SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
|_| 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 0-774
PHOENIX FOOTWEAR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 15-0327010
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
450 North Main Street, Old Town, Maine 04468
(Address of Principal Executive Offices) (Zip Code)
(207) 827-4431
(Registrant's Telephone Number, Including Area Code)
DANIEL GREEN COMPANY
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 2002
Common, $0.01 par value 2,152,859
1
PHOENIX FOOTWEAR GROUP, INC.
INDEX
Page
Number
Index..........................................................................1
PART I - Financial Information
Consolidated Balance Sheets, Assets
June 30, 2002 and December 31, 2001...................................3
Consolidated Balance Sheets, Liabilities & Stockholders' Equity
June 30, 2002 and December 31, 2001...................................4
Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001................................................5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001................................................6
Notes to Consolidated Financial Statements.....................................7
Management Discussion & Analysis of Financial Condition and Results
of Operations.........................................................8
PART II - Other Information...................................................12
2
PHOENIX FOOTWEAR GROUP, INC.
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2002 2001
(Unaudited) (*)
------------ ------------
Current Assets:
Cash $ 200 $ 1,161,101
Accounts Receivable, trade
less allowances of $878,466 in 2002
and $1,468,000 in 2001 6,335,473 8,197,086
Deferred Income Tax Asset 636,470 636,470
Finished Goods Inventories, at lower of
cost (FIFO) or market: 7,558,386 10,453,420
Notes Receivable 1,923,632 1,577,698
Other Current Assets 599,980 204,162
------------ -----------
Total Current Assets 17,054,141 22,229,937
Property, plant & equipment:
Real Estate and Water Power, at cost 1,628,581 1,628,581
Machinery & Equipment at cost 856,420 754,595
------------ -----------
2,485,001 2,383,176
Less: Accumulated Depreciation 693,215 625,887
------------ -----------
Property, plant & equipment, net 1,791,786 1,757,289
Other Assets:
Other Assets, net 175,764 251,528
Goodwill, net 1,645,476 1,645,476
Other Receivable 1,693,103 1,693,103
------------ -----------
Total Other Assets 3,514,343 3,590,107
------------ -----------
Total Assets $ 22,360,270 $27,577,333
============ ===========
(*) Derived from audited consolidated financial statements.
See notes to consolidated financial statements.
3
PHOENIX FOOTWEAR GROUP, INC.
Consolidated Balance Sheets
LIABILITIES & STOCKHOLDERS' EQUITY
June 30, December 31,
2002 2001
(Unaudited) (*)
------------ ------------
Current Liabilities:
Notes Payable, line of credit $ 1,858,883 $ 8,200,365
Notes Payable, current 1,500,000 4,016,485
Accounts Payable, trade 2,988,707 1,586,384
Liability to former stockholder 1,805,951 1,805,951
Income Tax Payable 609,194 15,447
Other Accrued Liabilities 801,575 1,248,407
------------ ------------
Total Current Liabilities 9,564,310 16,873,039
Deferred Income Taxes 641,090 641,090
Notes Payable, non-current 3,000,000 2,611,645
------------ ------------
Total Other Liabilities 3,641,090 3,252,735
Total Liabilities 13,205,400 20,125,774
Stockholders' Equity:
Common Stock 5,735,450 5,224,065
Paid-in-excess of par value 2,333,030 2,088,977
Retained Earnings 3,624,035 2,676,162
------------ ------------
11,692,515 9,989,204
Less: Treasury Stock (2,537,645) (2,537,645)
------------ ------------
Total Stockholders' Equity 9,154,870 7,451,559
------------ ------------
Total Liabilities & Stockholders'
Equity $ 22,360,270 $ 27,577,333
============ ============
(*) Derived from audited consolidated financial statements.
See notes to consolidated financial statements.
4
PHOENIX FOOTWEAR GROUP, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ------------ ----------- ------------
Net Sales $8,446,234 $ 8,399,823 $19,239,363 $ 19,317,315
Costs and Expenses
Cost of Goods Sold 5,363,321 5,364,824 12,323,930 12,305,596
Selling, General &
Administrative 2,408,240 2,504,759 5,000,616 5,609,119
Other Expense-Pension 0 1,713,710 0 1,713,710
Interest Expense 103,228 517,963 334,866 1,009,734
---------- ------------ ----------- ------------
Total Costs and Expenses 7,874,789 10,101,256 17,659,412 20,638,159
Income/(Loss) before Income
Tax Expense/(Benefit) 571,445 (1,701,433) 1,579,951 (1,320,844)
Income Tax Expense/(Benefit) 228,675 (474,158) 632,078 (317,923)
---------- ------------ ----------- ------------
Net Income/(Loss) $ 342,770 $ (1,227,275) $ 947,873 $ (1,002,921)
========== ============ =========== ============
Net Income (Loss) per Share:
Basic $ 0.19 $ (0.78) $ 0.57 $ (0.64)
Diluted $ 0.17 $ (0.78) $ 0.49 $ (0.64)
Shares Outstanding:
Basic 1,770,355 1,572,486 1,668,203 1,570,549
Diluted 1,976,124 1,572,486 1,932,648 1,570,549
See notes to consolidated financial statements.
