##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 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 July 1, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-31309
 PHOENIX FOOTWEAR GROUP, INC.
  Delaware
    
    15-0327010(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5759 Fleet Street, Suite 220
    
    92008Carlsbad, California(Address of principal executive offices)
    
    (Zip Code)
 (760) 602-9688   [None]
  þ o
  o o þ
  o þ
  Class
    
    Outstanding at July 31, 2006Common Stock, $.01 par value per share
    
    8,382,762 shares




---



##### 



PHOENIX FOOTWEAR GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATION
    
    1Item 1. Financial Statements and Notes to Financial Statements
    
    1Consolidated Condensed Balance Sheets as of July 1, 2006 (unaudited) and December 31, 2005
    
    1Consolidated Condensed Statements of Operations for the Three Months and Six Months Ended
July 1, 2006 and July 2, 2005 (unaudited)
    
    2Consolidated Condensed Statements of Cash Flows for the Six Months and Ended July 1,
2006 and July 2 , 2005 (unaudited)
    
    3Notes to Consolidated Condensed Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    26Item 4. Controls and Procedures
    
    26PART II OTHER INFORMATION
    
    27Item 1. Legal Proceedings
    
    27Item 1A. Risk Factors
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    27Item 3. Default upon Senior Securities
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    28Item 5. Other Information
    
    28Item 6. Exhibits
    
    28EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 Item 1. Consolidated Condensed Financial Statements
 PHOENIX FOOTWEAR GROUP, INC.
 
  DecemberJuly 1,
    
    
    31,2006
    
    
    2005(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    1,054,000
    
    
    $
    566,000Accounts receivable (less allowances of $1,401,000 in 2006 and $1,313,000 in 2005)
    
    
    26,764,000
    
    
    
    21,803,000Inventories  net
    
    
    38,572,000
    
    
    
    37,232,000Other current assets
    
    
    3,418,000
    
    
    
    1,915,000Deferred income tax asset
    
    
    473,000
    
    
    
    473,000Total current assets
    
    
    70,281,000
    
    
    
    61,989,000PLANT AND EQUIPMENT  Net
    
    
    4,421,000
    
    
    
    4,538,000OTHER ASSETS:Goodwill
    
    
    33,669,000
    
    
    
    35,976,000Unamortizable intangibles
    
    
    22,992,000
    
    
    
    22,992,000Intangible assets, net
    
    
    10,223,000
    
    
    
    12,082,000Other assets  net
    
    
    924,000
    
    
    
    1,314,000Total other assets
    
    
    67,808,000
    
    
    
    72,364,000TOTAL ASSETS
    
    $
    142,510,000
    
    
    $
    138,891,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    13,470,000
    
    
    $
    13,215,000Accrued expenses
    
    
    6,634,000
    
    
    
    3,752,000Notes payable  current
    
    
    56,541,000
    
    
    
    9,425,000Other current liabilities
    
    
    1,047,000
    
    
    
    1,466,000Income tax payable
    
    
    
    
    
    
    79,000Total current liabilities
    
    
    77,692,000
    
    
    
    27,937,000OTHER LIABILITIES:Notes payable  noncurrent
    
    
    
    
    
    
    25,025,000Note payable, line of credit
    
    
    
    
    
    
    21,091,000Other long-term liabilities
    
    
    1,699,000
    
    
    
    2,685,000Deferred income tax liability
    
    
    8,129,000
    
    
    
    8,129,000Total other liabilities
    
    
    9,828,000
    
    
    
    56,930,000Total liabilities
    
    
    87,520,000
    
    
    
    84,867,000STOCKHOLDERS EQUITY:Common stock, $.01 par value  50,000,000 shares authorized; 8,383,000 and 8,367,000
shares issued in 2006 and 2005, respectively
    
    
    84,000
    
    
    
    84,000Additional paid-in-capital
    
    
    45,988,000
    
    
    
    45,520,000Retained earnings
    
    
    12,182,000
    
    
    
    9,494,000Accumulated other comprehensive loss
    
    
    (2,000
    )
    
    
    (4,000
    )58,252,000
    
    
    
