UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended August 2, 2008
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For
the transition period from
to
Commission File Number: 000-50563
BAKERS FOOTWEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
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Missouri
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43-0577980
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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2815 Scott Avenue,
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63103
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St. Louis, Missouri
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(Zip Code)
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(Address of principal executive offices)
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(314) 621-0699
(Registrants telephone number, including area code)
Not Applicable
(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 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.
þ
Yes
o
No.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Stock, par value $0.0001 per share, 7,055,856 shares issued and outstanding as of September
5, 2008.
BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKERS FOOTWEAR GROUP, INC.
CONDENSED BALANCE SHEETS
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August 4,
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February 2,
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August 2,
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2007
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2008
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2008
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(Unaudited)
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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192,576
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$
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159,671
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$
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145,075
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Accounts receivable
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1,223,857
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1,192,674
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1,177,205
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Other receivables
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789,365
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182,999
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183,610
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Inventories
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22,920,714
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18,061,941
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21,559,866
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Prepaid expenses and other current assets
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4,228,172
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697,174
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971,396
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Prepaid income taxes
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2,251,523
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1,987,621
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106,415
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Total current assets
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31,606,207
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22,282,080
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24,143,567
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Property and equipment, net
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49,245,995
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43,810,776
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40,165,809
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Other assets
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1,270,730
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1,466,095
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1,156,665
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Total assets
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$
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82,122,932
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$
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67,558,951
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$
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65,466,041
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Liabilities and shareholders equity
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Current liabilities:
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Accounts payable
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$
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10,822,480
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$
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7,082,214
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$
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6,694,455
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Accrued expenses
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7,442,081
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9,162,561
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8,130,141
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Subordinated secured term loan
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5,876,590
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Subordinated convertible debentures
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4,000,000
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Sales tax payable
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457,958
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498,510
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573,989
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Deferred income
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1,194,489
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1,362,563
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1,179,666
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Revolving credit facility
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16,056,368
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11,184,379
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10,923,753
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Current maturities of capital lease obligations
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116,998
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57,863
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10,734
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Total current liabilities
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36,090,374
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29,348,090
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37,389,328
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Subordinated convertible debentures
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4,000,000
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4,000,000
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Obligations under capital leases, less current maturities
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10,734
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Accrued rent liabilities
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10,233,227
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10,170,761
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10,070,474
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Shareholders equity:
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Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares outstanding
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Common Stock, $0.0001 par value; 40,000,000 shares
authorized, 6,493,035 shares outstanding at August 4,
2007, 6,655,856 shares outstanding at February 2,
2008 and 7,055,856 shares outstanding at August 2,
2008
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649
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665
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705
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Additional paid-in capital
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36,903,127
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37,101,923
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38,203,800
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Accumulated deficit
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(5,115,179
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)
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(13,062,488
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)
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(20,198,266
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)
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Total shareholders equity
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31,788,597
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24,040,100
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18,006,239
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Total liabilities and shareholders equity
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$
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82,122,932
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$
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67,558,951
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$
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65,466,041
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See accompanying notes.
3
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Thirteen
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Thirteen
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Twenty-six
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Twenty-six
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Weeks
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Weeks
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Weeks
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Weeks
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Ended
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Ended
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Ended
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Ended
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August 4, 2007
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August 2, 2008
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August 4, 2007
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August 2, 2008
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Net sales
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$
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41,984,658
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$
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43,568,099
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$
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91,240,475
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$
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87,105,602
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Cost of merchandise sold, occupancy, and buying expenses
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32,708,564
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30,688,934
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66,676,340
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62,976,464
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Gross profit
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9,276,094
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12,879,165
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24,564,135
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24,129,138
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Operating expenses:
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Selling
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11,213,164
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10,195,159
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23,105,104
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20,907,132
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General and administrative
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4,385,807
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4,009,702
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8,950,562
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8,394,968
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Loss on disposal of property and equipment
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8,448
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31,740
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44,752
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253,600
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Impairment of long-lived assets
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755,672
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755,672
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Operating loss
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(7,086,997
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)
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(1,357,436
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)
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(8,291,955
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)
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(5,426,562
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)
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Other income (expense):
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Interest expense
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(402,294
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)
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(723,034
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)
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(764,418
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)
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(1,529,782
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)
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Other, net
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25,348
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41,258
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37,784
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43,064
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Loss before income taxes
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(7,463,943
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)
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|
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(2,039,212
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)
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(9,018,589
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)
|
|
|
(6,913,280
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)
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|
|
|
|
|
|
|
|
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|
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|
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|
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Provision for income taxes
|
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1,280,839
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|
222,498
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691,367
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222,498
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|
|
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|
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|
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|
|
|
|
|
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Net loss
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$
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(8,744,782
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)
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$
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(2,261,710
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)
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$
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(9,709,956
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)
|
|
$
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(7,135,778
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)
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|
|
|
|
|
|
|
|
|
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|
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Basic loss per share
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$
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(1.35
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)
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|
$
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(0.32
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)
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|
$
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(1.50
|
)
|
|
$
|
(1.02
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)
|
|
|
|
|
|
|
|
|
|
|
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Diluted loss per share
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$
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(1.35
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)
|
|
$
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(0.32
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)
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|
$
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(1.50
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)
|
|
$
|
(1.02
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
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|
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|
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Common Stock
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Shares
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Additional
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Issued and
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Paid-In
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Accumulated
|
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Outstanding
|
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Amount
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Capital
|
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Deficit
|
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|
Total
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|
Balance at February 2, 2008
|
|
|
6,655,856
|
|
|
$
|
665
|
|
|
$
|
37,101,923
|
|
|
$
|
(13,062,488
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)
|
|
$
|
24,040,100
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
301,917
|
|
|
|
|
|
|
|
301,917
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|
Issuance of common stock
|
|
|
400,000
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|
|
|
40
|
|
|
|
799,960
|
|
|
|
|
|
|
|
800,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,135,778
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)
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|
|
(7,135,778
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 2, 2008
|
|
|
7,055,856
|
|
|
$
|
705
|
|
|
$
|
38,203,800
|
|
|
$
|
(20,198,266
|
)
|
|
$
|
18,006,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,709,956
|
)
|
|
$
|
(7,135,778
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,330,394
|
|
|
|
4,029,245
|
|
Deferred income taxes
|
|
|
2,387,809
|
|
|
|
|
|
Accretion of debt discount
|
|
|
|
|
|
|
351,590
|
|
Stock-based compensation expense
|
|
|
331,704
|
|
|
|
301,917
|
|
Loss on disposal of property and equipment
|
|
|
44,752
|
|
|
|
253,600
|
|
Impairment of long-lived assets
|
|
|
755,672
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
479,882
|
|
|
|
14,858
|
|
Inventories
|
|
|
1,181,292
|
|
|
|
(
3,497,925
|
)
|
Prepaid expenses and other current assets
|
|
|
(3,514,362
|
)
|
|
|
(274,222
|
)
|
Prepaid income taxes
|
|
|
(1,121,886
|
)
|
|
|
1,881,206
|
|
Other assets
|
|
|
45,870
|
|
|
|
559,972
|
|
Accounts payable
|
|
|
2,687,838
|
|
|
|
(387,759
|
)
|
Accrued expenses and deferred income
|
|
|
(2,000,249
|
)
|
|
|
(1,139,838
|
)
|
Accrued rent liabilities
|
|
|
817,610
|
|
|
|
(
100,287
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,283,630
|
)
|
|
|
(5,143,421
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,367,602
|
)
|
|
|
(638,589
|
)
|
Proceeds from sale of property and equipment
|
|
|
19,783
|
|
|
|
711
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,347,819
|
)
|
|
|
(637,878
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net advances under revolving credit facility
|
|
|
2,957,064
|
|
|
|
(260,626
|
)
|
Proceeds from issuance of convertible debentures
|
|
|
4,000,000
|
|
|
|
|
|
Debt issuance costs
|
|
|
(420,447
|
)
|
|
|
|
|
Proceeds from issuance of subordinated secured term loan and common stock
|
|
|
|
|
|
|
7,025,000
|
|
Costs of issuing subordinated term loan and common stock
|
|
|
|
|
|
|
(325,542
|
)
|
Principal payments on subordinated secured term loan
|
|
|
|
|
|
|
(625,000
|
)
|
Principal payments under capital lease obligations
|
|
|
(119,938
|
)
|
|
|
(47,129
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,416,679
|
|
|
|
5,766,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(214,770
|
)
|
|
|
(14,596
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
407,346
|
|
|
|
159,671
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
192,576
|
|
|
$
|
145,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
71,011
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
687,869
|
|
|
$
|
1,534,120
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
BAKERS FOOTWEAR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
1. Basis of Presentation
The accompanying unaudited condensed financial statements contain all adjustments that
management believes are necessary to present fairly Bakers Footwear Group, Inc.s (the Companys)
financial position, results of operations and cash flows for the periods presented. Such
adjustments consist of normal recurring accruals. Certain information and disclosures normally
included in notes to financial statements have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. The Companys operations are
subject to seasonal fluctuations and, consequently, operating results for interim periods are not
necessarily indicative of the results that may be expected for other interim periods or for the
full year. The condensed financial statements should be read in conjunction with the audited
financial statements and the notes thereto contained in our Annual Report on Form 10-K for the
fiscal year ended February 2, 2008.
