##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended October 1, 2005
 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)
  
  
   R £
  £ R
  £ R
  CLASS
    
    OUTSTANDING AT NOVEMBER 11, 2005Common, $0.01 par value
    
    8,379,443




---



PHOENIX FOOTWEAR GROUP, INC.
 QUARTERLY REPORT ON FORM 10-Q
 TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATION
    
    3Item 1. Financial Statements and Notes to Financial Statements
    
    3Consolidated Condensed Balance Sheets as of October 1, 2005 (unaudited) and January 1, 2005
    
    3Consolidated Condensed Statements of Operations for the Three and Nine Months Ended October
1, 2005 and September 25, 2004 (unaudited)
    
    4Consolidated Condensed Statements of Cash Flows for the Nine Months Ended October 1, 2005
and September 25, 2004 (unaudited)
    
    5Notes to Consolidated Condensed Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4. Controls and Procedures
    
    32PART II OTHER INFORMATION
    
    32Item 1.
Legal ProceedingsItem 3.
Default Upon Senior SecuritiesItem 5. Other Information
    
    32Item 6. Exhibits
    
    32EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 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.
 
   October 1,
    
    
    January 1,2005
    
    
    2005ASSETSCURRENT ASSETS:Cash
    
    $
    3,032,000
    
    
    $
    694,000Accounts receivable (less allowances of $1,010,000 in 2005 and $1,567,000 in 2004)
    
    
    23,744,000
    
    
    
    11,177,000Inventories-net
    
    
    33,791,000
    
    
    
    28,317,000Other receivable
    
    
    336,000
    
    
    
    911,000Other current assets
    
    
    3,712,000
    
    
    
    2,971,000Deferred income tax asset
    
    
    255,000
    
    
    
    256,000Total current assets
    
    
    64,870,000
    
    
    
    44,326,000PLANT AND EQUIPMENT  Net
    
    
    4,270,000
    
    
    
    3,530,000OTHER ASSETS:Other assets  net
    
    
    1,208,000
    
    
    
    121,000Goodwill
    
    
    34,541,000
    
    
    
    27,500,000Unamortizable intangibles
    
    
    26,769,000
    
    
    
    17,975,000Intangible assets, net
    
    
    10,057,000
    
    
    
    4,728,000Total other assets
    
    
    72,575,000
    
    
    
    50,324,000TOTAL ASSETS
    
    $
    141,715,000
    
    
    $
    98,180,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    10,948,000
    
    
    $
    7,568,000Accrued expenses
    
    
    4,142,000
    
    
    
    3,543,000Notes payable  current
    
    
    9,200,000
    
    
    
    3,656,000Other current liabilities
    
    
    1,052,000
    
    
    
    400,000Total current liabilities
    
    
    25,342,000
    
    
    
    15,167,000OTHER LIABILITIES:Notes payable  noncurrent
    
    
    25,800,000
    
    
    
    10,451,000Note payable, line of credit
    
    
    23,641,000
    
    
    
    12,500,000Other long-term liabilities
    
    
    3,469,000
    
    
    
    1,111,000Deferred income tax liability
    
    
    9,263,000
    
    
    
    9,265,000Total other liabilities
    
    
    62,173,000
    
    
    
    33,327,000Total liabilities
    
    
    87,515,000
    
    
    
    48,494,000Commitments
and Contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Common
stock, $.01 par value  50,000,000 shares authorized; 8,400,000 and 7,858,000
shares issued in 2005 and 2004, respectively
    
    
    84,000
    
    
    
    78,000Additional paid-in-capital
    
    
    45,763,000
    
    
    
    42,685,000Retained earnings
    
    
    9,424,000
    
    
    
    8,303,00055,271,000
    
    
    
    51,066,000Less: Treasury stock at cost, 378,000 and 504,000 shares in 2005 and 2004, respectively
    
    
    (1,071,000
    )
    
    
    (1,380,000
    )Total stockholders equity
    
    
    54,200,000
    
    
    