5
PHOENIX FOOTWEAR GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30, June 30,
2002 2001
----------- -----------
Operating Activities:
Net Income $ 947,873 $(1,002,921)
Adjustments to reconcile net income
to net provided by operating activities:
Depreciation and amortization 143,092 408,638
Changes in assets & liabilities:
(Increases) decreases in:
Accounts Receivable, trade 1,861,613 7,733,448
Finished Goods Inventories 2,895,034 (1,934,089)
Other Current Assets (395,818) (552,218)
Other Assets (345,934) 0
Increases (decreases) in:
Accounts Payable, trade 1,402,323 (6,112,379)
Other Accrued Liabilities (446,832) (557,927)
Income Taxes Payable 593,747 (844,167)
Prepaid Pension 0 3,610,518
----------- -----------
Net cash provided by Operating Activities 6,655,098 748,903
Investing Activities:
Purchase of property & equipment (101,825) 0
----------- -----------
Net cash used by Investing Activities (101,825) 0
Financing Activities:
Net Paydown on Line of Credit (6,341,482) (2,922,819)
Net (Paydown)/Borrowings of Notes Payable (1,378,130) 2,336,981
Purchase of Treasury Stock 0 (40,611)
Issuance of Common Stock 5,438
----------- -----------
Net cash used in financing activities (7,714,174) (626,449)
----------- -----------
Net Increase (Decrease) in Cash (1,160,901) 122,454
Cash at Beginning of Period 1,161,101 1,395
----------- -----------
Cash at End of Period $ 200 $ 123,849
=========== ===========
6
PHOENIX FOOTWEAR GROUP, INC.
Notes to Consolidated Financial Statements
Note 1.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain adjustments, all of which are of a normal and
recurring nature, necessary to present fairly the financial position as of June
30, 2002 and the results of operations and cash flows for the three and six
months then ended. The results of operations for the six months ended June 30,
2002 are not necessarily indicative of the results to be expected for the full
year.
Note 2.
The accounting policies used in preparing these statements are the same as
those used in preparing the Company's consolidated financial statements for the
year ended December 31, 2001. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report to stockholders for the
year ended December 31, 2001.
Note 3.
Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Impairment would be examined more frequently if certain indicators
are encountered. Intangible assets with a determinable useful life will continue
to be amortized over their useful lives. SFAS No. 142 applies to goodwill and
intangible assets acquired after June 30, 2001.
Goodwill amortization totaling $31,063 and $142,535 for the quarter and six
months ended June 30, 2001, respectively was not recognized in the quarter
and six months ended June 30, 2002. There was no impact of impairment during the
quarter ended June 30, 2002. The following summary presents unaudited pro-forma
consolidated results of operations as if SFAS No. 142 had been adopted at the
beginning of 2001 and includes an adjustment for the amount of goodwill
amortization. The pro-forma results are for illustrative purposes only.
Quarter Ended June 30, 2001 Six Months Ended June 30, 2001
In thousands, except for per share amounts (unaudited)
Reported net income(loss) $(1,227) $(1,003)
Add back: goodwill amortization 31 143
------- -------
Adjusted net income $ 1,196 $ (860)
======= =======
Basic and Diluted Earnings(loss) per Share:
Reported earnings(loss) per share $ (.79) $ (.64)
Add back: goodwill amortization .02 .09
------- -------
Adjusted earnings(loss) per share $ (.76) $ (.55)
======= =======
Note 4.
In addition to shares outstanding held by the public, the Company's defined
contribution 401(k) savings plan holds approximately 390,000 shares which were
issued during 2001 in connection with the termination of the defined benefit
pension plan. These shares, while eligible to vote, are classified as treasury
stock and therefore are not outstanding for purpose of determining per share
earnings until the time that such shares are vested in employee accounts. This
vesting is occurring over the course of the next six years. For basic income per
share for the three months ended June 30, 2002, the shares outstanding include
the weighted average number of issued common shares, 2,293,930, less the shares
held in treasury, 523,575. For basic income per share on a year to date basis,
the shares outstanding include the weighted average number of issued common
shares of 2,191,778, less the shares held in treasury, 523,575. For diluted
income per share, the shares outstanding include the aforementioned shares for
basic income per share as well as dilutive stock options totaling 205,769
shares.