2. Liquidity
The Companys cash requirements are primarily for working capital, principal and interest
payments on debt obligations, and capital expenditures. Historically, these cash needs have been
met by cash flows from operations, borrowings under the Companys revolving credit facility and
sales of securities. The balance on the revolving credit facility fluctuates throughout the year as
a result of seasonal working capital requirements and other uses of cash.
The Companys losses in the first half of fiscal year 2008 and in fiscal year 2007 have had a
significant negative impact on the Companys financial position and liquidity. As of August 2,
2008, the Company had negative working capital of $13.2 million, unused borrowing capacity under
its revolving credit facility of $1.7 million, and shareholders equity had declined to
$18.0 million. During fiscal year 2007, the Company began addressing its liquidity issues by
amending its revolving credit facility to provide for additional availability from April through
September 2007, raising $3.6 million in net proceeds from issuing $4.0 million of subordinated
convertible debentures in June 2007, and terminating a long-term below market lease in exchange for
receiving a $5.0 million cash payment in December 2007. The Company does not believe that any of
its other leases could be terminated on substantially similar terms. In fiscal year 2008, the
Company obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year
subordinated secured term loan and the issuance of 350,000 shares of common stock. On May 9, 2008,
the Company amended the subordinated secured term loan to reduce the financial covenant for minimum
adjusted EBITDA for the first quarter of fiscal year 2008 and to defer principal payments until
September 1, 2008. As consideration for the amendment, the Company issued an additional 50,000
shares of common stock. As of September 6, 2008, the balance on the revolving credit facility was
$14.1 million and unused borrowing capacity was $0.7 million.
The Companys business plan for the remainder of fiscal year 2008 is based on moderate
increases in comparable store sales through the remainder of the year. The business plan also
reflects improved inventory management with a greater emphasis on core lines and on focused
promotional activity. This increased focus on inventory should improve overall gross margin
performance compared to fiscal year 2007. The Company has adjusted its business plan in light of
year-to-date sales and its current liquidity position and has taken actions considered necessary to
maintain adequate liquidity and meet the financial covenants under
debt agreements. However, there
is no assurance that the Company will meet the sales or margin levels contemplated in the business
plan.
The Company continues to face considerable liquidity constraints. Comparable store sales for
the first five weeks of the third quarter increased 2.2% and are expected to remain positive for
the remainder of fiscal year 2008. Although the Company believes its business plan is achievable,
should the Company fail to achieve the sales or gross margin levels it anticipates, or if the
Company were to incur significant unplanned cash outlays, it would become necessary for the Company
to obtain additional sources of liquidity or make further cost cuts to fund operations. However,
there is no assurance that the Company would be able to obtain such financing on favorable terms,
if at all, or to successfully further reduce costs in such a way that would continue to allow it to
operate its business.
The Companys $7.5 million three-year subordinated secured term loan includes certain
financial covenants which require it to maintain specified levels of adjusted EBITDA and tangible
net worth each fiscal quarter and provides for annual limits on capital expenditures (all as
calculated in accordance with the loan agreement). The Company met all financial covenants as of
the end of the second quarter of fiscal year 2008. The minimum adjusted EBITDA covenant for the
first quarter of fiscal year 2008 was reduced as part of the amendment made on May 9, 2008 in order
to maintain compliance at May 3, 2008.
7
Based on the business plan for the remainder of the year and its other actions, the Company
believes that it will be able to comply with its financial covenants. However, given the inherent
volatility in the Companys sales performance, there is no assurance that it will be able to do so.
Furthermore, in light of past sales results and the current state of the economy, there is a
reasonable possibility that the Company may not be able to comply with the quarterly minimum
adjusted EBITDA covenants. Failure to comply would be a default under the terms of the Companys
term loan and could result in the acceleration of the term loan, and possibly all of the Companys
debt obligations. If the Company is unable to comply with its financial covenants, it will be
required to seek one or more amendments or waivers from its lenders. The Company obtained an
amendment reducing the first quarter adjusted EBITDA covenant and believes that it would be able to
obtain any additional required amendments or waivers, but there is no assurance that it would be
able to do so on favorable terms, if at all. If the Company is unable to obtain any required
amendments or waivers, the Companys lenders would have the right to exercise remedies specified in
the loan agreements, including accelerating the repayment of its debt obligations and taking
collection actions. If such acceleration occurred, the Company currently has insufficient cash to
pay the amounts owed and would be forced to obtain alternative financing as discussed above. As a
result of these uncertainties, the Companys long-term debt obligations have been classified as
current liabilities.
The Companys independent registered public accounting firms report issued in its Annual
Report on Form 10-K for fiscal year 2007 included an explanatory paragraph describing the existence
of conditions that raise substantial doubt about the Companys ability to continue as a going
concern, including recent losses and the potential inability to comply with financial covenants.
The financial statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount of and classification of liabilities that
may result should the Company be unable to continue as a going concern.
3. Issuance of Debt and Common Stock
Effective February 4, 2008, the Company consummated a $7.5 million three-year subordinated
secured term loan (the Loan) and issued 350,000 shares of the Companys common stock as additional
consideration. The Loan matures on February 1, 2011, and requires 36 monthly payments of principal
and interest at an interest rate of 15% per annum. Net proceeds to the Company after transaction
costs were approximately $6.7 million. The Company used the net proceeds initially to repay amounts
owed under its senior revolving credit facility and for working capital purposes. The Loan is
secured by substantially all of the Companys assets and is subordinate to the Companys revolving
credit facility but has priority over the Companys subordinated convertible debentures. As a
result of the uncertainties described in Note 2 above, the Loan has been classified as a current
liability.
Under the Loan Agreement, the Company is permitted to prepay the Loan, subject to prepayment
penalties which range between 3% and 1% of the aggregate principal balance of the Loan. The Company
is also required to make prepayments, subject to a senior subordination agreement (Senior
Subordination Agreement) related to the Companys senior revolving credit facility, on the Loan in
certain circumstances, including generally if the Company sells property and assets outside the
ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales
of securities.
The Loan agreement contains financial covenants which require the Company to maintain
specified levels of tangible net worth and adjusted EBITDA, both as defined in the loan agreement,
each fiscal quarter and annual limits on capital expenditures, as defined in the loan agreement, of
no more than $1.5 million, $2 million and $3 million, for each of the fiscal years in the period
ending January 28, 2011, respectively.