    49,686,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    141,715,000
    
    
    $
    98,180,000
  3




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
 
   Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    September 25,
    
    
    October 1,
    
    
    September 25,2005
    
    
    2004
    
    
    2005
    
    
    2004NET SALES
    
    $
    34,275,000
    
    
    $
    23,176,000
    
    
    $
    76,028,000
    
    
    $
    55,690,000COST OF GOODS SOLD
    
    
    21,703,000
    
    
    
    13,345,000
    
    
    
    47,026,000
    
    
    
    31,424,000GROSS PROFIT
    
    
    12,572,000
    
    
    
    9,831,000
    
    
    
    29,002,000
    
    
    
    24,266,000OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    9,090,000
    
    
    
    6,530,000
    
    
    
    22,850,000
    
    
    
    16,836,000Non cash 401k stock grant compensation
    
    
    233,000
    
    
    
    213,000
    
    
    
    700,000
    
    
    
    637,000Amortization
    
    
    433,000
    
    
    
    164,000
    
    
    
    814,000
    
    
    
    267,000Other expenses  net
    
    
    2,000
    
    
    
    3,000
    
    
    
    617,000
    
    
    
    62,000Total operating expenses
    
    
    9,758,000
    
    
    
    6,910,000
    
    
    
    24,981,000
    
    
    
    17,802,000OPERATING INCOME
    
    
    2,814,000
    
    
    
    2,921,000
    
    
    
    4,021,000
    
    
    
    6,464,000INTEREST EXPENSE
    
    
    1,156,000
    
    
    
    199,000
    
    
    
    2,121,000
    
    
    
    503,000EARNINGS BEFORE INCOME TAXES
    
    
    1,658,000
    
    
    
    2,722,000
    
    
    
    1,900,000
    
    
    
    5,961,000INCOME TAX PROVISION
    
    
    677,000
    
    
    
    994,000
    
    
    
    779,000
    
    
    
    2,354,000NET EARNINGS
    
    $
    981,000
    
    
    $
    1,728,000
    
    
    $
    1,121,000
    
    
    $
    3,607,000NET EARNINGS PER SHARE (Note 5)Basic
    
    $
    .12
    
    
    $
    .26
    
    
    $
    .15
    
    
    $
    .68Diluted
    
    $
    .12
    
    
    $
    .24
    
    
    $
    .14
    
    
    $
    .61SHARES OUTSTANDING:Basic
    
    
    8,001,439
    
    
    
    6,665,616
    
    
    
    7,688,673
    
    
    
    5,272,501Diluted
    
    
    8,371,290
    
    
    
    7,331,021
    
    
    
    8,057,542
    
    
    
    5,903,212
  4




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
 
   Nine Months EndedOctober 1,
    
    
    September 25,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    1,121,000
    
    
    $
    3,607,000Adjustments to reconcile net earnings to net cash used by operating activities:Depreciation and amortization
    
    
    1,578,000
    
    
    
    753,000Allocation of shares in defined contribution plan
    
    
    700,000
    
    
    
    854,000Changes in assets and liabilities (net of impact of acquisitions):(Increase) decrease in:Accounts receivable  net
    
    
    (4,866,000
    )
    
    
    (5,761,000
    )Inventories  net
    
    
    3,238,000
    
    
    
    (2,544,000
    )Other current receivable
    
    
    575,000
    
    
    
    (172,000
    )Prepaid income tax
    
    
    
    
    
    
    Other current assets
    
    
    (49,000
    )
    
    
    (412,000
    )Other noncurrent assets
    
    
    (2,533,000
    )
    
    
    58,000Increase (decrease) in:Accounts payable
    
    
    (1,662,000
    )
    
    
    999,000Accrued expenses
    
    
    276,000
    
    
    
    (89,000
    )Other liabilities
    
    
    (535,000
    )
    
    
    (339,000
    )Income taxes payable
    
    
    
    
    
    
    (111,000
    )Net cash used by operating activities
    
    
    (2,157,000
    )
    
    
    (3,157,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of equipment
    
    
    (668,000
    )
    
    
    (872,000
    )Proceeds from disposal of property and equipment
    
    
    3,000
    
    
    
    Acquisitions, net of cash acquired
    
    
    (25,876,000
    )
    
    
    (37,862,000
    )Net cash used by investing activities
    
    
    (26,541,000
    )
    
    
    (38,734,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings on note payable-line of credit
    
