##### 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 July 2, 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)
  
  
   þ o
  o þ
  CLASS
Common, $0.01 par value
    
    OUTSTANDING AT JULY 30, 2005
8,366,547




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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
    
    
    3Consolidated
Condensed Balance Sheets as of July 2, 2005 (unaudited) and
January 1, 2005
    
    
    3Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 2, 2005 and June 26, 2004
(unaudited)
    
    
    4Consolidated Condensed Statements of Cash Flows for the Six Months Ended July 2, 2005 and June 26, 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
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II OTHER INFORMATION
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 10.7EXHIBIT 10.8EXHIBIT 10.9EXHIBIT 10.10EXHIBIT 10.11EXHIBIT 10.12EXHIBIT 10.13EXHIBIT 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.
 
 
 July 2,
    
    January 1,2005
    
    2005ASSETSCURRENT ASSETS:Cash
    
    $
    670,000
    
    
    $
    694,000Accounts receivable (less allowances of $1,137,000 in
2005 and $1,567,000 in 2004)
    
    
    15,288,000
    
    
    
    11,177,000Inventories-net
    
    
    32,228,000
    
    
    
    28,317,000Other receivable
    
    
    38,000
    
    
    
    911,000Other current assets
    
    
    3,555,000
    
    
    
    2,971,000Deferred income tax asset
    
    
    255,000
    
    
    
    256,000Total current assets
    
    
    52,034,000
    
    
    
    44,326,000PLANT AND EQUIPMENT  Net
    
    
    4,054,000
    
    
    
    3,530,000OTHER ASSETS:Other assets  net
    
    
    1,178,000
    
    
    
    121,000Goodwill
    
    
    41,559,000
    
    
    
    27,500,000Unamortizable intangibles
    
    
    17,975,000
    
    
    
    17,975,000Intangible assets, net
    
    
    10,209,000
    
    
    
    4,728,000Total other assets
    
    
    70,921,000
    
    
    
    50,324,000TOTAL ASSETS
    
    $
    127,009,000
    
    
    $
    98,180,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    8,173,000
    
    
    $
    7,568,000Accrued expenses
    
    
    3,649,000
    
    
    
    3,543,000Notes payable  current
    
    
    2,200,000
    
    
    
    3,656,000Other current liabilities
    
    
    1,000,000
    
    
    
    400,000Total current liabilities
    
    
    15,022,000
    
    
    
    15,167,000OTHER LIABILITIES:Notes payable  noncurrent
    
    
    25,800,000
    
    
    
    10,451,000Note payable, line of credit
    
    
    20,650,000
    
    
    
    12,500,000Other long-term liabilities
    
    
    3,054,000
    
    
    
    1,111,000Deferred income tax liability
    
    
    9,263,000
    
    
    
    9,265,000Total other liabilities
    
    
    58,767,000
    
    
    
    33,327,000Total liabilities
    
    
    73,789,000
    
    
    
    48,494,000STOCKHOLDERS EQUITY:Common stock, $.01 par value  50,000,000 shares authorized; 8,367,000 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
    
    
    8,444,000
    
    
    
    8,303,00054,291,000
    
    
    
    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
    
    
    53,220,000
    
    
    
    49,686,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    127,009,000
    
    
    $
    98,180,000
  3




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PHOENIX FOOTWEAR GROUP, INC.
 
