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Phoenix Footwear sales impacted by difficult retail environment

Oct '09
Phoenix Footwear Group, Inc. reported its preliminary results of operations for the third quarter of fiscal 2009.

•Net profit of $310,000, or $0.04 per share, compared to a net loss of $2.1 million for the third quarter of fiscal 2008.
•A loss from continuing operations during the third quarter of $1.0 million, or $0.12 per share. Included in this loss is $303,000 in amortized financing exit fees, $180,000 of payroll related expenses for terminated employees, and $115,000 of financial consulting and other fees. This loss compares to a loss from continuing operations of $1.3 million for the third quarter of fiscal 2008.
•Net sales from continuing operations during the third quarter of $5.5 million, down 32% compared to net sales from continuing operations of $8.0 million during the third quarter of fiscal 2008.
•Funded bank debt balance of $2.6 million at the close of the third quarter, which is a reduction of $5.4 million from the close of the second fiscal quarter of 2009.

Commenting on the quarter, Rusty Hall, CEO, said, "We are pleased to report a net profit for the quarter and to have begun rebuilding our capital base and balance sheet. During the quarter we closed the divestiture of our belt accessories business that was operated by our wholly-owned subsidiary, Chambers Belt Company, reduced bank debt by 68%, improved our gross margin by 22 percentage points from the second quarter of fiscal 2009, and further reduced SG&A to $2.3 million for the quarter after eliminating certain nonrecurring items.

While our net sales for the quarter continued to be impacted by the difficult retail environment, we believe we have made considerable progress on the sales front. Our order backlog for future shipments is 65% above orders at the same time last year and our products are performing well at retail. Given the foundation our team has rebuilt, and based on this backlog, we expect to begin generating profitable organic growth beginning with the upcoming quarter."

As previously reported on July 9, 2009, we closed the Chambers' asset sale transaction with Tandy Brands Accessories, Inc. The transaction was completed pursuant to an Amended and Restated Asset Purchase Agreement dated July 7, 2009. As part of the purchase price, at closing, Tandy paid $2.6 million for inventory and $500,000 for equipment. In addition to the closing payments, during the 12 months following closing, Tandy is obligated to pay Chambers an earn-out based on a percentage of Tandy's revenues generated from the sale of products formerly sold by the Chambers business.

This earn-out is not capped and provides for $2,000,000 in minimum aggregate payments. These payments are to be paid on a monthly basis, except for an initial $430,000 advance payment that was made to Chambers at closing.

Banking Update
On October 15, 2009 the Company and Wells Fargo Bank, National Association entered into a Third Amendment to Forbearance Agreement and Fourth Amendment to Credit and Security Agreement. Under the terms of this Amendment, the existing credit agreement and forbearance agreements were changed by, among other things, decreasing the inventory sublimit in the borrowing base to $2.3 million and providing for daily 1% decreases in the 46% advance rate on eligible inventory after October 26, 2009 and extending the maturity date for the revolving line of credit and the expiration of the forbearance period to November 30, 2009.

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