    
    36,374,000
    
    
    
    6,980,000Proceeds from notes payable
    
    
    35,000,000
    
    
    
    8,013,000Repayments of notes payable
    
    
    (39,396,000
    )
    
    
    (1,775,000
    )Bank overdraft
    
    
    
    
    
    
    Issuance of common stock
    
    
    327,000
    
    
    
    28,490,000Debt issuance and other costs
    
    
    (1,269,000
    )
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    (100,000
    )Net cash provided by financing activities
    
    
    31,036,000
    
    
    
    41,608,000NET INCREASE
(DECREASE) IN CASH
    
    
    2,338,000
    
    
    
    (283,000
    )CASH  Beginning of period
    
    
    694,000
    
    
    
    1,058,000CASH  End of period
    
    $
    3,032,000
    
    
    $
    775,000SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for:Interest
    
    $
    1,164,000
    
    
    $
    507,000Income taxes
    
    $
    51,000
    
    
    $
    2,439,000
  5




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
 
  Description of Business and Summary of Significant Accounting Policies
 1. Basis of Presentation
  Principles of Consolidation
  Accounting Period
  Reclassifications
  Critical Accounting Policies
   6




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##### Table of Contents



Recent Accounting Pronouncements
 Share-Based Compensation, Accounting for Stock Issued to Employees,
 2. Inventories
  October 1, 2005
    
    
    January 1, 2005Raw materials
    
    $
    3,433,000
    
    
    $
    1,861,000Work in process
    
    
    1,537,000
    
    
    
    807,000Finished goods
    
    
    28,821,000
    
    
    
    25,649,000$
    33,791,000
    
    
    $
    28,317,000
 3. Goodwill and Intangible Assets
  Useful
    
    
    October 1, 2005
    
    
    January 1, 2005Life
    
    
    
    
    
    
    Accumulated
    
    
    Net Book
    
    
    
    
    
    
    Accumulated
    
    
    Net Book(Years)
    
    
    Gross
    
    
    Amortization
    
    
    Value
    
    
    Gross
    
    
    Amortization
    
    
    ValueNon-amortizing:Trademarks/trade
names
    
    
    
    
    
    $
    19,134,000
    
    
    
    
    
    
    $
    19,134,000
    
    
    $
    10,340,000
    
    
    $
    
    
    
    $
    10,340,000Customer
relationships
    
    
    
    
    
    
    7,635,000
    
    
    
    
    
    
    
    7,635,000
    
    
    
    7,635,000
    
    
    
    
    
    
    
    7,635,000Total non-amortizing assets
    
    
    
    
    
    $
    26,769,000
    
    
    
    
    
    
    $
    26,769,000
    
    
    $
    17,975,000
    
    
    
    
    
    
    $
    17,975,000Amortizing:Customer lists
    
    
    5-13
    
    
    
    6,369,000
    
    
    
    636,000
    
    
    
    5,733,000
    
    
    
    3,222,000
    
    
    
    278,000
    
    
    
    2,944,000Other
    
    
    2-5
    
    
    
    5,016,000
    
    
    
    692,000
    
    
    
    4,324,000
    
    
    
    2,021,000
    
    
    
    237,000
    
    
    
    1,784,000Total amortizing
intangible assets
    
    
    
    
    
    $
    11,385,000
    
    
    $
    1,328,000
    
    
    $
    10,057,000
    
    
    $
    5,243,000
    
    
    $
    515,000
    
    
    $
    4,728,000
  Remainder of 2005
    
    $
    438,0002006
    
    
    1,744,0002007
    
    
    1,744,0002008
    
    
    1,729,0002009
    
    
    1,522,000Thereafter
    
    
    2,880,000$
    10,057,000
  GoodwillBalance
Forward at January 1, 2005
    
    
    $
    27,500,000Acquired
    
    
    
    7,041,000Ending
Balance at July 2, 2005
    
    
    
    34,541,000Acquired
    
    
    
    Ending
Balance at October 1, 2005
    
    
    $
    34,541,000
 7




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##### Table of Contents



4. Stock-Based Compensation
 Accounting
for Stock Issued to Employees
 Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    September 25,
    
    
    October 1,
    
    
    September 25,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings, as reported
    