Upon the occurrence of an event of default as defined in the Loan Agreement, the Lender will
be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the Senior
Subordination Agreement, with the interest rate increasing to 17.5% per annum.
The Company allocated the net proceeds received in connection with this loan and the related
issuance of common stock based on the relative fair values of the debt and equity components of the
transaction. The fair value of the 350,000 shares of common stock issued was estimated based on
the actual market value of the Companys common stock at the time of the transaction net of a
discount to reflect that unregistered shares were issued and could not be sold on the open market
unless and until the related registration statement, discussed below, covering these shares was
declared effective by the SEC. The fair value of the $7.5 million of debt was estimated based on
publicly available data regarding the valuation of debt of companies with comparable credit
ratings. The relative fair values of the debt and equity components were then pro rated into the
net proceeds received by the Company to determine the actual amounts to be allocated to debt and to
equity. Other expenses incurred by the Company relative to this transaction were allocated either
to debt issuance costs or as a reduction of additional paid-in capital based on either specific
identification of the particular expenses or on a pro rata basis. Based on this analysis, the
Company allocated $6,150,000 to the initial value of the
subordinated secured term loan and allocated $715,000 to the value of the 350,000 shares of
common stock.
8
The Company will accrete the initial value of the debt to the nominal value of the
debt over the term of the loan using the effective interest method and will recognize such
accretion as a component of interest expense. Likewise, the Company will amortize the related debt
issuance costs using the effective interest method and recognize this amortization as a component
of interest expense.
The Company also entered into a registration rights agreement in respect of the shares issued.
The Company was required to file a registration statement relating to the shares with the SEC by
the earlier of 90 days of February 1, 2008 and five business days of the filing date of its annual
report on Form 10-K for fiscal year 2007. The Company was also required to have the registration
statement declared effective by the SEC within 120 days after February 1, 2008. If the Company did
not meet these deadlines, or if the registration statement ceases to be effective for more than
60 days per year or more than 30 consecutive calendar days or if the Companys common stock ceases
to be traded on an eligible market as required, then the Company must generally pay liquidated
damages in an amount equal to 2% of the value of the registrable shares remaining. The Company is
required to use its reasonable best efforts to keep the registration statement continuously
effective, subject to certain exceptions, until the earlier of all of the registrable securities
being sold or ceasing to be registrable under the agreement, or February 1, 2010. The Company is
required to pay all costs of preparing, filing and maintaining the effectiveness of the
registration statement. The Company also has certain other ongoing obligations, including providing
specified notices and certain information, indemnifying the investor for certain liabilities and
using reasonable best efforts to timely file all required filings with the SEC and make and keep
current public information about the Company.
On May 9, 2008, the Company entered into an amendment to the subordinated secured term loan
which modified the first quarter 2008 minimum adjusted EBITDA financial covenant, deferred
principal payments until September 1, 2008 and re-amortized the remaining principal payments. As
consideration for the amendment, the Company issued 50,000 additional shares of common stock. The
fair value of the 50,000 shares of common stock issued was estimated based on the actual market
value of the Companys common stock at the time of the transaction net of a discount to reflect
that unregistered shares were issued and could not be sold on the open market unless and until the
related registration statement, discussed above, covering these shares was declared effective by
the SEC. Based on this analysis, the Company allocated $85,000 to the value of the 50,000 shares of
common stock. The amendment also modified the terms of the registration rights agreement by adding
the 50,000 additional shares to the registration obligations, changing the date on which the
Company was required to file the registration statement, to May 12, 2008, and increasing the
specified aggregate value on which liquidated damages would initially be computed to $1,096,000
from the initial specified value of $959,000. Based on the updated specified value, as of August 2,
2008, the maximum amount of liquidated damages that the Company could be required to pay would have
been $394,320, which represents 18 potential monthly payments of $21,920. The Company filed the
required registration statement on May 9, 2008 and the registration statement was declared
effective by the SEC on May 21, 2008. The Company has not recorded a liability in connection with
the registration rights agreement because, in accordance with SFAS No. 5,
Accounting for
Contingencies
, management has concluded that it is not probable that the Company will make any
payments under the liquidated damages provisions of the registration rights agreement.
4. Revolving Credit Facility
The Company has a revolving credit facility with a commercial bank with a maximum line of
credit of $40,000,000 subject to the calculated borrowing base as defined in the agreement, and a
maturity of August 31, 2010. The agreement is secured by substantially all assets of the Company.
Interest is payable monthly at either the banks base rate (5.0% per annum at August 2, 2008) or,
at the Companys option, based on LIBOR (London Interbank Offered Rate, as defined in the
agreement) plus 1.75% to 2.25% on a designated portion of the outstanding balance for a specified
period of time. An unused line fee of 0.25% per annum is payable monthly based on the difference
between the maximum line and the average loan balance. The Company had approximately $790,000,
$1,456,000, and $1,737,000 of unused borrowing capacity under the revolving credit facility based
upon the Companys borrowing base calculation as of August 4, 2007, February 2, 2008, and August 2,
2008, respectively. The agreement has certain restrictive financial and other covenants, including
a requirement that the Company maintain a minimum availability. As of September 5, 2008, the
Company was in compliance with all of its financial and other covenants and expects to remain in
compliance throughout fiscal year 2008 based on the expected execution of its business plan, as
discussed in Note 2.
9
5. Subordinated Convertible Debentures
The Company completed a private placement of $4,000,000 in aggregate principal amount of
subordinated convertible debentures on June 26, 2007. The Company received net proceeds of
approximately $3.6 million. The debentures bear interest at a rate of 9.5% per annum, payable
semi-annually. The principal balance of $4,000,000 is payable in full on June 30, 2012. As a result
of the uncertainties described in Note 2 above, the subordinated convertible debentures have been
classified as current liabilities. The initial conversion price of the debentures was $9.00 per
share. The conversion price is subject to anti-dilution and other adjustments, including a weighted
average conversion price adjustment for certain future issuances or deemed issuances of common
stock at a lower price, subject to limitations as required under rules of the Nasdaq Stock Market.
The Company can redeem the unpaid principal balance of the debentures if the closing price of the
Companys common stock is at least $16.00 per share, subject to the adjustments and conditions in
the debentures.
The debentures contain a weighted average conversion price adjustment that is triggered by
issuances or deemed issuances of the Companys common stock. As a result of the issuance of the
shares described in Note 3, effective February 4, 2008, the weighted average conversion price of
the debentures decreased from $9.00 to $8.64 and on May 9, 2008, the weighted average conversion
price of the debentures decreased from $8.64 to $8.59.
6. Income Taxes
In accordance with FASB Statement No. 109, Accounting for Income Taxes (SFAS 109), the Company
regularly assesses available positive and negative evidence to determine whether it is more likely
than not that its deferred tax asset balances will be recovered from (a) reversals of deferred tax
liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning
strategies and (d) future taxable income. SFAS 109 places significant restrictions on the
consideration of future taxable income in determining the realizability of deferred tax assets in
situations where a company has experienced a cumulative loss in recent years. When sufficient
negative evidence exists that indicates that full realization of deferred tax assets is no longer
more likely than not, a valuation allowance is established as necessary against the deferred tax
assets, increasing the Companys income tax expense in the period that such conclusion is reached.
Subsequently the valuation allowance is adjusted up or down as necessary to maintain coverage
against the deferred tax assets. If, in the future, sufficient positive evidence, such as a
sustained return to profitability, arises that would indicate that realization of deferred tax
assets is once again more likely than not, any existing valuation allowance would be reversed as
appropriate, decreasing the Companys income tax expense in the period that such conclusion is
reached.