 
 Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004NET SALES
    
    $
    15,353,000
    
    
    $
    13,876,000
    
    
    $
    41,753,000
    
    
    $
    32,514,000COST OF GOODS SOLD
    
    
    9,481,000
    
    
    
    7,587,000
    
    
    
    25,323,000
    
    
    
    18,079,000GROSS PROFIT
    
    
    5,872,000
    
    
    
    6,289,000
    
    
    
    16,430,000
    
    
    
    14,435,000OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    7,063,000
    
    
    
    5,021,000
    
    
    
    14,608,000
    
    
    
    10,832,000Other expenses  net
    
    
    2,000
    
    
    
    26,000
    
    
    
    615,000
    
    
    
    60,000Total operating expenses
    
    
    7,065,000
    
    
    
    5,047,000
    
    
    
    15,223,000
    
    
    
    10,892,000OPERATING INCOME (LOSS)
    
    
    (1,193,000
    )
    
    
    1,242,000
    
    
    
    1,207,000
    
    
    
    3,543,000INTEREST EXPENSE
    
    
    533,000
    
    
    
    134,000
    
    
    
    965,000
    
    
    
    304,000EARNINGS (LOSS) BEFORE INCOME TAXES
    
    
    (1,726,000
    )
    
    
    1,108,000
    
    
    
    242,000
    
    
    
    3,239,000INCOME TAX PROVISION (BENEFIT)
    
    
    (685,000
    )
    
    
    465,000
    
    
    
    102,000
    
    
    
    1,360,000NET EARNINGS (LOSS)
    
    $
    (1,041,000
    )
    
    $
    643,000
    
    
    $
    140,000
    
    
    $
    1,879,000NET EARNINGS (LOSS) PER SHARE (Note 5)Basic
    
    $
    (.14
    )
    
    $
    .14
    
    
    $
    .02
    
    
    $
    .41Diluted
    
    $
    (.14
    )
    
    $
    .12
    
    
    $
    .02
    
    
    $
    .36SHARES OUTSTANDING:Basic
    
    
    7,630,056
    
    
    
    4,628,987
    
    
    
    7,532,290
    
    
    
    4,580,134Diluted
    
    
    7,630,056
    
    
    
    5,321,659
    
    
    
    7,909,540
    
    
    
    5,221,499
  4




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PHOENIX FOOTWEAR GROUP, INC.
 
 
 Six Months EndedJuly 2,
    
    June 26,2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    140,000
    
    
    $
    1,879,000Adjustments to reconcile net earnings to net cash used by operating activities:Depreciation and amortization
    
    
    846,000
    
    
    
    364,000Allocation of shares in defined contribution plan
    
    
    467,000
    
    
    
    427,000Changes in assets and liabilities (net of impact of acquisitions):(Increase) decrease in:Accounts receivable  net
    
    
    1,749,000
    
    
    
    (1,167,000
    )Inventories  net
    
    
    1,508,000
    
    
    
    310,000Other current receivable
    
    
    873,000
    
    
    
    (165,000
    )Prepaid
income tax
    
    
    
    
    
    
    (783,000
    )Other current assets
    
    
    43,000
    
    
    
    (1,067,000
    )Other noncurrent assets
    
    
    (2,694,000
    )
    
    
    572,000Increase (decrease) in:Accounts payable
    
    
    (2,922,000
    )
    
    
    535,000Accrued expenses
    
    
    (283,000
    )
    
    
    (70,000
    )Other liabilities
    
    
    (449,000
    )
    
    
    Income taxes payable
    
    
    
    
    
    
    (111,000
    )Net cash
(used by) provided by operating activities
    
    
    (722,000
    )
    
    
    724,000CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of equipment
    
    
    (221,000
    )
    
    
    (554,000
    )Proceeds from disposal of property and equipment
    
    
    3,000
    
    
    
    Acquisitions, net of cash acquired
    
    
    (20,335,000
    )
    
    
    Net cash used by investing activities
    
    
    (20,553,000
    )
    
    
    (554,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings (payments) on note payable-line of credit
    
    
    32,674,000
    
    
    
    (280,000
    )Proceeds from notes payable
    
    
    28,000,000
    
    
    
    Repayments of notes payable
    
    
    (38,671,000
    )
    
    
    (1,209,000
    )Bank overdraft
    
    
    
    
    
    
    48,000Issuance of common stock
    
    
    327,000
    
    
    