    $
    981,000
    
    
    $
    1,728,000
    
    
    $
    1,121,000
    
    
    $
    3,607,000Add/Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (123,000
    )
    
    
    (225,000
    )
    
    
    (2,832,000
    )
    
    
    (480,000
    )Pro forma net earnings (loss)
    
    $
    858,000
    
    
    $
    1,503,000
    
    
    $
    (1,711,000
    )
    
    $
    3,127,000Earnings (loss) per common share:Basic  as reported
    
    $
    0.12
    
    
    $
    0.26
    
    
    $
    0.15
    
    
    $
    0.68Basic  pro forma
    
    $
    0.11
    
    
    $
    0.23
    
    
    $
    (0.22
    )
    
    $
    0.59Diluted  as reported
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.14
    
    
    $
    0.61Diluted  pro forma
    
    $
    0.10
    
    
    $
    0.21
    
    
    $
    (0.21
    )
    
    $
    0.53
  Three Months Ended
    
    Nine Months EndedOctober 1,
    
    September 25,
    
    October 1,
    
    September 25,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility from stock
    
    
    44.84
    %
    
    
    45.92
    %
    
    
    44.84
    %
    
    
    45.92
    %Risk free interest rates
    
    
    4.16
    %
    
    
    4.73
    %
    
    
    4.16
    %
    
    
    4.73
    %Expected lives
    
    10 years
    
    10 years
    
    10 years
    
    10 years
  8




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##### Table of Contents



5. Per Share Data
  Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    September 25,
    
    
    October 1,
    
    
    September 25,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic net earnings per share:Net earnings
    
    $
    981,000
    
    
    $
    1,728,000
    
    
    $
    1,121,000
    
    
    $
    3,607,000Weighted average common shares outstanding
    
    
    8,001,439
    
    
    
    6,665,616
    
    
    
    7,688,673
    
    
    
    5,272,501Basic net earnings per share
    
    $
    0.12
    
    
    $
    0.26
    
    
    $
    0.15
    
    
    $
    0.68Diluted net earnings per share:Net earnings
    
    $
    981,000
    
    
    $
    1,728,000
    
    
    $
    1,121,000
    
    
    $
    3,607,000Weighted average common shares outstanding
    
    
    8,001,439
    
    
    
    6,665,616
    
    
    
    7,688,673
    
    
    
    5,272,501Effect of stock options outstanding
    
    
    369,851
    
    
    
    665,405
    
    
    
    368,869
    
    
    
    630,711Weighted average common and potential
common shares outstanding
    
    
    8,371,290
    
    
    
    7,331,021
    
    
    
    8,057,542
    
    
    
    5,903,212Diluted net earnings per share
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.14
    
    
    $
    0.61
   6. Contingent Liability
  7. Debt
  9




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##### Table of Contents



Risk Factors  Defaults
under our secured credit arrangement could result in a foreclosure on
our assets by our bank.
  October 1,
    
    
    January 1,2005
    
    

2005Revolving line of credit to
bank; secured by accounts
receivable, inventory and
equipment; interest due monthly at
LIBOR rate of 6.44%;
    
    $
    16,000,000
    
    
    $
    Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at Prime plus .375%;
    
    
    7,641,000
    
    
    
    Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at LIBOR plus 275
basis points
    
    
    
    
    
    
    5,000,000Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at Prime plus .25%
    
    
    
    
    
    
    7,500,000Term loan payable to bank in
variable quarterly installments
through 2011, interest due monthly
at LIBOR plus 3.5%
    
    
    28,000,000
    
    
    
    Term loan payable to bank in
annual installments of $750,000
through 2006, interest due monthly
at LIBOR plus 300 basis points
    
    
    
    
    
    
    1,500,000Term loan payable to bank in
quarterly installments of $150,000
through 2008, interest due monthly
at LIBOR plus 300 basis points
    
    
    
    
    
    
    2,250,000Term loan payable to bank in
monthly installments of $25,000
through 2008, interest due monthly
at LIBOR plus 300 basis points
    
    
    
    
    
    
    1,175,000Term loan payable to bank in
monthly installments of $167,000
through 2009, interest due monthly
at LIBOR plus 300 basis points
    