At May 5, 2007, the Company had adequate available net operating loss carryback potential to
support the recorded balance of net deferred tax assets. The Companys loss before income taxes for
the twenty-six weeks ended August 4, 2007 exceeded the Companys carryback potential and was
anticipated to result in a cumulative loss before income taxes for the three-year period ending
February 2, 2008. Therefore, as of August 4, 2007, the Company concluded that the realizability of
net deferred tax assets was no longer more likely than not, and established a valuation allowance
against its net deferred tax assets. As of August 2, 2008, the Company increased the valuation
allowance to $9,831,405. The Company has scheduled the reversals of its deferred tax assets and
deferred tax liabilities and has concluded that based on the anticipated reversals a valuation
allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.
During the second quarter of fiscal year 2008, the Company received federal income tax refunds
of $1.6 million from the carryback of net operating losses. The balance of prepaid income taxes at
August 2, 2008, consists of refunds of state estimated income tax payments made for fiscal year
2006 that were claimed on the Companys state income tax returns for the year ended February 3,
2007. As of August 2, 2008, the Company has approximately $14.0 million of net operating loss
carryforwards that expire in 2022 available to offset future taxable income.
The Company recognized $0.2 million of income tax expense during the second quarter of fiscal
year 2008 related to differences between the alternative minimum tax recognized in the income tax
provision and the federal income tax return filed for fiscal year 2007.
10
Significant components of the provision for income tax expense for the thirteen weeks and
twenty-six weeks ended August 4, 2007 and August 2, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,609,858
|
)
|
|
$
|
(52,723
|
)
|
|
$
|
(1,831,569
|
)
|
|
$
|
(1,383,104
|
)
|
State and local
|
|
|
189,743
|
|
|
|
(54,856
|
)
|
|
|
135,127
|
|
|
|
(342,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(1,420,115
|
)
|
|
|
(107,579
|
)
|
|
|
(1,696,442
|
)
|
|
|
(1,725,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(752,613
|
)
|
|
|
(368,731
|
)
|
|
|
(1,017,582
|
)
|
|
|
(578,178
|
)
|
State and local
|
|
|
(688,720
|
)
|
|
|
(81,153
|
)
|
|
|
(736,896
|
)
|
|
|
(119,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(1,441,333
|
)
|
|
|
(449,884
|
)
|
|
|
(1,754,478
|
)
|
|
|
(697,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
4,142,287
|
|
|
|
779,961
|
|
|
|
4,142,287
|
|
|
|
2,645,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,280,839
|
|
|
$
|
222,498
|
|
|
$
|
691,367
|
|
|
$
|
222,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between income tax expense at the statutory U.S. federal income tax rate of
35% and the amount reported in the statements of operations for the thirteen weeks and twenty-six
weeks ended August 4, 2007 and August 2, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
Federal income tax at statutory rate
|
|
$
|
(2,612,380
|
)
|
|
$
|
(713,724
|
)
|
|
$
|
(3,156,506
|
)
|
|
$
|
(2,419,648
|
)
|
Impact of federal alternative minimum tax
|
|
|
|
|
|
|
222,498
|
|
|
|
|
|
|
|
222,498
|
|
Impact of graduated Federal rates
|
|
|
74,639
|
|
|
|
20,392
|
|
|
|
90,186
|
|
|
|
69,133
|
|
State and local taxes, net of federal income taxes
|
|
|
(330,068
|
)
|
|
|
(90,181
|
)
|
|
|
(398,831
|
)
|
|
|
(305,728
|
)
|
Permanent differences
|
|
|
6,361
|
|
|
|
3,552
|
|
|
|
14,231
|
|
|
|
11,227
|
|
Valuation allowance
|
|
|
4,142,287
|
|
|
|
779,961
|
|
|
|
4,142,287
|
|
|
|
2,645,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,280,839
|
|
|
$
|
222,498
|
|
|
$
|
691,367
|
|
|
$
|
222,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes arise from temporary differences in the recognition of income and
expense for income tax purposes. Deferred income taxes were computed using the liability method and
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax purposes.
Components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2007
|
|
|
February 2, 2008
|
|
|
August 2, 2008
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,144,058
|
|
|
$
|
3,048,240
|
|
|
$
|
5,450,787
|
|
Vacation accrual
|
|
|
444,313
|
|
|
|
392,994
|
|
|
|
377,004
|
|
Inventory
|
|
|
1,514,078
|
|
|
|
1,379,621
|
|
|
|
1,439,736
|
|
Stock-based compensation
|
|
|
573,205
|
|
|
|
650,373
|
|
|
|
768,121
|
|
Accrued rent
|
|
|
3,990,959
|
|
|
|
4,049,924
|
|
|
|
3,952,312
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,666,613
|
|
|
|
9,521,152
|
|
|
|
11,987,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
233,000
|
|
|
|
184,606
|
|
|
|
216,705
|
|
Property and equipment
|
|
|
3,291,326
|
|
|
|
2,150,157
|
|
|
|
1,939,850
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
3,524,326
|
|
|
|
2,334,763
|
|
|
|
2,156,555
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(4,142,287
|
)
|
|
|
(7,186,389
|
)
|
|
|
(9,831,405
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
11
7. Stock-Based Compensation
During the twenty-six weeks ended August 2, 2008, the Company issued 216,500 nonqualified
stock options with an exercise price of $1.95 and 94,000 nonqualified stock options with an
exercise price of $1.43. These options are exercisable in equal annual installments of 20% on or
after each of the first five years from the date of grant and expire ten years from the date of
grant. The Company uses the Black-Scholes option pricing model to determine the fair value of
stock-based compensation. The number of options granted, their grant-date weighted-average fair
value, and the significant assumptions used to determine fair-value during the twenty-six weeks
ended August 4, 2007 and August 2, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Twenty-six
|
|
Twenty-six
|
|
|
Weeks Ended
|
|
Weeks Ended
|
|
|
August 4, 2007
|
|
August 2, 2008
|
Options granted
|
|
|
132,613
|
|
|
|
310,500
|
|
Weighted-average fair value of options granted
|
|
$
|
4.99
|
|
|
$
|
0.86
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
4.5
|
%
|
|
|
2.83.7
|
%
|
Expected volatility
|
|
|
43%46
|
%
|
|
|
46
|
%
|
Expected option life
|
|
56 years
|
|
6 years
|
8. Earnings (Loss) Per Share
Basic earnings (loss) per share are computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share are computed using the weighted
average number of common shares and potential dilutive securities that were outstanding during the
period. Potential dilutive securities consist of outstanding stock options and warrants and shares
underlying the subordinated convertible debentures.
The following table sets forth the components of the computation of basic and diluted earnings
(loss) per share for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
|
August 4, 2007
|
|
|
August 2, 2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,744,782
|
)
|
|
$
|
(
2,261,710
|
)
|
|
$
|
(9,709,956
|
)
|
|
$
|
(7,135,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for loss per share
|
|
|
(8,744,782
|
)
|
|
|
(2,261,710
|
)
|
|
|
(9,709,956
|
)
|
|
|
(7,135,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense related to convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per share
|
|
$
|
(8,744,782
|
)
|
|
$
|
(
2,261,710
|
)
|
|
$
|
(9,709,956
|
)
|
|
$
|
(7,135,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted average shares
|
|
|
6,493,035
|
|
|
|
7,052,559
|
|
|
|
6,493,035
|
|
|
|
7,025,361
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share
adjusted weighted average shares and assumed
conversions
|
|
|
6,493,035
|
|
|
|
7,052,559
|
|
|
|
6,493,035
|
|
|
|
7,025,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The diluted earnings per share calculation for the thirteen weeks ended August 2, 2008
excludes 4,690 incremental shares related to outstanding stock options and 465,656 incremental
shares underlying convertible debentures because they are antidilutive. The diluted earnings per
share calculation for the twenty-six weeks ended August 2, 2008 excludes 4,693 incremental shares
related to outstanding stock options and 464,309 incremental shares underlying convertible
debentures because they are antidilutive. The diluted earnings per share calculation for the
thirteen weeks ended August 4, 2007 excludes 82,713 incremental shares related to outstanding stock
options and 190,476 incremental shares underlying convertible debentures because they are
antidilutive. The diluted earnings per share calculation for the twenty-six weeks ended August 4,
2007 excludes 98,770 incremental shares related to outstanding stock options and 95,238 incremental
shares underlying convertible debentures because they are antidilutive.
