Phoenix Footwear May Not Meet Financial Covenants for Q1

Phoenix Footwear Group Inc., the parent of Royal Robbins, said it does not believe it will meet its financial covenants for the first quarter and the company's independent public accountants have included a “going concern” qualification in its report.

The company is having ongoing discussions with its bank about waiving its expected first quarter default and amending its financial covenants to better align with management's expected financial performance for the remainder of fiscal 2007, but offered no assurance an agreement could be reached. Phoenix Footwear also reported a loss in its fourth quarter and year.

On the positive side, fourth quarter net sales for Royal Robbins increased 26.2% to $4.6 million, compared to $3.7 million a year ago. For the full fiscal year, Royal Robbins sales were also very strong at $31.8 million, a 27.8% increase, compared to $24.9 million in 2005. The double-digit growth of Royal Robbins was primarily attributable to moving to direct sales in Canada earlier in 2006 as well as improved sell-through in all of its retail accounts, including REI.

For the fourth quarter, the overall company reported a net loss of $23.4 million, or $2.95 a share, compared with a net income of $71,000, or a penny a share, in Q4 2005. The latest fourth quarter included a non-cash intangible impairment charge of $23.5 million, or $2.42 per diluted share, associated with its Premium Footwear and Military Boot segments.

Sales for the quarter decreased 12.8% to $28.9 million compared to $33.2 million. The company reported net sales increases of 26.2% and 11.5% in Royal Robbins and H.S. Trask, respectively, which were offset by declines in the other brands.

For fiscal 2006, the net loss after chargers totaled $20.4 million, or $2.58 per share, compared to net income of $1.2 million, or 15 cents, for fiscal 2005. Excluding the non-cash intangible impairment charge,net loss for fiscal 2006 was $1.2 million, or $0.15 per diluted share.

For fiscal 2006, net sales increased 28.8% to $140.6 million. The company reported full- year organic growth of 3.9%, which excludes the Chambers Belt and Tommy Bahama Footwear brands that were acquired during June 2005 and August 2005, respectively. The positive organic growth was due to a 27.8% increase in Royal Robbins net sales, which was partially offset by declines in the Company's other brands.

Jim Riedman, Phoenix Footwear's Chairman and CEO, said, “2006 was an important year for Phoenix as we addressed several significant challenges which we believe pave the way for improved performance. We aggressively dealt with excess inventory levels, reducing our footwear inventory by over 300,000 pair or approximately 40% year-over-year. Additionally, we completely repositioned the Tommy Bahama Footwear brand and launched a new Spring 2007 line. We now have product with world class design and quality, which is being shipped to major national retailers, including Nordstrom and Macy's. During the fourth quarter we also began reinvesting in our H.S. Trask brand and started updating and redesigning the product line. Finally, we rationalized many of our third party sourcing relationships, opened up a second foreign sourcing office and started consolidating our distribution facilities. While these efforts suppressed our margins in the later half of 2006 we believe they provide the basis for improving our operating results in 2007 and beyond.

Riedman continued, “The final two initiatives on which we are presently focused, are the strengthening of our balance sheet and complementing our management team with the addition of a new CEO. We are making progress on both these fronts and hope to report further details in the coming months.”

Gross margin in the fourth quarter of fiscal 2006 was 22.4%, compared to 37.4% in the fourth quarter of 2005. The decrease in gross margin was due to a significantly increased level of close-out sales and inventory write-downs. Operating costs increased to $34.8 million, compared to $10.8 million – attributable to the company's $23.5 non-cash intangible impairment charge, as well as operating costs associated with staffing and operating its Tommy Bahama Footwear unit.

During the fourth quarter of 2006, interest expense totaled $1.6 million, compared to $1.4 million in the comparable prior fiscal year period. This increase is primarily related to increased acquisition and working capital debt associated with brand acquisitions and higher interest rates.

The company announced that as of December 30, it had defaulted on its financial covenants with its bank. On March 30, 2007, the bank waived the defaults. The company, however, does not believe it will meet its financial covenants for the fiscal quarter ended March 31, 2007. The company is having ongoing discussions with its bank about waiving its expected first quarter default and amending its financial covenants to better align with management's expected financial performance for the remainder of fiscal 2007. There is no assurance, when or if, the required waiver or amendment will be provided by its bank.

In the absence of a refinancing, asset sale or other transaction, the Company would not be able to repay the bank debt if accelerated. Based on this, the Company's registered independent public accountants have included a going concern qualification in its report on the financial statements that are part of the Company's Annual Report on Form 10-K to be filed with the Securities and Exchange Commission on or before April 16, 2007. This announcement of a going concern qualification is being made in compliance with American Stock Exchange Company Guide Section 610(b), which requires disclosure of receipt of an audit opinion that contains a going concern qualification.