    
    
    
    
    
    9,167,000Bridge loan payable to bank on
December 31, 2005, interest due
monthly at LIBOR plus 3.5% or the
prime rate plus .75%
    
    
    7,000,000
    
    
    
    Note payable to financial
institution; collateralized by
vehicle; interest at 0%; principal
payable $493 monthly; remaining
principal balance due July 2007
    
    
    
    
    
    
    15,00058,641,000
    
    
    
    26,607,000Less: current portion
    
    
    9,200,000
    
    
    
    3,656,000Noncurrent portion
    
    $
    49,441,000
    
    
    $
    22,951,000
  One year or less
    
    $
    9,200,000One to three years
    
    
    6,500,000Three to five years
    
    
    42,941,000Total
    
    $
    58,641,000
 10




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##### Table of Contents



8. Other (income) expenses  net
  9. Operating Segment Information
   Three Months Ended
    


Three Months Ended


    Nine Months Ended

    
Nine Months EndedOctober 1,
    

    September 25,


    October 1,

    
September 25,2005
    


2004



    2005

    
2004Net revenuesFootwear and apparel
    $
    18,408,000
    

    $
16,431,000


    $
    49,875,000

    
$
48,945,000Accessories
    
    9,710,000
    

    



    
    9,710,000

    

Military boots
    
    6,157,000
    

    
6,745,000


    
    16,443,000

    

6,745,000$
    34,275,000
    

    $
23,176,000


    $
    76,028,000

    
$
55,690,000Operating incomeFootwear and apparel
    $
    2,252,000
    

    $
2,871,000


    $
    5,854,000

    
$
8,222,000Accessories
    
    1,135,000
    

    



    
    1,135,000

    

Military boots
    
    943,000
    

    
1,445,000


    
    2,379,000

    

1,445,000Reconciling items(1)
    
    (1,516,000
    )

    
(1,395,000
)

    
    (5,347,000
)
    

(3,203,000
)$
    2,814,000
    

    $
2,921,000


    $
    4,021,000

    
$
6,464,000 As of



As ofOctober 1,
January 1,2005
2005Identifiable assetsFootwear and apparel
$
25,745,000


    $
    28,785,000Accessories

12,344,000


    
    Military boots

10,029,000


    
    7,527,000Goodwill and non-amortizable intangiblesFootwear and apparel

14,269,000


    
    10,645,000Accessories

10,745,000


    
    Military boots

36,297,000


    
    34,830,000Reconciling items(2)

32,286,000


    
    16,393,000$
141,715,000


    $
    98,180,000
 
 (1)
    
    Represents corporate general and administrative expenses and other income (expense) not
utilized by management in determining segment profitability.(2)
    
    Identifiable assets are comprised of net inventory, certain property and plant and equipment.
Reconciling items represent unallocated corporate assets not segregated between the three
segments. 11




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##### Table of Contents



10. Acquisitions
    Current assets
    
    $
    5,432,000Property, plant and equipment
    
    
    66,000Intangible assets, subject to amortization
    
    
    462,000Goodwill and unamortizable intangibles
    
    
    2,347,000Total assets acquired
    
    
    8,307,000Less liabilities
    
    
    (2,015,000
    )Net assets acquired
    
    $
    6,292,000
     Current assets
    
    $
    11,587,000Property, plant and equipment
    
    
    753,000Intangible assets, subject to amortization
    
    
    5,686,000Goodwill and unamortizable intangibles
    
    
    10,746,000Total assets acquired
    
    
    28,772,000Less liabilities
    
    
    (7,027,000
    )Net assets acquired
    
    $
    21,745,000
 12




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    September 25,
    
    
    October 1,
    
    
    September 25,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    35,775,000
    
    
    $
    39,584,000
    
    
    $
    106,153,000
    
    
    $
    126,171,000Gross profit
    
    $
    13,067,000
    
    
    $
    15,715,000
    
    
    $
    39,489,000
    
    
    $
    48,669,000Net earnings (loss)
    
