear Group, Inc., W.
Whitlow Wyatt and Escrow Agent, dated July 19, 2004Exhibit 10.8
    
    Consulting Agreement by and among Phoenix Footwear Group, Inc.,
and W. Whitlow Wyatt, dated July 19, 2004Exhibit 10.9
    
    Non-Competition and Confidentiality Agreement by and among Phoenix
Footwear Group, Inc., and W. Whitlow Wyatt, dated July 19, 2004
 30




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Exhibit 10.10
    
    Third Amended and Restated Revolving Credit and Term Loan
Agreement By and Between Phoenix Footwear Group, Inc. and
Manufacturers and Traders Trust Company, dated July 19, 2004Exhibit 10.11
    
    Letter Agreement by and between Altama Delta Corporation and
Ro-Search, Incorporated dated September 13, 1984, as amended
(incorporated by reference to Exhibit No. 10.28 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 10.12
    
    Award/ Contract by and between the Defense Supply Center
Philadelphia and Altama Delta Corporation dated September 30, 2003
(incorporated by reference to Exhibit No. 10.29 to the Phoenix
Footwear Group, Inc. Registration Statement on Form S-2, Amendment
No. 1 (File No. 333-114109) filed on June 16, 2004, as amended)Exhibit 31.1
    
    Section 302 Certification of Chief Executive OfficerExhibit 31.2
    
    Section 302 Certification of Chief Financial OfficerExhibit 32.1
    
    Section 906 Certification of Chief Executive Officer and Chief
Financial Officer
 31