Note 5.
Included in other expenses for the second quarter of 2001 are costs associated
with the termination of the Penobscot Shoe Company Retirement Plan, totaling
$1,713,710. During the quarter ended June 30, 2001, the Company completed the
termination of its defined benefit pension plan. On the date of termination, the
Company received cash totaling $2,377,600, which was less than the carrying
value of the prepaid pension cost asset of $3,734,670, resulting in a loss of
$1,357,070. This loss was increased by an excise tax totaling $356,640, which
resulted in a total loss on this transaction totaling $1,713,710.
7
PHOENIX FOOTWEAR GROUP, INC.
Management Discussion & Analysis of Financial Condition and
Results of Operations
Results of Operations
Six Months and Quarter Ended June 30, 2002 compared to the Six Months and
Quarter Ended June 30, 2001:
Net sales for the second quarter of 2002 were $8.4 million compared to $8.4
million for the same period in the prior year. Net sales in the second quarter
of 2001 included $1.2 million in sales generated by previously divested brands.
The growth rate in the Trotters(R) and SoftWalk(R) brands in the second quarter
of 2002 vs. the second quarter of 2001 was approximately 16%.
Gross profits in the second quarter of 2002 were $3.1 million or 36.5% of net
sales as compared to $3.0 million or 36.1% of net sales in the second quarter of
2001.
Selling, general and administrative expenses as a percentage of net sales was
28.5% or $2.4 million for the quarter ended June 30, 2002, as compared to 29.8%
or $2.5 million for the same quarter in fiscal 2001. The costs in 2001 include
amounts associated with supporting the sales of the previously divested brands.
Included in other expenses for the second quarter of 2001 are costs associated
with the termination of the Penobscot Shoe Company Retirement Plan, totaling
$1,713,710. During the quarter ended June 30, 2001, the Company completed the
termination of its defined benefit pension plan. On the date of termination, the
Company received cash totaling $2,377,600, which was less than the carrying
value of the prepaid pension cost asset of $3,734,670, resulting in a loss of
$1,357,070. This loss was increased by an excise tax totaling $356,640, which
resulted in a total loss on this transaction totaling $1,713,710.
8
During the second quarter of 2002, interest expense amounted to $103,228 as
compared to $517,963 in the same period in 2001. This decrease is a result of
the lower outstanding indebtedness. For the six months ended June 30, 2002
interest expense amounted to $334,866 compared to $1,009,734 for the same period
last year. The reason for the decrease is the decrease in outstanding debt vs.
last year. For the six months ended June 30, 2002, the interest expense includes
$31,250 related to a note paid April 11, 2002 and $45,000 relating to
non-recurring costs associated with financing inventory purchases.
The Company's effective tax rate for the second quarter of 2002 is 40% as
compared to (28%) in the second quarter of 2001.
During what has been described as a "very tough" early spring season by the
industry, both Trotters(R) and SoftWalk(R) brands of the Company have continued
to perform well at retail. This is a result of our brands maintaining a focused
channel of distribution, growing the business with non-promotional retailers.
Management anticipates that the Company will experience continued growth in both
brands in the subsequent quarters as compared to the same periods in the
previous year.
Liquidity and Capital Resources
As of June 30, 2002 Phoenix Footwear had working capital of $7,489,831 vs.
working capital of $5,356,898 at December 31, 2001. Working capital may vary
from time to time as a result of seasonal requirements which are heightened
during the first and third quarters, the timing of factory shipments and the
need to increase inventories and support an in-stock position in anticipation of
customers' orders, and the timing of accounts receivable collections.
The consolidated statement of cash flows for the first quarter of 2002 shows a
decrease of cash since December 31, 2001. Net cash provided by operations was
$6,655,098, primarily due to the decrease in inventories and accounts
receivable.
At the end of the second quarter of 2002, total indebtedness was $8,164,834
which consisted of: line of credit balance, current of $1,858,883, notes payable
current of $1,500,000, notes payable non-current of $3,000,000, and a liability
relating to the dissenting shareholders of Penobscot of $1,805,951.