9. Fair Value Measurements
On February 3, 2008, the Company adopted SFAS No. 157,
Fair Value Measurements
which defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. This statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new
fair value measurements. Adoption of this statement did not impact the Companys financial
statements.
On February 3, 2008 the Company adopted SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115
. SFAS No. 159
permits entities to measure eligible financial assets, financial liabilities, and firm commitments
at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be
accounted for at fair value under other generally accepted accounting principles. The fair value
measurement election is irrevocable and subsequent changes in fair value must be recorded in
earnings. The Company did not elect the fair value option for any of its eligible financial
instruments or other items. Adoption of this statement did not impact the Companys financial
statements.
10. Contingencies
The Company was served with a lawsuit filed in federal court in the state of California by two
former store managers. They claim they should have been classified as non-exempt employees under
both the California Labor Code and the Fair Labor Standards Act. They filed the case as a class
action on behalf of California based store managers. The Company will defend the plaintiffs
anticipated effort to seek class certification and will vigorously defend itself in this
lawsuit. At this time, the Company does not believe this matter will have a material adverse
effect on its business or financial condition. The Company cannot give assurance, however, that
this matter will not have a material adverse effect on its results of operations for the period in
which it is resolved.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys unaudited condensed
financial statements and notes thereto provided herein and the Companys audited financial
statements and notes thereto in our annual report on Form 10-K. The following Managements
Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. The factors that might cause such a difference
also include, but are not limited to, those discussed in our Annual Report on Form 10-K under Item
1. Business Cautionary Note Regarding Forward-Looking Statements and Risk Factors and under
Item 1. Business Risk Factors and those discussed elsewhere in our Annual Report on Form 10-K
and related notes thereto and elsewhere in this quarterly report.
Overview
We are a national, mall-based, specialty retailer of distinctive footwear and accessories
targeting young women who demand quality fashion products. We feature private label and national
brand dress, casual and sport shoes, boots, sandals and accessories. As of August 2, 2008, we
operated 243 stores, including 217 Bakers stores and 26 Wild Pair stores located in 38 states.
During the first half of 2008, our net sales decreased 4.5% compared to the first half of
2007, reflecting a soft first quarter offset by an improved second quarter that benefited from
strong sandal sales. Comparable store sales in the first half of 2008 decreased 3.1%, compared to a
decrease of 13.6% in the first half of last year. Gross profit percentage increased to 27.7% of
sales in the first half of 2008 compared to 26.9% in the first half of 2007 due to strong sandal
sales and reduced markdowns while ending the first half with inventory down 6% from a year ago. Our
selling, general and administrative expenses decreased 8.6%. Our net loss of $7.1 million for the
first half of 2008 compares to a net loss of $9.7 million in the first half of 2007. Comparable
store sales for the first five weeks of the third quarter of 2008 have increased 2.2%.
We opened one new store and closed seven stores during the first half of 2008. We currently
expect to open a total of two new stores, remodel two stores and close a total of 12 to 14 stores
during fiscal year 2008.
We continue to face
considerable liquidity constraints. As of August 2, 2008, we had negative
working capital of $13.2 million and unused borrowing capacity under our revolving credit facility
of $1.7 million, and our shareholders equity had declined to $18.0 million. As of September 6,
2008, the balance on our revolving line of credit was $14.1 million and our unused borrowing
capacity was $0.7 million. During the first quarter of 2008, we obtained net proceeds of $6.7
million from the entry into a $7.5 million three-year subordinated secured term loan and the
issuance of 350,000 shares of common stock. Also, on May, 9, 2008, we amended our subordinated
secured term loan to reduce the financial covenant for minimum adjusted EBITDA for the first
quarter of 2008 and to defer principal payments until September 1, 2008 for which we issued an
additional 50,000 shares of common stock as consideration for the amendment.
Our business plan for fiscal year 2008 continues to be based on moderate increases in
comparable store sales through the remainder of the year, improved gross margins, and expense
reductions. We have adjusted our business plan in light of year-to-date sales and our current
liquidity position and have taken actions we consider necessary to maintain adequate liquidity and
meet the financial covenants under our debt agreements. Although we believe our business plan is
achievable, in light of past sales results and the current state of the economy, there is a
reasonable possibility that we may not be able to comply with the quarterly minimum adjusted EBITDA
covenants. As a result, our long-term debt obligations are classified as current liabilities. If
we are unable to comply with our financial covenants or otherwise maintain adequate liquidity it
could be necessary for us to obtain one or more amendments or waivers from our lenders, obtain
additional sources of liquidity, or make further cost cuts to fund operations. However, there is
no assurance that we could accomplish these steps. Our Annual Report on Form 10-K provides
additional detail about the risks of our liquidity situation and our ability to comply with our
financial covenants. See also Liquidity and Capital Resources below.
Our independent registered public accounting firms report issued in our Annual Report on
Form 10-K for fiscal year 2007 included an explanatory paragraph describing the existence of
conditions that raise substantial doubt about our ability to continue as a going concern, including
recent losses and the potential inability to comply with financial covenants. The financial
statements do not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount of and classification of liabilities that may result should we
be unable to continue as a going concern.
13
For comparison purposes, we classify our stores as comparable or non-comparable. A new stores
sales are not included in comparable store sales until the thirteenth month of operation. Sales
from remodeled stores are excluded from comparable store sales during the period of remodeling. We
include our Internet and catalog sales as one store in calculating our comparable store sales.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting
principles, which require us to make estimates and assumptions about future events and their impact
on amounts reported in our Financial Statements and related Notes. Since future events and their
impact cannot be determined with certainty, the actual results will inevitably differ from our
estimates. These differences could be material to the financial statements.
We believe that our application of accounting policies, and the estimates that are inherently
required by these policies, are reasonable. We believe that the following significant accounting
policies may involve a higher degree of judgment and complexity.
Merchandise inventories
Merchandise inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out retail inventory method. Consideration received from vendors relating to
inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying
expenses after an agreement with the vendor is executed and when the related inventory is sold. We
physically count all merchandise inventory on hand twice annually, generally during the months of
January and July, and adjust the recorded balance to reflect the results of the physical counts.
We record estimated shrinkage between physical inventory counts based on historical results.
Inventory shrinkage is included as a component of cost of merchandise sold, occupancy, and buying
costs. Permanent markdowns are recorded to reflect expected adjustments to retail prices in
accordance with the retail inventory method. In determining permanent markdowns, we consider
current and recently recorded sales prices, the length of time product is held in inventory, and
quantities of various product styles contained in inventory, among other factors. The process of
determining our expected adjustments to retail prices requires significant judgment by management.
The ultimate amount realized from the sale of inventories could differ materially from our
estimates. If market conditions are less favorable than those projected, additional inventory
markdowns may be required.
Store closing and impairment charges
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for
the Disposal of Long-Lived Assets
, long-lived assets to be held and used are reviewed for
impairment when events or circumstances exist that indicate the carrying amount of those assets may
not be recoverable. We regularly analyze the operating results of our stores and assess the
viability of under-performing stores to determine whether they should be closed or whether their
associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been
impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After
allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends,
long-lived assets of stores indicated to be impaired are written down to fair value.
During the twenty-six weeks ended August 4, 2007, we recorded $755,672, in noncash charges to
earnings related to the impairment of furniture, fixtures, and equipment, leasehold improvements,
and other assets at specifically identified underperforming stores. We recognized no impairment
expense during the twenty-six weeks ended August 2, 2008. We typically perform our impairment
analysis closer to the end of our fiscal year in order to incorporate operating results from the
important holiday season into our analysis.