    55,094,000Less: Treasury stock at cost, 455,000 and 378,000 shares in 2006 and 2005, respectively
    
    
    (3,262,000
    )
    
    
    (1,070,000
    )Total stockholders equity
    
    
    54,990,000
    
    
    
    54,024,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    142,510,000
    
    
    $
    138,891,000
  1




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
 
   Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005NET SALES
    
    $
    34,871,000
    
    
    $
    15,353,000
    
    
    $
    75,213,000
    
    
    $
    41,753,000COST OF GOODS SOLD
    
    
    21,694,000
    
    
    
    9,481,000
    
    
    
    46,333,000
    
    
    
    25,323,000GROSS PROFIT
    
    
    13,177,000
    
    
    
    5,872,000
    
    
    
    28,880,000
    
    
    
    16,430,000OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    11,413,000
    
    
    
    7,063,000
    
    
    
    23,100,000
    
    
    
    14,608,000Other expenses (income)  net
    
    
    829,000
    
    
    
    2,000
    
    
    
    (565,000
    )
    
    
    615,000Total operating expenses
    
    
    12,242,000
    
    
    
    7,065,000
    
    
    
    22,535,000
    
    
    
    15,223,000OPERATING INCOME (LOSS)
    
    
    935,000
    
    
    
    (1,193,000
    )
    
    
    6,345,000
    
    
    
    1,207,000INTEREST EXPENSE
    
    
    1,470,000
    
    
    
    533,000
    
    
    
    2,839,000
    
    
    
    965,000EARNINGS (LOSS) BEFORE INCOME TAXES
    
    
    (535,000
    )
    
    
    (1,726,000
    )
    
    
    3,506,000
    
    
    
    242,000INCOME TAX PROVISION (BENEFIT)
    
    
    (193,000
    )
    
    
    (685,000
    )
    
    
    818,000
    
    
    
    102,000NET EARNINGS (LOSS)
    
    $
    (342,000
    )
    
    $
    (1,041,000
    )
    
    $
    2,688,000
    
    
    $
    140,000NET EARNINGS
(LOSS) PER SHARE (Note 5)Basic
    
    $
    (.04
    )
    
    $
    (.14
    )
    
    $
    .34
    
    
    $
    .02Diluted
    
    $
    (.04
    )
    
    $
    (.14
    )
    
    $
    .33
    
    
    $
    .02SHARES OUTSTANDING:Basic
    
    
    7,911,531
    
    
    
    7,630,056
    
    
    
    7,893,543
    
    
    
    7,532,290Diluted
    
    
    7,911,531
    
    
    
    7,630,056
    
    
    
    8,265,301
    
    
    
    7,909,540
  2




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
 
   Six Months EndedJuly 1,
    
    
    July 2,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    2,688,000
    
    
    $
    140,000Adjustments to reconcile net earnings to net cash used by operating activities:Depreciation and amortization
    
    
    1,216,000
    
    
    
    846,000Allocation of shares in defined contribution plan
    
    
    323,000
    
    
    
    467,000Loss on disposal of long-lived assets
    
    
    90,000
    
    
    
    Non-cash share-based compensation
    
    
    81,000
    
    
    
    Changes in assets and liabilities (net of impact of acquisitions):(Increase) decrease in:Accounts receivable  net
    
    
    (4,961,000
    )
    
    
    1,749,000Inventories  net
    
    
    (1,340,000
    )
    
    
    1,508,000Other current receivable
    
    
    (41,000
    )
    
    
    873,000Prepaid Income Tax
    
    
    
    
    
    
    Other current assets
    
    
    (1,068,000
    )
    
    
    43,000Other noncurrent assets
    
    
    129,000
    
    
    
    (2,694,000
    )Increase (decrease) in:Accounts payable
    
    
    255,000
    
    
    
    (2,922,000
    )Accrued expenses
    
    
    2,882,000
    
    
    
    (283,000
    )Other liabilities
    
    
    (265,000
    )
    
    
    (449,000
    )Income taxes payable
    
    
    (80,000
    )
    
    
    Net cash used by operating activities
    
    
    (91,000
    )
    
    
    (722,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of equipment
    
    
    (474,000
    )
    