    313,000Debt issuance and other costs
    
    
    (1,079,000
    )
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    (100,000
    )Net cash provided by (used by) financing activities
    
    
    21,251,000
    
    
    
    (1,228,000
    )NET DECREASE IN CASH
    
    
    (24,000
    )
    
    
    (1,058,000
    )CASH  Beginning of period
    
    
    694,000
    
    
    
    1,058,000CASH  End of period
    
    $
    670,000
    
    
    $
    SUPPLEMENTAL
CASH FLOW INFORMATION Cash paid during the period for:Interest
    
    $
    872,000
    
    
    $
    311,000Income taxes
    
    $
    
    
    
    $
    2,255,000
  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
   Recent Accounting Pronouncements
 Share-Based Compensation, Accounting for Stock Issued to Employees,
 6




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##### Table of Contents



2. Inventories
  July 2, 2005
    
    January 1, 2005Raw materials
    
    $
    3,185,000
    
    
    $
    1,861,000Work in process
    
    
    1,305,000
    
    
    
    807,000Finished goods
    
    
    27,738,000
    
    
    
    25,649,000$
    32,228,000
    
    
    $
    28,317,000
 3. Goodwill and Intangible Assets
  July 2, 2005
    
    January 1, 2005UsefulLife
    
    
    
    
    
    Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net Book(Years)
    
    Gross
    
    Amortization
    
    Value
    
    Gross
    
    Amortization
    
    ValueNon-amortizing:Trademarks/tradenames and customer
relationships
    
    
    
    
    
    $
    17,975,000
    
    
    $
    
    
    
    $
    17,975,000
    
    
    $
    17,975,000
    
    
    $
    
    
    
    $
    17,975,000Amortizing:Customer lists
    
    
    5-13
    
    
    
    6,088,000
    
    
    
    454,000
    
    
    
    5,634,000
    
    
    
    3,222,000
    
    
    
    278,000
    
    
    
    2,944,000Other
    
    
    2-5
    
    
    
    5,016,000
    
    
    
    441,000
    
    
    
    4,575,000
    
    
    
    2,021,000
    
    
    
    237,000
    
    
    
    1,784,000Total amortizing
intangible assets
    
    
    
    
    
    $
    11,104,000
    
    
    $
    895,000
    
    
    $
    10,209,000
    
    
    $
    5,243,000
    
    
    $
    515,000
    
    
    $
    4,728,000
  7




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Remainder of 2005
    
    $
    856,0002006
    
    
    1,711,0002007
    
    
    1,709,0002008
    
    
    1,694,0002009
    
    
    1,487,000Thereafter
    
    
    2,752,000$
    10,209,000
  July 2, 2005
    
    
    January 1, 2005GoodwillBalance Forward
    
    $
    27,500,000
    
    
    $
    6,680,000Impaired
    
    
    
    
    
    
    Acquired
    
    
    14,059,000
    
    
    
    20,820,000Ending Balance
    
    $
    41,559,000
    
    
    $
    27,500,000
 4. Stock-Based Compensation
 Accounting
for Stock Issued to Employees
 Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Net earnings (loss), as reported
    
    $
    (1,041,000
    )
    
    $
    643,000
    
    
    $
    140,000
    
    
    $
    1,879,000Add/Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    (99,000
    )
    
    
    (192,000
    )
    
    
    (2,709,000
    )
    
    
    (383,000
    )Pro forma net earnings (loss)
    
    $
    (1,140,000
    )
    
    $
    451,000
    
    
    $
    (2,569,000
    )
    
    $
    1,496,000Earnings (loss) per common share:Basic  as reported
    
    $
    (0.14
    )
    
    $
    0.14
    
    
    $
    0.02
    
    
    $
    0.41Basic  pro forma
    
    $
    (0.15
    )
    
    $
    0.10
    
    
    $
    (0.34
    )
    
    $
    0.33Diluted  as reported
    
    $
    (0.14
    )
    