Stock-based compensation expense
In accordance with SFAS No. 123R,
Share-Based Payment
, (SFAS 123R), we recognize compensation
expense for stock-based compensation based on the grant date fair value. Stock-based compensation
expense is then recognized ratably over the service period related to each grant. We used the
modified prospective transition method under which financial statements covering periods prior to
adoption have not been restated. We determine the fair value of stock-based compensation using the
Black-Scholes option pricing model, which requires us to make assumptions regarding future
dividends, expected volatility of our stock, and the expected lives of the options. Under SFAS
123R, we also make assumptions regarding the number of options and the number of performance shares
that will ultimately vest. The assumptions and calculations required by SFAS 123R are complex and
require a high degree of judgment. Assumptions regarding the vesting of grants are accounting
estimates that must be updated as necessary with any resulting
change recognized as an increase or decrease in compensation expense at the time the estimate
is changed. SFAS 123R also requires that excess tax benefits related to stock option exercises be
reflected as financing cash inflows and operating cash outflows.
14
Deferred income taxes
We calculate income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
(SFAS
109), which requires the use of the asset and liability method. Under this method, deferred tax
assets and liabilities are recognized based on the difference between their carrying amounts for
financial reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities
are measured using the tax rates in effect in the years when those temporary differences are
expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and
interpretations of existing tax law and other published guidance as applied to our operations.
In accordance with SFAS 109, we regularly assess available positive and negative evidence to
determine whether it is more likely than not that our deferred tax asset balances will be recovered
from (a) reversals of deferred tax liabilities, (b) potential utilization of net operating loss
carrybacks, (c) tax planning strategies and (d) future taxable income. SFAS 109 places significant
restrictions on the consideration of future taxable income in determining the realizability of
deferred tax assets in situations where a company has experienced a cumulative loss in recent
years. When sufficient negative evidence exists that indicates that full realization of deferred
tax assets is no longer more likely than not, a valuation allowance is established as necessary
against the deferred tax assets, increasing our income tax expense in the period that such
conclusion is reached. Subsequently, the valuation allowance is adjusted up or down as necessary to
maintain coverage against the deferred tax assets. If, in the future, sufficient positive
evidence, such as a sustained return to profitability, arises that would indicate that realization
of deferred tax assets is once again more likely than not, any existing valuation allowance would
be reversed as appropriate, decreasing our income tax expense in the period that such conclusion is
reached.
At February 3, 2007 and May 5, 2007, we had adequate available net operating loss carryback
potential to support the recorded balance of net deferred tax assets. Our loss before income taxes
for the twenty-six weeks ended August 4, 2007 exceeded our loss carryback potential and was
anticipated to result in a cumulative loss before income taxes for the three-year period ending
February 2, 2008. Based on this factor and after evaluating other available evidence, we concluded
that the realizability of net deferred tax assets was no longer more likely than not, and
established a valuation allowance against our net deferred tax assets. We have scheduled the
reversals of our deferred tax assets and deferred tax liabilities and have concluded that based on
the anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax
assets over deferred tax liabilities. As of August 2, 2008, the valuation allowance is $9.8
million.
We anticipate that until we re-establish a pattern of continuing profitability, in accordance
with SFAS 109, we will not recognize any material income tax benefit in our statement of operations
for future periods, as pretax profits or losses will generate tax effects that will be offset by
decreases or increases in the valuation allowance with no net effect on the statement of
operations. If a pattern of continuing profitability is re-established and we conclude that it is
more likely than not that deferred income tax assets are realizable, we will reverse any remaining
valuation allowance which will result in the recognition of an income tax benefit in the period
that it occurs.
We adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), as of February 4, 2007, the beginning of fiscal
year 2007, and we have analyzed filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all open tax years in these
jurisdictions. The adoption of FIN 48 had no effect on our financial statements for the thirteen
weeks ended May 5, 2007. Our federal income tax returns subsequent to the fiscal year ended
January 1, 2005 remain open. As of August 2, 2008, we have not recorded any unrecognized tax
benefits. Our policy, if we had unrecognized benefits, is to recognize accrued interest and
penalties related to unrecognized tax benefits as interest expense and other expense, respectively.
15
Results of Operations
The following table sets forth our operating results, expressed as a percentage of sales, for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Twenty-
|
|
Twenty-
|
|
|
Weeks
|
|
Weeks
|
|
six Weeks
|
|
six Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
August 4,
|
|
August 2,
|
|
August 4,
|
|
August 2,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of merchandise sold, occupancy and buying expense
|
|
|
77.9
|
|
|
|
70.4
|
|
|
|
73.1
|
|
|
|
72.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22.1
|
|
|
|
29.6
|
|
|
|
26.9
|
|
|
|
27.7
|
|
Selling expense
|
|
|
26.7
|
|
|
|
23.4
|
|
|
|
25.3
|
|
|
|
24.0
|
|
General and administrative expense
|
|
|
10.5
|
|
|
|
9.2
|
|
|
|
9.8
|
|
|
|
9.6
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
Impairment of long-lived assets
|
|
|
1.8
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(16.9
|
)
|
|
|
(3.1
|
)
|
|
|
(9.1
|
)
|
|
|
(6.2
|
)
|
Other income, net
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(1.0
|
)
|
|
|
(1.7
|
)
|
|
|
(0.8
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(17.8
|
)
|
|
|
(4.7
|
)
|
|
|
(9.8
|
)
|
|
|
(7.9
|
)
|
Provision for income taxes
|
|
|
3.0
|
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(20.8
|
)%
|
|
|
(
5.2
|
)%
|
|
|
(10.6
|
)%
|
|
|
(8.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our number of stores at the beginning and end of each period
indicated and the number of stores opened and closed during each period indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Twenty-
|
|
Twenty-
|
|
|
Weeks
|
|
Weeks
|
|
six Weeks
|
|
six Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
August 4,
|
|
August 2,
|
|
August 4,
|
|
August 2,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
Number of stores at beginning of period
|
|
|
258
|
|
|
|
249
|
|
|
|
257
|
|
|
|
249
|
|
Stores opened during period
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
|
|
1
|
|
Stores closed during period
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end of period
|
|
|
257
|
|
|
|
243
|
|
|
|
257
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended August 2, 2008 Compared to Thirteen Weeks Ended August 4, 2007
Net sales.
Net sales increased to $43.6 million for the thirteen weeks ended August 2, 2008
(second quarter 2008) from $42.0 million for the thirteen weeks ended August 4, 2007 (second
quarter 2007), an increase of $1.6 million or 3.8%. This increase reflected strong sandal sales.
Our comparable store sales for the second quarter of 2008, including Internet and catalog sales,
increased by 6.4% compared to an 18.3% decrease in comparable store sales in the second quarter of
2007. Average unit selling prices increased 12.7% while unit sales decreased 7.8% compared to the
second quarter of 2007. Our Internet and catalog sales decreased 1.5% to $1.9 million. We did not
issue a catalog during the second quarter of 2008 compared to one catalog issued in the second
quarter of 2007.
Gross profit.
Gross profit increased to $12.9 million in the second quarter of 2008 from $9.3
million in the second quarter of 2007, an increase of $3.6 million or 38.8%. As a percentage of
sales, gross profit increased to 29.6% in the second quarter of 2008 from 22.1% in the second
quarter of 2007 primarily as a result of strong regular price sales across all categories of
footwear and reduced markdowns. The increase in gross profit is attributable to an increase of $3.1
million from improved gross margin percentage, an increase of $0.7 million from higher comparable
store sales, partially offset by an decrease of $0.3 million from net store closings. Permanent
markdown costs decreased to $2.9 million in the second quarter of 2008 from $4.0 million in the
second quarter of 2007 .
Selling expense.