    
    (221,000
    )Proceeds from disposal of property and equipment
    
    
    13,000
    
    
    
    3,000Acquisitions, net of cash acquired
    
    
    
    
    
    
    (20,335,000
    )Net cash used by investing activities
    
    
    (461,000
    )
    
    
    (20,553,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net (payments) borrowings on note payable-line of credit
    
    
    7,050,000
    
    
    
    32,674,000Proceeds from notes payable
    
    
    
    
    
    
    28,000,000Repayments of notes payable
    
    
    (6,060,000
    )
    
    
    (38,671,000
    )Issuance of common stock
    
    
    50,000
    
    
    
    327,000Debt issuance and other costs
    
    
    
    
    
    
    (1,079,000
    )Net cash provided by financing activities
    
    
    1,040,000
    
    
    
    21,251,000NET INCREASE
(DECREASE) IN CASH
    
    
    488,000
    
    
    
    (24,000
    )CASH  Beginning of period
    
    
    566,000
    
    
    
    694,000CASH  End of period
    
    $
    1,054,000
    
    
    $
    670,000SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for:Interest
    
    $
    2,579,000
    
    
    $
    872,000Income taxes
    
    $
    1,700,000
    
    
    
    SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:In 2006, the Company received 196,967 of its Common Stock previously held
in escrow in connection with a reduction in the purchase price recorded
for its acquisition of Altama in 2004 see note 13, Settlement of Claims.
    
    $
    2,500,000
    
    
    
    
  3




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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.
 
  Description of Business and Summary of Significant Accounting Policies
 1. Basis of Presentation
  Liquidity
  Classification of Obligations When a Violation
Is Waived by the Creditor (EITF 86-30),
 Principles of Consolidation
  Accounting Period
  4




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##### Table of Contents



Reclassifications
  Critical Accounting Policies
  Income Tax Provision
  2. Inventories
  July 1,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    4,791,000
    
    
    $
    3,995,000Work in process
    
    
    1,748,000
    
    
    
    1,286,000Finished goods
    
    
    32,033,000
    
    
    
    31,951,000$
    38,572,000
    
    
    $
    37,232,000
 3. Goodwill and Intangible Assets
  Non-AmortizableGoodwill
    
    
    IntangiblesBalance at December 31, 2005
    
    $
    35,976,000
    
    
    $
    22,992,000Adjustments to purchase price allocation from prior acquisitions
    
    
    (2,307,000
    )
    
    
    Balance at July 1, 2006
    
    $
    33,669,000
    
    
    $
    22,992,000
   AmortizableIntangiblesGross
    
    
    Amortization
    
    
    NetBalance at December 31, 2005
    
    $
    13,818,000
    
    
    $
    (1,736,000
    )
    
    $
    12,082,000Altama purchase price adjustment
    
    
    (1,704,000
    )
    
    
    495,000
    
    
    
    (1,209,000
    )Amortization Expense
    
    
    
    
    
    $
    (650,000
    )
    
    $
    (650,000
    )Balance at July 1, 2006
    
    $
    12,114,000
    
    
    $
    (1,891,000
    )
    
    $
    10,223,000
  5




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##### Table of Contents



Useful Life
    
    
    July 1,
    
    
    December 31,(Years)
    
    
    2006
    
    
    2005Non-amortizing:Trademarks and tradenames
    
    
    
    
    
    $
    15,357,000
    
    
    $
    15,357,000DoD relationship
    
    
    
    
    
    
    7,635,000
    
    
    
    7,635,000Total
    
    
    
    
    
    $
    22,992,000
    
    
    $
    22,992,000Amortizing:Customer lists
    
    
    1-20
    
    
    $
    9,049,000
    
    
    $
    9,049,000Covenant not to compete
    
    
    2-5
    
    
    
    3,026,000
    
    
    
    4,730,000Other
    
    
    5
    
    
    
    39,000
    
    
    
    39,000Less: Accumulated Amortization
    
    
    
    
    
    
    (1,891,000
    )
    
    
    (1,736,000
    )Total
    
    
    
    
    