    $
    734,000
    
    
    $
    2,151,000
    
    
    $
    585,000
    
    
    $
    7,100,000Net earnings (loss) per diluted common share
    
    $
    0.09
    
    
    $
    0.28
    
    
    $
    0.07
    
    
    $
    1.10
 
 13




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##### Table of Contents



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 in our
Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (SEC) for the
fiscal year ended January 1, 2005. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from these forward-looking
statements as a result of any number of factors, including those set forth under Factors That May
Affect Forward Looking Statements below.
 References to our   refer to our fiscal year ended December 27, 2003, references
to our   refer to our fiscal year ended January 1, 2005, and references to our   refer to our fiscal year ending December 31, 2005.
 Overview
      Altama Acquisition
     14




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##### Table of Contents



Chambers Belt Acquisition
  Tommy
Bahama Footwear Acquisition
   Results of Operations
  Three Months Ended
    
    Nine Months EndedOctober 1,
    
    September 25,
    
    October 1,
    
    September 25,2005
    
    2004
    
    2005
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of goods sold
    
    
    63
    %
    
    
    58
    %
    
    
    62
    %
    
    
    56
    %Gross profit
    
    
    37
    %
    
    
    42
    %
    
    
    38
    %
    
    
    44
    %Operating expenses and other expenses  net
    
    
    29
    %
    
    
    30
    %
    
    
    33
    %
    
    
    32
    %Operating (loss) income
    
    
    8
    %
    
    
    12
    %
    
    
    5
    %
    
    
    12
    %Interest expense
    
    
    3
    %
    
    
    1
    %
    
    
    3
    %
    
    
    1
    %Earnings (loss) before income taxes
    
    
    5
    %
    
    
    11
    %
    
    
    2
    %
    
    
    11
    %Income tax provision (benefit)
    
    
    2
    %
    
    
    4
    %
    
    
    1
    %
    
    
    4
    %Net (loss) earnings
    
    
    3
    %
    
    
    7
    %
    
    
    1
    %
    
    
    7
    %
 15




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##### Table of Contents



Fiscal Quarter Ended October 1, 2005 Compared to Fiscal Quarter Ended September 25, 2004 .
 Consolidated Net Sales
  Consolidated Gross Profit
  Consolidated Operating Expenses
   Consolidated Interest Expense
  Consolidated Income Tax Provision
  Consolidated Net Earnings
  16




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##### Table of Contents



Footwear and Apparel Business
 Net Sales
  Gross Profit
  Operating Expenses
  Accessories Business
 Net Sales
  Gross Profit
  Operating Expenses
  17




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##### Table of Contents



Military Boot Business
 Net Sales
  Gross Profit
  Operating Expenses
  Corporate Expenses
  Fiscal Nine Month Period Ended October 1, 2005 Compared to Fiscal Nine Month Period Ended September
25, 2004.
 Consolidated Net Sales
  Consolidated Gross Profit
  Consolidated Operating Expenses
  18




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##### Table of Contents



Consolidated Interest Expense
  Consolidated Income Tax Provision
  Consolidated Net Earnings
  Footwear and Apparel Business
 Net Sales
  Gross Profit
  Operating Expenses
  19




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##### Table of Contents



Accessories Business
 Net Sales
  Gross Profit
  Operating Expenses
  Military Boot Business
 Net Sales
  20




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##### Table of Contents



Gross Profit
  Operating Expenses
  Corporate Expenses
  Seasonal and Quarterly Fluctuations
  Fiscal 2004First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterNet sales
    
    $
    18,638
    
    
    $
    13,876
    
    
    $
    23,176
    
    
    $
    20,696Income (loss) from operations
    
    $
    2,301
    
    
    $
    1,242
    
    
    $
    2,921
    
    
    $
    (603
    )
 Fiscal 2005First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterNet sales
    
    $
    26,400
    
    
    $
    15,353
    
    
    $
    34,275
    
    
    
    Income (loss) from operations
    
    $
    2,400
    
    
    $
    (1,193
    )
    
    $
    2,814
    
    
    
    
  Liquidity and Capital Resources
   21




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##### Table of Contents



Risk Factors  Defaults under our secured
credit arrangement could result in a foreclosure on our assets by our
bank.
 Cash Flows Used By Operations.
  Investing Activities.
  Financing Activities.
   Contractual Obligations
  22