Selling expense decreased to $10.2 million in the second quarter of 2008 from
$11.2 million in the second quarter of 2007, a decrease of $1.0 million or 9.1%, and decreased as a
percentage of sales to 23.4% from 26.7%. This decrease was primarily the result of $0.3 million of
lower catalog production and mailing costs, $0.3 million decrease in store payroll expenses, and
$0.2 million in lower store depreciation expense, due to a reduction in store count.
General and administrative expense.
General and administrative expense decreased to $4.0
million in the second quarter of 2008 from $4.4 million in the second quarter of 2007, a decrease
of $0.4 million or 8.6%, and decreased as a percentage of sales to 9.2%
from 10.5%. The decrease was due primarily to a $0.3 million decrease in administrative
salaries and benefits compared to the second quarter of 2007.
16
Impairment of long-lived assets
. Based on the criteria in SFAS No. 144,
Accounting for the
Disposal of Long-Lived Assets
, long-lived assets to be held and used are reviewed for impairment
when events or circumstances exist that indicate the carrying amount of those assets may not be
recoverable. During the second quarter of 2007 we recognized $0.8 million in noncash charges
related to the impairment of fixed assets and other assets at specific underperforming stores. We
recognized no impairment expense in the second quarter of 2008.
Interest expense.
Interest expense increased to $0.7 million in the second quarter of 2008
from $0.4 million in the second quarter of 2007, an increase of $0.3 million. The increase in
interest expense reflects the interest on our subordinated secured term loan entered into in
February 2008 and our subordinated convertible debentures issued in June 2007. The increase was
slightly offset by the decrease in our borrowings under our revolving credit facility compared to
the prior year.
Income tax expense.
We recognized income tax expense of $0.2 million in the second quarter of
2008 compared to income tax expense of $1.3 million in the second quarter of 2008. The income tax
expense for the second quarter of 2007 reflects the establishment of a $4.1 million valuation
reserve against net deferred tax assets as a result of accumulated pre-tax losses. The income tax
expense in the second quarter of 2008 reflects differences between the alternative minimum tax
recognized in the income tax provision and the income tax return filed for fiscal year 2007.
Net loss
. We had a net loss of $2.3 million in the second quarter of 2008 compared to a net
loss of $8.7 million in the second quarter of 2007.
Twenty-six Weeks Ended August 2, 2008 Compared to Twenty-six Weeks Ended August 4, 2007
Net sales.
Net sales decreased to $87.1 million for the twenty-six weeks ended August 2, 2008
(first half 2008) from $91.2 million for the twenty-six weeks ended August 4, 2007 (first half
2007), a decrease of $4.1 million or 4.5%. This decrease reflected weak customer response to early
spring offerings impacted by unseasonable cool weather and an early Easter holiday offset by strong
sandal sales during the summer months. Our comparable store sales for the first half of 2008,
including Internet and catalog sales, decreased by 3.1% compared to a 13.6% decrease in comparable
store sales in the first half of 2007. Average unit selling prices increased 7.7% and unit sales
decreased 11.3% compared to the first half of 2007. Our Internet and catalog sales decreased 6.3%
to $4.3 million for the first half of 2008. We issued one catalog during the first half of 2008
compared to three catalogs issued in the first half of 2007.
Gross profit.
Gross profit decreased to $24.1 million in the first half of 2008 from $24.6
million in the first half of 2007, a decrease of $0.5 million or 1.8%. As a percentage of sales,
gross profit increased to 27.7% in the first half of 2008 from 26.9% in the first half of 2007. We
attribute the decrease in gross profit dollars to the following components: a decrease of $0.5
million due to net store closings, a decrease of $0.6 million from lower comparable store sales,
partially offset by our improved margin percentage of $0.7 million. Permanent markdown costs
decreased to $5.8 million in the first half of 2008 from $7.0 million in the first half of 2007 as
a result of stronger regular price sales across all categories of footwear and lower inventory
levels in 2008.
Selling expense.
Selling expense decreased to $20.9 million in the first half of 2008 from
$23.1 million in the first half of 2007, a decrease of $2.2 million or 9.5%, and decreased as a
percentage of sales to 24.0% from 25.3%. This decrease reflects a $1.0 million reduction in
marketing and catalog expense as we published one catalog in the first half of 2008 down from three
catalogs in the first half of 2007. Store salaries and commissions decreased $0.8 million and
store depreciation expense decreased $0.3 million reflecting our reduced store count.
General and administrative expense.
General and administrative expense decreased to $8.4
million in the first half of 2008 from $9.0 million in the first half of 2007, a decrease of $0.6
million or 6.2% and decreased as a percentage of sales to 9.7% from 9.8%.
Impairment of long-lived assets
. Based on the criteria in SFAS No. 144,
Accounting for the
Disposal of Long-Lived Assets
, long-lived assets to be held and used are reviewed for impairment
when events or circumstances exist that indicate the carrying amount of those assets may not be
recoverable. During the first half of 2007 we recognized $0.8 million in noncash charges related to
the impairment of fixed assets and other assets at specific underperforming stores. We recognized
no impairment expense in the first half of 2008.
17
Interest expense.
Interest expense increased to $1.5 million in the first half of 2008 from
$0.8 million in the first half of 2007, an increase of $0.7 million. The increase in interest
expense reflects the interest on our subordinated secured term loan entered into in February 2008
and our subordinated convertible debentures issued in June 2007. The increase was slightly offset
by the decrease in our borrowings under our revolving credit facility compared to the prior year.
Income tax expense.
We recognized $0.2 million in income tax expense compared to income tax
expense of $0.7 million in the first half of 2007. The income tax expense in the first half of 2008
reflects differences between the income tax provision and the income tax return filed for fiscal
year 2007. The income tax expense for the first half of 2007 reflects the establishment of a $4.1
million valuation reserve against net deferred tax assets as a result
of accumulated pre-tax losses.
Net loss
. We had a net loss of $7.1 million in the first half of 2008 compared to a net loss
of $9.7 million in the first half of 2007.
Seasonality and Quarterly Fluctuations
Our operating results are subject to significant seasonal variations. Our quarterly results of
operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of
these seasonal variances, in particular our principal selling seasons. We have five principal
selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Sales and
operating results in our third quarter are typically much weaker than in our other quarters.
Quarterly comparisons may also be affected by the timing of sales promotions and costs associated
with remodeling stores, opening new stores, or acquiring stores.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, capital expenditures and principal
payments on our debt obligations. Historically, these cash needs have been met by cash flows from
operations, borrowings under our revolving credit facility and sales of securities. As discussed
below in Financing Activities the balance on our revolving credit facility fluctuates throughout
the year as a result of our seasonal working capital requirements and our other uses of cash.
Our losses in the first half of fiscal year 2008 and fiscal year 2007 have had a significant
negative impact on our financial position and liquidity. At August 2, 2008 we had negative working
capital of $13.2 million and unused borrowing capacity under our revolving credit facility of $1.7
million and our shareholders equity had declined to $18.0 million. During fiscal year 2007, we began addressing our liquidity issues by amending our revolving
credit facility to temporarily increase our unused borrowing capacity from April through September
2007, raising $3.6 million in net proceeds from a private placement of $4.0 million of aggregate
principal amount of subordinated convertible debentures in June 2007 and terminating a long-term
below market operating lease in exchange for receiving a $5.0 million cash payment in December
2007. We do not believe that we have other leases which could be terminated on substantially
similar terms. In fiscal year 2008, we obtained $6.7 million in net proceeds from a $7.5 million
subordinated secured term loan and the issuance of 350,000 shares of common stock. On May 9, 2008,
we amended the subordinated secured term loan to reduce the financial covenant for minimum adjusted
EBITDA for the first quarter of fiscal year 2008 and to defer principal payments until September 1,
2008. As of September 6, 2008, the balance on our revolving credit facility was $14.1 million and
unused borrowing capacity was $0.7 million. We have reduced inventory levels
below those of the prior year and have modified our business plan to reduce overhead and operating
expenses. We also delayed most store expansion and remodeling projects until funding for such
expansion can be generated from ongoing operating activities. See Item 1. Business Risk
FactorsOur operations and expansion plans could be constrained by our ability to obtain funds
under the terms of our revolving credit facility in our Annual Report on Form 10-K.