    $
    10,223,000
    
    
    $
    12,082,000
  Remainder of 2006
    
    $
    656,0002007
    
    
    1,325,0002008
    
    
    1,329,0002009
    
    
    1,299,0002010
    
    
    1,019,000Thereafter
    
    
    4,595,000Total
    
    $
    10,223,000
 4. Accounting for Stock-Based Compensation
  6




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 1, 2006
    
    
    July 1, 2006Selling, general and administrative
    
    $
    35,000
    
    
    $
    80,000Pre-tax stock-based compensation expense
    
    
    35,000
    
    
    
    80,000Income tax benefit
    
    
    5,000
    
    
    
    13,000Total stock-based compensation expense
    
    $
    30,000
    
    
    $
    67,000
   July 1,2006Expected life (years)
    
    
    6Risk-free interest rate
    
    
    4.16
    %Expected volatility
    
    
    44.26
    %Expected dividend yield
    
    
    0.0
    %
  WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    life
    
    
    intrinsicShares
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding December 31, 2005
    
    
    1,163,000
    
    
    $
    7.50Granted
    
    
    
    
    
    
    Exercised
    
    
    (20,000
    )
    
    
    3.63Canceled
    
    
    (255,000
    )
    
    
    5.74Options outstanding July 1, 2006
    
    
    888,000
    
    
    $
    6.13
    
    
    
    7.1
    
    
    $
    473,000Options exercisable July 1, 2006
    
    
    821,000
    
    
    $
    8.07
    
    
    
    7.0
    
    
    $
    472,000
  7




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##### Table of Contents



AggregateIntrinsicRights
    
    ValueStock Rights outstanding December 31, 2005
    
    
    33,000Granted
    
    
    50,000Stock Rights outstanding July 1, 2006
    
    
    83,000
    
    
    $
    493,000
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 2,2005
    
    2005Net earnings (loss), as reported
    
    $
    (1,041,000
    )
    
    $
    140,000Add/Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects
    
    
    (99,000
    )
    
    
    (2,709,000
    )Pro forma net loss
    
    $
    (1,140,000
    )
    
    $
    (2,569,000
    )Earnings (loss) per common share:Basic  as reported
    
    $
    (0.14
    )
    
    $
    0.02Basic  pro forma
    
    $
    (0.15
    )
    
    $
    (0.34
    )Diluted  as reported
    
    $
    (0.14
    )
    
    $
    0.02Diluted  pro forma
    
    $
    (0.15
    )
    
    $
    (0.32
    )
  Three Months andSix Months endedJuly 2, 2005Dividend yield
    
    
    0
    %Expected volatility from stock
    
    
    44.78
    %Risk free interest rates
    
    
    4.16
    %Expected lives
    
    9 years
 8




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##### Table of Contents



5. Per Share Data
  Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic net earnings (loss) per share:Net earnings (loss)
    
    $
    (342,000
    )
    
    $
    (1,041,000
    )
    
    $
    2,688,000
    
    
    $
    140,000Weighted average common shares outstanding
    
    
    7,911,531
    
    
    
    7,630,056
    
    
    
    7,893,543
    
    
    
    7,532,290Basic net earnings (loss) per share
    
    $
    (.04
    )
    
    $
    (.14
    )
    
    $
    0.34
    
    
    $
    0.02Diluted net earnings per share:Net earnings (loss)
    
    $
    (342,000
    )
    
    $
    (1,041,000
    )
    
    $
    2,688,000
    
    
    $
    140,000Weighted average common shares outstanding
    
    
    7,911,531
    
    
    
    7,630,056
    
    
    
    7,893,543
    
    
    
    7,532,290Effect of stock options outstanding
    
    
    
    
    
    
    
    
    
    
    332,748
    
    
    
    377,250Weighted average common and potential
common shares outstanding
    
    
    7,911,531
    
    
    
    7,630,056
    
    
    
    8,265,301
    
    
    
    7,909,540Diluted net earnings (loss) per share
    
    $
    (.04
    )
    
    $
    (.14
    )
    
    $
    0.33
    
    
    $
    0.02
    9




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##### Table of Contents



6. Contingent Liabilities and Contractual Obligations
    7. Debt
   July 1,
    
    December 31,2006
    
    2005Revolving line of credit to bank; secured by
accounts receivable, inventory and
equipment; interest due monthly at LIBOR
plus 3.5% or Prime plus .75%;
    