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##### Table of Contents



Off-Balance Sheet Arrangements
  Critical Accounting Policies
    CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
    23




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##### Table of Contents



Factors That May Affect Forward Looking Statements
 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
  Our future success depends on our ability to respond to changing consumer preferences and
fashion trends and to develop and commercialize new products successfully
  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
   24




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##### Table of Contents



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
   The financial instability of our customers could adversely affect our business and result in
reduced sales, profits and cash flows
  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 depend on third-party trademarks to market some of our products and services and the loss
of the right to use these trademarks or the diminished marketing appeal of these trademarks could
adversely affect our business.
  25




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##### Table of Contents



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
  Our reliance on independent manufacturers for almost all of our non mil-spec products, with
whom we do not have long-term written agreements, could cause delay and damage customer
relationships
   Our results could be adversely affected by disruptions in the manufacturing system for our
Altama brand
  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
   26




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##### Table of Contents



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
  
    
    the convenience of the government;
    
    the lack of funding; or
    
    our actual or anticipated failure to perform our contractual obligations.
      The sales of the Altama brand to the commercial market have 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
  27




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##### Table of Contents



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
  Fluctuations in the price, availability and quality of raw materials could 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
  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
   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
  28




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##### Table of Contents



Defaults under our secured credit arrangement could result in a foreclosure on our assets by
our bank
  We may be required to recognize impairment charges that could adversely affect our reported
earnings in future periods
  The exercise of outstanding stock options and warrants, and the allocation of unallocated
shares held by our 401(k) plan, would cause dilution to our stockholders ownership percentage
and/or a reduction in earnings per diluted share
  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
  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
  
    
    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.
 29




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##### Table of Contents



Our inventory levels may exceed our actual needs, which could adversely affect our operating
results by requiring us to make inventory write-downs
  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
  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
  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
    30




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##### Table of Contents



Our stock price has fluctuated significantly during the past 12 months and may continue to do
so in the future, which could result in litigation against us and significant losses for investors
  
    
    the failure of our quarterly operating results or those of similarly situated companies to meet expectations;
    
    adverse developments in the footwear, apparel or accessories 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.
      31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    
 Part II  Other Information
 Item 1. Legal Proceedings
  Item 3. Default Upon Senior Securities
 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and
Capital Resources.
 
 Item 5: Other Information
   
 Item 6. Exhibits:
        
 
    
    Certain confidential information contained in the document has been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended, or Rule 24b-2 promulgated under the Securities and Exchange Act of
1934, as amended. 32




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##### Table of Contents



SIGNATURES
  PHOENIX FOOTWEAR GROUP, INC.Date: November 15, 2005
    /s/ Richard E. WhiteRichard E. WhiteChief Executive OfficerDate: November 15, 2005
    /s/ Kenneth E. WolfKenneth E. WolfChief Financial Officer 33




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description of ExhibitExhibit 10.1
    
    Asset Purchase Agreement dated August 3, 2005 by and among Phoenix Delaware
Acquisition, Inc., The Paradise Shoe Company, LLC, Tommy Bahama Group, Inc.,
Sensi USA, Inc., and Phoenix Footwear Group, Inc. (incorporated by reference to
Exhibit 2.1 to the Form 8-K filed on August 9, 2005 by Phoenix Footwear Group,
Inc. (SEC File No. 001-31309))Exhibit 10.2
    
    Amended and Restated Credit Facility Agreement between Phoenix Footwear Group,
Inc. and Manufacturers and Traders Trust Company, dated August 4, 2005
(incorporated by reference to exhibit 10.12 to the quarterly report form 10-Q
filed on August 16, 2005 by Phoenix Footwear Group, Inc. (SEC File No.
001-31309))Exhibit 10.3
    
    Trademark License Agreement between Tommy Bahama Group, Inc. and Phoenix
Delaware Acquisition, Inc. dated August 3, 2005 Exhibit 10.4
    
    Amendment dated September 23,
2005 to the award/contract by and between The Defense Supply Center
Philadelphia and Altama Delta Corporation dated September 23,
2005Exhibit 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
 
 
    
    Certain confidential information contained in this document has been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended, or Rule 24b-2 promulgated under the Securities and Exchange Act of
1934, as amended. 34