    $
    0.12
    
    
    $
    0.02
    
    
    $
    0.36Diluted  pro forma
    
    $
    (0.15
    )
    
    $
    0.08
    
    
    $
    (0.32
    )
    
    $
    0.29
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility from stock
    
    
    44.78
    %
    
    
    39.81
    %
    
    
    44.78
    %
    
    
    39.81
    %Risk free interest rates
    
    
    4.16
    %
    
    
    4.73
    %
    
    
    4.16
    %
    
    
    4.73
    %Expected lives
    
    9 years
    
    10 years
    
    9 years
    
    10 years
  5. Per Share Data
 8




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Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Basic net
earnings (loss) per share:Net earnings (loss)
    
    $
    (1,041,000
    )
    
    $
    643,000
    
    
    $
    140,000
    
    
    $
    1,879,000Weighted average common shares outstanding
    
    
    7,630,056
    
    
    
    4,628,987
    
    
    
    7,532,290
    
    
    
    4,580,134Basic net earnings (loss) per share
    
    $
    (0.14
    )
    
    $
    0.14
    
    
    $
    0.02
    
    
    $
    0.41Diluted net earnings (loss) per share:Net earnings (loss)
    
    $
    (1,041,000
    )
    
    $
    643,000
    
    
    $
    140,000
    
    
    $
    1,879,000Weighted average common shares outstanding
    
    
    7,630,056
    
    
    
    4,628,987
    
    
    
    7,532,290
    
    
    
    4,580,134Effect of stock options outstanding
    
    
    
    
    
    
    692,672
    
    
    
    377,250
    
    
    
    641,365Weighted average common and potential
common shares outstanding
    
    
    7,630,056
    
    
    
    5,321,659
    
    
    
    7,909,540
    
    
    
    5,221,499Diluted net earnings (loss) per share
    
    $
    (0.14
    )
    
    $
    0.12
    
    
    $
    0.02
    
    
    $
    0.36
  6. Contingent Liability
  7. Debt
   9




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2005
    
    2004Revolving line of credit to
bank; secured by accounts
receivable, inventory and
equipment; interest due monthly at
LIBOR rate of 6.44%; matures on
September 1, 2005
    
    $
    16,000,000
    
    
    $
    Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at Prime plus .375%;
    
    
    4,650,000
    
    
    
    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
    
    
    
    
    
    
    9,167,000Note payable to financial
institution; collateralized by
vehicle; interest at 0%; principal
payable $493 monthly; remaining
principal balance due July 2007
    
    
    
    
    
    
    15,00048,650,000
    
    
    
    26,607,000Less: current portion
    
    
    2,200,000
    
    
    
    3,656,000Noncurrent portion
    
    $
    46,450,000
    
    
    $
    22,951,000
  One year or less
    
    $
    2,200,000One to three years.
    
    
    6,500,000Three to five years
    
    
    39,950,000Total
    
    $
    48,650,000
 10




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

    
    Six Months Ended

    
    EndedJuly 2,

    
    July 2,

    
    January 1,2005
    
    2005
    

    2005Net revenuesFootwear and apparel
    
    $
    11,886,000
    
    
    $
    31,467,000
    
    
    $
    62,750,000Military boots
    
    
    3,467,000
    
    
    
    10,286,000
    
    
    
    13,636,000$
    15,353,000
    
    
    $
    41,753,000
    
    
    $
    76,386,000Operating incomeFootwear and apparel
    
    $
    182,000
    
    
    $
    3,619,000
    
    
    $
    8,226,000Military boots
    
    
    383,000
    
    
    
    1,437,000
    
    
    
    2,358,000Reconciling items(1)
    
    
    (1,758,000
    )
    
    
    (3,849,000
    )
    
    
    (4,723,000
    )$
    (1,193,000
    )
    
    $
    1,207,000
    
    
    $
    5,861,000Identifiable assetsFootwear and apparel
    
    
    