    $
    16,000,000
    
    
    $
    16,000,000Revolving line of credit to bank; secured by
accounts receivable, inventory and
equipment; interest due monthly at LIBOR plus 3.5% or Prime
plus .75%;
    
    
    7,191,000
    
    
    
    5,091,000Term loan payable to bank in variable
quarterly installments through 2011,
interest due monthly at LIBOR plus 4.0 or
Prime plus 1.25%
    
    
    26,350,000
    
    
    
    27,450,000Bridge loan
payable to bank on August 4, 2006
interest due monthly at LIBOR plus 3.5% or
the prime rate plus .75%
    
    
    7,000,000
    
    
    
    7,000,00056,541,000
    
    
    
    55,541,000Less: current portion
    
    

56,541,000
    
    
    
    9,425,000Noncurrent portion
    
    $
    
    
    
    $
    46,116,000
  One year or less
    
    $
    56,541,000One to three years
    

    $
    Three to five years
    
    $
    Total
    
    $

56,541,000
 10




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##### Table of Contents



8. Other (income) expenses  net
  9. Operating Segment Information
    Three Months ended
    
    Six months endedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Footwear and Apparel:REI
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %
    
    
    9
    %Premium Footwear:Nordstrom
    
    
    17
    %
    
    
    
    
    
    
    17
    %
    
    
    Tommy Bahama
    
    
    16
    %
    
    
    
    
    
    
    13
    %
    
    
    Military:DoD
    
    
    60
    %
    
    
    27
    %
    
    
    66
    %
    
    
    9
    %Accessories:Wal-Mart
    
    
    29
    %
    
    
    
    
    
    
    57
    %
    
    
    
  11




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##### Table of Contents



Three Months ended
    
    Six months endedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Net SalesFootwear and Apparel
    
    $
    11,735,000
    
    
    $
    10,218,000
    
    
    $
    30,513,000
    
    
    $
    27,763,000Premium Footwear
    
    
    5,596,000
    
    
    
    1,668,000
    
    
    
    12,290,000
    
    
    
    3,704,000Military Boots
    
    
    6,512,000
    
    
    
    3,467,000
    
    
    
    13,698,000
    
    
    
    10,286,000Accessories
    
    
    11,028,000
    
    
    
    
    
    
    
    18,712,000
    
    
    
    $
    34,871,000
    
    
    $
    15,353,000
    
    
    $
    75,213,000
    
    
    $
    41,753,000Operating Income
(loss)Footwear and Apparel
    
    $
    1,649,000
    
    
    $
    411,000
    
    
    $
    6,258,000
    
    
    $
    3,886,000Premium Footwear
    
    
    303,000
    
    
    
    (229,000
    )
    
    
    (157,000
    )
    
    
    (267,000
    )Military Boots
    
    
    377,000
    
    
    
    383,000
    
    
    
    1,474,000
    
    
    
    1,437,000Accessories
    
    
    1,244,000
    
    
    
    
    
    
    
    1,637,000
    
    
    
    Reconciling Items(1)
    
    
    (2,638,000
    )
    
    
    (1,758,000
    )
    
    
    (2,867,000
    )
    
    
    (3,849,000
    )$
    935,000
    
    
    $
    (1,193,000
    )
    
    $
    6,345,000
    
    
    $
    1,207,000Depreciation and
AmortizationFootwear and Apparel
    
    $
    71,000
    
    
    $
    100,000
    
    
    $
    116,000
    
    
    $
    198,000Premium Footwear
    
    
    55,000
    
    
    
    24,000
    
    
    
    114,000
    
    
    
    64,000Military Boots
    
    
    194,000
    
    
    
    280,000
    
    
    
    379,000
    
    
    
    498,000Accessories
    
    
    252,000
    
    
    
    
    
    
    
    502,000
    
    
    
    Reconciling Items(2)
    
    
    53,000
    
    
    
    41,000
    
    
    
    105,000
    
    
    