In the first quarter of 2002 the Company entered into a new loan agreement with
its existing bank. The new terms of the agreement were used to determine the
current and non-current portions of its long-term debt as of June 30, 2002. The
loan agreement consists of a revolving line of credit ("revolver"), a term loan
facility in the amount of $3,000,000, a supplemental loan facility in the amount
of $929,762 and a bridge loan in the amount of $1,500,000. Under the terms of
the new agreement, the borrowing base for the revolver is based on certain
balances of accounts receivable and inventory, as defined in the
9
agreement. The maximum credit amount under the revolver is $12,500,000 minus a
$1.7 million letter of credit available for the dissenting Penobscot
shareholders, and will be decreased to $11,000,000 on July 20, 2002. The
revolver expires on December 20, 2005 and has an interest rate of LIBOR plus 225
basis points (LIBOR was 1.8357% on June 30, 2002). Effective January 1, 2003,
the interest rate ranges from LIBOR plus 175 to 300 basis points depending on
the level of the Company's debt to earnings ratio. The revolver is secured by
accounts receivable, inventory and equipment. The term loan is payable through
December 20, 2005 and is also secured by accounts receivable, inventory and
equipment. The supplemental loan facility is due in 2002 and the bridge loan is
due in full on June 30, 2002. The term loan is subject to similar interest rate
changes as the revolver.
The Company must meet certain restrictive financial covenants as agreed upon in
the facility. Depending on the Company's future growth rate, funds may be
required by operating activities. Management is not aware of any known demands,
commitments, or events that would materially affect its liquidity. With
continued us of its revolving credit facility and internally generated funds,
the Company believes its present and currently anticipated sources of capital
are sufficient to sustain its anticipated capital needs for the remainder of
2002.
Notes Regarding Forward-Looking Statements and Analyst Reports
"Forward-looking statements", within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"), include certain written and oral
statements made, or incorporated by reference, by the Company or its
representatives in this report, other reports, filings with the Securities and
Exchange Commission (the "S.E.C."), press releases, conferences or otherwise.
Such forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe", "anticipate", "expect",
"estimate"' "intend", "plan", "project", "will be", "will continue", "will
likely result", or any variations of such words with similar meaning. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results may differ materially from those expressed or forecasted in any
such forward-looking statements. Investors should carefully review the risk
factors set forth in other reports or documents the Company files with the
S.E,C., including Forms 10-Q, 10-K, and 8-K. Some of the other risks and
uncertainties that should be considered include, but are not limited to, the
following: international, national and local general economic and market
conditions; the inability to source the Company's products because of adverse
political and economic factors or the imposition of trade or duty restrictions;
changing consumer preferences; changing fashion trends; intense competition
among other footwear brands; demographic changes; popularity of particular
designs and products; seasonal and geographic demand for the Company's products;
fluctuations and difficulty in forecasting operating results, including without
limitation, the ability of the Company to continue, manage and forecast its
growth and inventories; risk of unavailability or price increase in raw
materials needed to make the Company's products; new product development and
commercialization; the ability to secure and
10
protect trademarks; performance and reliability of products; customer service;
adverse publicity; the loss of significant customers or suppliers; increase cost
of freight and transportation to meet delivery deadlines; changes in business
strategy or development plans; general risks of doing business outside the
United States; including without limitation, import duties, quotas, tariffs, and
political and economic instability; changes in government regulation; liability
and other claims asserted against the Company; the ability to attract and retain
qualified personnel; the risk of the Company's customers filing bankruptcy and
other factors referenced or incorporated by reference in this report and other
reports.
The Company operates in a very competitive and rapidly changing environment. New
risk factors can arise and it is not possible for management to predict all such
risk factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements.
Investors should also be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report.
Furthermore, the Company has a policy against issuing or confirming financial
forecasts or projections issued by others. Thus, to the extent that reports
issued by securities analysts contain any projections, forecasts or opinions,
such reports are not the responsibility of the Company.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
11
Part II - Other Information
1. Legal Proceedings - None.
2. Changes in Securities - None.
3. Default upon Senior Securities - None.
4. Submission of matters to a vote of security holders. - None
5. Other Information - None.
6. Exhibits and Reports on Form 8K - Certifications of Chief Executive
Officer and Chief Financial Officer.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto, duly authorized.
PHOENIX FOOTWEAR GROUP, INC.
Registrant
Date: August 12, 2002 /s/ Robert M. Pereira
----------------------- -------------------------------
Robert M. Pereira
Chief Financial Officer
/s/ James R. Riedman
-------------------------------
James R. Reidman
Chief Executive Officer
12