    
    
    $
    35,734,000
    
    
    $
    28,785,000Military boots
    
    
    
    
    
    
    10,757,000
    
    
    
    7,527,000Goodwill and non-amortizable intangiblesFootwear and apparel
    
    
    
    
    
    
    23,238,000
    
    
    
    10,645,000Military boots
    
    
    
    
    
    
    36,297,000
    
    
    
    34,830,000Reconciling items(2)
    
    
    
    
    
    
    20,983,000
    
    
    
    16,393,000$
    127,009,000
    
    
    $
    98,180,000Depreciation and amortizationFootwear and apparel
    
    
    
    
    
    $
    348,000
    
    
    $
    812,000Military boots
    
    
    
    
    
    
    498,000
    
    
    
    407,000$
    846,000
    
    
    $
    1,219,000
 
 (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 unallocaated corporate assets
not segregated between the two segments. 10. Acquisition
  11




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Current assets
    
    $
    11,587,000Property, plant and equipment
    
    
    753,000Intangible assets, subject to amortization
    
    
    5,866,000Goodwill and unamortizable intangibles
    
    
    9,316,000Total assets acquired
    
    
    27,522,000Less liabilities
    
    
    (7,027,000
    )Net assets acquired
    
    $
    20,495,000
   Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Net sales
    
    $
    23,533,000
    
    
    $
    35,232,000
    
    
    $
    58,533,000
    
    
    $
    73,646,000Gross profit
    
    $
    9,103,000
    
    
    $
    13,805,000
    
    
    $
    23,108,000
    
    
    $
    28,466,000Net earnings (loss)
    
    $
    (998,000
    )
    
    $
    4,157,000
    
    
    $
    721,000
    
    
    $
    8,014,000Net earnings (loss) per diluted common share
    
    $
    (0.12
    )
    
    $
    0.50
    
    
    $
    0.09
    
    
    $
    0.97
 11. Subsequent Event
  12




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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 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
     13




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##### Table of Contents



Altama Acquisition
        14




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##### Table of Contents





Chambers
Belt Acquisition




Results of Operations




Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Costs of goods sold
    
    
    62
    %
    
    
    55
    %
    
    
    61
    %
    
    
    56
    %Gross profit
    
    
    38
    %
    
    
    45
    %
    
    
    39
    %
    
    
    44
    %Operating expenses and other
expenses  net
    
    
    46
    %
    
    
    36
    %
    
    
    36
    %
    
    
    33
    %Operating (loss) income
    
    
    (8
    )%
    
    
    9
    %
    
    
    3
    %
    
    
    11
    %Interest expense
    
    
    3
    %
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %Earnings (loss) before income taxes
    
    
    (11
    )%
    
    
    8
    %
    
    
    1
    %
    
    
    10
    %Income tax provision (benefit)
    
    
    (4
    )%
    
    
    3
    %
    
    
    .5
    %
    
    
    4
    %Net (loss) earnings
    
    
    (7
    )%
    
    
    5
    %
    
    
    .5
    %
    
    
    6
    %


Fiscal Quarter Ended July 2, 2005 Compared to Fiscal Quarter Ended June 26, 2004 .


Consolidated Net Sales


Consolidated Gross Profit
  Consolidated Operating Expenses
   Consolidated Interest Expense
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Consolidated Income Tax Provision
  Consolidated Net (Loss) Earnings
  Footwear and Apparel Business
 Net Sales
  Gross Profit
  Operating Expenses
  16




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##### Table of Contents



Military Boot Business
 Net Sales
  Gross Profit
  Operating Expenses
  Fiscal Six Month Period Ended July 2, 2005 Compared to Fiscal Six Month Period Ended June 26, 2004.
 Consolidated Net Sales
  Consolidated Gross Profit
  Consolidated Operating Expenses
   Consolidated Interest Expense
 17