    86,000$
    625,000
    
    
    $
    445,000
    
    
    $
    1,216,000
    
    
    $
    846,000Capital ExpendituresFootwear and Apparel
    
    $
    4,000
    
    
    $
    48,000
    
    
    $
    62,000
    
    
    $
    74,000Premium Footwear
    
    
    2,000
    
    
    
    8,000
    
    
    
    7,000
    
    
    
    8,000Military Boots
    
    
    64,000
    
    
    
    45,000
    
    
    
    173,000
    
    
    
    45,000Accessories
    
    
    44,000
    
    
    
    
    
    
    
    71,000
    
    
    
    Reconciling Items(2)
    
    
    89,000
    
    
    
    26,000
    
    
    
    161,000
    
    
    
    94,000$
    203,000
    
    
    $
    127,000
    
    
    $
    474,000
    
    
    $
    221,000
 12




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##### Table of Contents



As of
    
    
    As ofJuly 1,
    
    
    December 31,2006
    
    
    2005Identifiable AssetsFootwear and Apparel
    
    $
    23,661,000
    
    
    $
    23,345,000Premium Footwear
    
    
    14,578,000
    
    
    
    15,357,000Military Boots
    
    
    13,835,000
    
    
    
    13,987,000Accessories
    
    
    26,991,000
    
    
    
    22,116,000Reconciling Items(2)
    
    
    915,000
    
    
    
    849,000GoodwillFootwear and Apparel
    
    
    6,553,000
    
    
    
    6,553,000Premium Footwear
    
    
    3,344,000
    
    
    
    3,168,000Military Boots
    
    
    18,077,000
    
    
    
    20,577,000Accessories
    
    
    5,695,000
    
    
    
    5,678,000Non-amortizable intangiblesFootwear and Apparel
    
    
    2,590,000
    
    
    
    2,590,000Premium Footwear
    
    
    3,577,000
    
    
    
    3,577,000Military Boots
    
    
    14,155,000
    
    
    
    14,155,000Accessories
    
    
    2,670,000
    
    
    
    2,670,000Reconciling Items(3)
    
    
    5,869,000
    
    
    
    4,269,000$
    142,510,000
    
    
    $
    138,891,000
 
 (1)
    
    Represents corporate general and administrative expenses and other income (expense) not utilized by management in
determining segment profitability. Corporate general and administrative expenses include expenses such as salaries
and related expenses for executive management and support departments such as accounting, information technology and
human resources which benefit the entire corporation and are not segment specific. The decrease in corporate expenses
during the first half of fiscal 2006 is primarily due to the $1.5 million net gain related to the Altama purchase
price reduction settlement and the reduction of severance and management restructuring costs.(2)
    
    Represents capital expenditures of our corporate office not utilized by management in determining segment performance.(3)
    
    Identifiable assets are comprised of net receivables, net inventory, certain property and plant and equipment.
Reconciling items represent unallocated corporate assets not segregated between the four segments and includes
amortizable intangibles and other assets. 10.
Acquisitions
    13




---



##### Table of Contents



Current assets
    
    $
    11,587,000Property, plant and equipment
    
    
    753,000Intangible assets, subject to amortization
    
    
    8,119,000Goodwill and unamortizable intangibles
    
    
    8,365,000Total assets acquired
    
    
    28,824,000Less liabilities
    
    
    (6,780,000
    )Net assets acquired
    
    $
    22,044,000
  ®
 ®
  Current assets
    
    $
    5,432,000Property, plant and equipment
    
    
    66,000Intangible assets, subject to amortization
    
    
    462,000Goodwill and unamortizable intangibles
    
    
    2,579,000Total assets acquired
    
    
    8,539,000Less liabilities
    
    
    (2,083,000
    )Net assets acquired
    
    $
    6,456,000
   Three Months
    
    Six MonthsEnded
    
    EndedJuly 2 , 2005
    
    July 2, 2005Pro forma net sales
    
    $
    29,526,000
    
    
    $
    70,378,000Pro forma net income
    
    $
    81,000
    
    
    $
    1,551,000Basic Pro forma net income per share
    
    $
    0.01
    
    
    $
    0.21Diluted Pro forma net income per share
    
    $
    0.01
    
    
    $
    0.20
 14




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##### Table of Contents



11. Related Parties
  12. Comprehensive Income
  Three Months EndedJuly 1, 2006
    
    
    July 2, 2005Net loss
    
    $
    (342,000
    )
    
    $
    (1,041,000
    )Other comprehensive income:Foreign currency translation
    
    
    2,000
    
    
    
    Comprehensive loss
    
    $
    (344,000
    )
    
    $
    (1,041,000
    )
 Six Months EndedJuly 1, 2006
    
    
    July 2, 2005Net income
    
    $
    2,688,000
    
    
    $
    140,000Other comprehensive income:Foreign currency translation
    
    
    2,000
    
    
    
    Comprehensive income
    
    $
    2,686,000
    
    
    $
    140,000
 13. Settlement of Claims
  15




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##### Table of Contents



14. Recent Accounting Pronouncements
    15. Subsequent Event
    
 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 filed with the Securities and Exchange Commission (SEC) for the fiscal
year ended December 31, 2005. 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.
 References to our   refer to our fiscal year ended January 1, 2005, references to
our   refer to our fiscal year ended December 31, 2005, and references to our   refer to our fiscal year ending December 30, 2006.
 Overview
 ® ® ® ® ® ® ®
    ®
 16




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Six Months EndedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold
    
    
    62
    %
    
    
    62
    %
    
    
    62
    %
    
    
    61
    %Gross profit
    
    
    38
    %
    
    
    38
    %
    
    
    38
    %
    
    
    39
    %Operating expenses and other expenses
 net
    
    
    35
    %
    
    
    46
    %
    
    
    30
    %
    
    
    36
    %Operating income (loss)
    
    
    3
    %
    
    
    (8
    )%
    
    
    8
    %
    
    
    3
    %Interest expense
    
    
    4
    %
    
    
    3
    %
    
    
    4
    %
    
    
    2
    %Earnings (loss) before income taxes
    
    
    (1
    )%
    
    
    (11
    )%
    
    
    4
    %
    
    
    1
    %Income tax provision (benefit)
    
    
    
    %
    
    
    (4
    )%
    
    
    1
    %
    
    
    .5
    %Net earnings (loss)
    
    
    (1
    )%
    
    
    (7
    )%
    
    
    3
    %
    
    
    .5
    %
 Fiscal Quarter Ended July 1, 2006 Compared to Fiscal Quarter Ended July 2, 2005 .
  Consolidated Gross Profit
  Consolidated Operating Expenses
    17




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##### Table of Contents



Consolidated Other Income (Expense)  Net
  Consolidated Interest Expense
  Consolidated Income Tax Provision
  Consolidated Net Loss
  Footwear and Apparel Business
 Net Sales
  Gross Profit
  Operating Expenses
  Premium Footwear Business
 Net Sales
  18




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##### Table of Contents



Gross Profit
  Operating Expenses
  Military Boot Business
 Net Sales
  Gross Profit
  Operating Expenses
  Accessories Business
 Net Sales
  Gross Profit
  Operating Expenses
  19




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##### Table of Contents



Fiscal Six Month Period Ended July 1, 2006 Compared to Fiscal Six Month Period Ended July 2, 2005
  Consolidated Gross Profit
  Consolidated Operating Expenses
    Consolidated Other Income (Expense)  Net
  20




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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
  Premium Footwear Business
 Net Sales
  21




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##### Table of Contents



Gross Profit
  Operating Expenses
  Military Boot Business
 Net Sales
  Gross Profit
  Operating Expenses
  Accessories Business
 Net Sales
  Gross Profit
  Operating Expenses
  22




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##### Table of Contents



Seasonal and Quarterly Fluctuations
  Fiscal 2005First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    26,400
    
    
    $
    15,353
    
    
    $
    34,275
    
    
    $
    33,161Income (loss) from operations
    
    $
    2,400
    
    
    $
    (1,193
    )
    
    $
    2,814
    
    
    $
    1,640Fiscal 2006First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    40,342
    
    
    $
    34,871
    
    
    $
    
    
    
    $
    Operating Income
    
    $
    5,410
    
    
    $
    935
    
    
    $
    
    
    