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Consolidated Income Tax Provision
  Consolidated Net Earnings
  18




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##### Table of Contents



Footwear and Apparel Business
 Net Sales
  Gross Profit
  Operating Expenses
  Military Boot Business
 Net Sales
  Gross Profit
  Operating Expenses
  19




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##### Table of Contents



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
    
    
    
    
    
    
    
    Income from operations
    
    $
    2,400
    
    
    $
    (1,193
    )
    
    
    
    
    
    
    
  Liquidity and Capital Resources
    Cash Flows Used By Operations.
  20




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##### Table of Contents



Investing Activities.
  Financing Activities.
  Contractual Obligations
  Off-Balance Sheet Arrangements
  Critical Accounting Policies
   21




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##### Table of Contents



CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
     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
  22




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##### Table of Contents



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
   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
  23




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##### Table of Contents



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.
   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
  24




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##### Table of Contents



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
   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
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##### Table of Contents




    
    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
  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
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##### Table of Contents



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
  27




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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
  28




---



##### Table of Contents




    
    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
  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
  29




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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 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.
   30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    31




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##### Table of Contents



Part II  Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Nominee
    
    Votes For
    
    Votes WithheldJohn C. Kratzer
    
    
    6,783,532
    
    
    
    93,550Steven M. DePerrior
    
    
    6,773,179
    
    
    
    103,903Gregory M. Harden
    
    
    6,776,280
    
    
    
    100,802Wilhelm Pfander
    
    
    6,749,331
    
    
    
    127,751Frederick R. Port
    
    
    6,783,532
    
    
    
    93,550John M. Robbins
    
    
    6,783,532
    
    
    
    93,550Richard E. White
    
    
    6,781,331
    
    
    
    95,751James R. Reidman
    
    
    6,725,129
    
    
    
    151,953
 
 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: August 16, 2005
    
    
    
    /s/ Richard E. WhiteRichard E. WhiteChief Executive OfficerDate: August 16, 2005
    
    
    
    /s/ Kenneth E. WolfKenneth E. Wolf
Chief 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
    
    Registration Rights Agreement by and between Phoenix Footwear Group, Inc. and Chambers Belt Company, dated June 28, 2005Exhibit 10.3
    
    Escrow Agreement by and among Phoenix Footwear Group, Inc., Chambers Belt Company and Escrow Agent, dated June 28, 2005Exhibit 10.4
    
    Employment Agreement by and among Chambers Delaware Acquisition Company and Charles Stewart dated June 28, 2005Exhibit 10.5
    
    Employment Agreement by and among Chambers Delaware Acquisition Company and Kelly Green dated June 28, 2005Exhibit 10.6
    
    Employment Agreement by and among Chambers Delaware Acquisition Company and David Matheson dated June 28, 2005Exhibit 10.7
    
    Non-Competition and Confidentiality Agreement by and among Chambers Delaware Acquisition Company and Charles Stewart dated June 28, 2005Exhibit 10.8
    
    Non-Competition and Confidentiality Agreement by and among Chambers Delaware Acquisition Company and Kelly Green dated June 28, 2005Exhibit 10.9
    
    Non-Competition and Confidentiality Agreement by and among Chambers Delaware Acquisition Company and David Matheson dated June 28, 2005Exhibit 10.10
    
    Non-Competition and Confidentiality Agreement by and among Chambers Delaware Acquisition Company and Gary Edman dated June 28, 2005Exhibit 10.11
    
    Credit Facility Agreement by and between Phoenix Footwear Group, Inc. and Manufacturers and Traders Trust Company, dated June 29, 2005Exhibit 10.12
    
    Amended and Restated Credit Facility Agreement between Phoenix Footwear Group, Inc. and Manufacturers and Traders Trust Company, dated August 4, 2005Exhibit 10.13
    
    License Agreement by and between Wrangler Apparel Corp. and Chambers Belt Company dated January 1, 2004
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
  
 
    
    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