    $
    
  Liquidity and Capital Resources
     Classification of Obligations When a Violation Is Waived
by the Creditor,
     23




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##### Table of Contents



Cash Flows Used By Operations.
  Investing Activities.
  Financing Activities.
   24




---



##### Table of Contents



Inflation
  Contractual Obligations
  Off-Balance Sheet Arrangements
  Critical Accounting Policies:
 Adoption of SFAS No. 123 (Revised 2004)
   CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
  Form 10-K
 25




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Fluctuations
    Interest Rate Fluctuations
  
 Item 4. Evaluation of Disclosure Controls and Procedures
    26




---



##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 Part II  Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  If we are unable to obtain awards of future DoD boot solicitations, our net sales and consolidated
operating results would be adversely affected
  Defaults under our secured credit arrangement could result in a foreclosure on our assets by our
bank
     
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  COMPANY PURCHASES OF EQUITY SECURITIES
 (c)Total Number of
    
    
    (d)Shares Purchased as
    
    
    Maximum Number of(a)
    
    
    (b)
    
    
    Part of Publicly
    
    
    Shares that May YetTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    be Purchased UnderPeriod
    
    Shares Purchased
    
    
    Per Share
    
    
    Programs
    
    
    the Plans or Programs4/2/06 - 5/1/06
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    05/2/06 - 6/1/06(1)
    
    
    12,500
    
    
    $
    4.83
    
    
    
    0
    
    
    
    06/2/06 - 7/1/06
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 (1)
    
    Includes, 12,500 shares purchased by James R. Riedman, President, Chief Executive Officer
and Chairman in open market transactions.
 
 Item 3. Default Upon Senior Securities
 See Managements Discussion and Analysis of Financial Condition and Results
of Operations  Liquidity and Capital Resources
 27




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Votes
    
    VotesNominee
    
    For
    
    WithheldSteven M. DePerrior
    
    
    7,832,850
    
    
    
    266,343Gregory M. Harden
    
    
    7,832,450
    
    
    
    266,743John C. Kratzer
    
    
    7,840,227
    
    
    
    258,966Wilhelm Pfander
    
    
    7,630,535
    
    
    
    468,658Frederick R. Port
    
    
    7,830,883
    
    
    
    268,310James R. Reidman
    
    
    7,578158
    
    
    
    521,035John M. Robbins
    
    
    7,828,733
    
    
    
    270,460
    
 Item 5. Other Information
   Item 6. Exhibits
 10.1
    
    Covenant Waiver  Amendment No. 5 to Amended and Restated Credit Facility Agreement between
Phoenix Footwear Group, Inc. and Manufacturers and Traders Trust Company dated
March 29, 2006 (incorporated by reference to Exhibit 10.30 to the Annual Report
on Form 10-K for December 31, 2005 by Phoenix Footwear Group, Inc. (SEC File
No. 001-31309))10.2
    
    Amended and Restated Credit Facility Agreement Amendment No. 6 between Phoenix
Footwear Group, Inc. and Manufacturers and Traders Trust Company dated April
26, 2006 (incorporated by reference to Exhibit 10.1 on Form 8-K filed May 2,
2006 by Phoenix Footwear Group, Inc. (SEC File No. 001-31309))10.3
    
    Confidential Severance Agreement and General Release dated as of May 10, 2006 between Phoenix
Footwear Group, Inc. and Richard E. White (incorporated by reference to Exhibit 10.1 on Form 8-K
filed May 15, 2006 by Phoenix Footwear Group, Inc. (SEC File No. 001-31309)10.4
    
    Amended and Restated Credit Facility Agreement Amendment No. 7 between Phoenix Footwear Group,
Inc. and Manufacturers and Traders Trust Company dated June 1, 200610.5
    
    Amended and Restated Credit Facility Agreement Amendment No. 8 between Phoenix Footwear Group,
Inc. and Manufacturers and Traders Trust Company dated June 30, 200610.6
    
    Amended and Restated Credit Facility Agreement Amendment No. 9 between Phoenix Footwear Group,
Inc. and Manufacturers and Traders Trust Company dated August 1, 200631.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer and Chief Financial Officer
 28