Our business plan for the remainder of fiscal year 2008 is based on moderate increases in
comparable store sales continuing through the remainder of the year. Our business plan also
reflects improved inventory management with a greater emphasis on core lines and on focused
promotional activity. We expect this increased focus on inventory should improve overall gross
margin performance compared to fiscal year 2007. We have limited our planned capital expenditures
for fiscal year 2008 to opening two new stores and remodeling two stores. However, there is no
assurance that the we will meet the sales or margin levels contemplated in the business plan.
We continue to face considerable liquidity constraints. Comparable store sales for the first
five weeks of the third quarter increased 2.2%. Although we believe our business plan is
achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were
to incur significant unplanned cash outlays, it would become necessary for us to obtain additional
sources of liquidity or make further cost cuts to fund operations. However, there is no assurance
that we would be able to obtain such financing on favorable terms, if at all, or to successfully
further reduce costs in such a way that would continue to allow us to operate our business. See
Item 1. Business Risk Factors If our sales trends do not improve, we could fail to maintain a
liquidity position adequate to support our ongoing operations in our Annual Report on Form 10-K.
Our $7.5 million three-year subordinated secured term loan includes certain financial
covenants which require us to maintain specified levels of adjusted EBITDA and tangible net worth
each fiscal quarter and provides for annual limits on capital expenditures
(all as calculated in accordance with the loan agreement).
18
The minimum adjusted EBITDA covenant for the first quarter of
fiscal year 2008 was reduced as part of the May 9, 2008 amendment. Based on the business plan for
the remainder of the year and other actions, we believe that we will be able to comply with our
financial covenants. However, given the inherent volatility in our sales performance, there is no
assurance that we will be able to do so. Furthermore, in light of our recent sales results and the
current state of the economy, there is a reasonable possibility that we may not be able to comply
with the quarterly minimum adjusted EBITDA covenants. Failure to comply would be a default under
the terms of our term loan and could result in the acceleration of the term loan, and possibly all
of our debt obligations. If we are unable to comply with our financial covenants, we will be
required to seek one or more amendments or waivers from our lenders. We obtained an amendment
adjusting the first quarter adjusted EBITDA covenant and believe that we would be able to obtain
any additional required amendments or waivers, but there is no assurance that we would be able to
do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers,
our lenders would have the right to exercise remedies specified in the loan agreements, including
accelerating the repayment of our debt obligations and taking collection actions. If such
acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be
forced to obtain alternative financing as discussed above. As a result of these uncertainties, our
long-term debt obligations have been classified as current liabilities. Please see Item 1.
Business Risk Factors The terms of our three-year subordinated secured term loan contain
certain financial covenants with respect to our performance and other covenants that restrict our
activities. If we are unable to comply with these covenants, the lender could accelerate the
repayment of our indebtedness and subject us to a cross-default under our credit facility in our
Annual Report on Form 10-K.
Our independent registered public accounting firms report issued in our Annual Report on
Form 10-K for fiscal year 2007 included an explanatory paragraph describing the existence of
conditions that raise substantial doubt about our ability to continue as a going concern, including
recent losses and the potential inability to comply with financial covenants. The financial
statements do not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount of and classification of liabilities that may result should we
be unable to continue as a going concern. See Item 1. Business Risk Factors The report issued
by our independent registered public accounting firm on our fiscal year 2007 financial statements
contains language expressing substantial doubt about our ability to continue as a going concern in
our Annual Report on Form 10-K.
The following table summarizes certain key liquidity measurements as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2007
|
|
February 2, 2008
|
|
August 2, 2008
|
Cash
|
|
$
|
192,576
|
|
|
$
|
159,671
|
|
|
$
|
145,075
|
|
Inventories
|
|
|
22,920,714
|
|
|
|
18,061,941
|
|
|
|
21,559,866
|
|
Total current assets
|
|
|
31,606,207
|
|
|
|
22,282,080
|
|
|
|
24,143,567
|
|
Property and equipment, net
|
|
|
49,245,995
|
|
|
|
43,810,776
|
|
|
|
40,165,809
|
|
Total assets
|
|
|
82,122,932
|
|
|
|
67,558,951
|
|
|
|
65,466,041
|
|
Revolving credit facility
|
|
|
16,056,368
|
|
|
|
11,184,379
|
|
|
|
10,923,753
|
|
Subordinated convertible debentures
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Subordinated secured term loan
|
|
|
|
|
|
|
|
|
|
|
5,876,590
|
|
Total current liabilities
|
|
|
36,090,374
|
|
|
|
29,348,090
|
|
|
|
37,389,328
|
|
Total shareholders equity
|
|
|
31,788,597
|
|
|
|
24,040,100
|
|
|
|
18,006,239
|
|
Net working capital
|
|
|
(4,484,167
|
)
|
|
|
(7,066,010
|
)
|
|
|
(13,245,761
|
)
|
Unused borrowing capacity*
|
|
|
789,734
|
|
|
|
1,455,865
|
|
|
|
1,737,378
|
|
|
|
|
*
|
|
as calculated under the terms of our revolving credit facility
|
Operating activities
Cash used in operating activities was $5.1 million in the first half of 2008 compared to cash
used in operating activities of $3.3 million in the first half of 2007. Besides our net loss of
$7.1 million, the most significant use of cash in operating activities in the first half of 2008
primarily relates to a $3.5 million increase in inventory partially offset by significant noncash
expenses ($4.0 million of depreciation, and $0.3 million of stock-based compensation expense). The
most significant uses of cash in operating activities in the first half of 2007, relate to a net
loss of $9.7 million, $3.5 million increase in prepaid expenses (principally due to the timing of
rent payments relative to the end of our fiscal 2007 second quarter) partially offset by a $1.2
million reduction in inventory and significant noncash expenses ($4.3 million of depreciation, $0.8
million of impairment expense, $0.7 million of income tax expense, and $0.3 million of stock-based
compensation expense).
Inventories at August 2, 2008 were $3.5 million, or 19.4% higher than at February 2, 2008 but
were $1.4 million, or 5.9%, lower than at August 4, 2007. Although we believe that at August 2,
2008, inventory levels and valuations are appropriate given current and anticipated sales trends,
there is always the possibility that fashion trends could change suddenly. We monitor our inventory
levels closely and will take appropriate actions, including taking additional markdowns, as
necessary, to maintain the freshness of our inventory.
19
Investing activities
Cash used in investing activities was $0.6 million in the first half of 2008 compared to $3.3
million for the first half of 2007. During each period, cash used in investing activities
substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements
for both new and remodeled stores.
We have limited our planned capital expenditures for fiscal year 2008 to opening two new
stores and remodeling two stores. Our future capital expenditures will depend primarily on the
number of new stores we open, the number of existing stores we remodel and the timing of these
expenditures. We continuously evaluate our future capital expenditure plans and adjust planned
expenditures, as necessary, based on business conditions. As of September 6, 2008, we have opened
two new stores in fiscal year 2008. We currently anticipate that our capital expenditures in fiscal
year 2008, primarily related to new stores, store remodelings, distribution and general corporate
activities, will be approximately $2.0 million. Capital expenditures for a new store typically
range from $300,000 to over $500,000. We generally receive landlord allowances in connection with
new stores ranging from $25,000 to $100,000. The average cash investment in inventory for a new
store generally ranges from $45,000 to $75,000, depending on the size and sales expectation of the
store and the timing of the new store opening. Pre-opening expenses, such as marketing, salaries,
supplies, rent and utilities are expensed as incurred. Remodeling the average existing store into
the new format typically costs approximately $350,000.
Financing activities
Cash provided by financing activities was $5.8 million in the first half of 2008 compared to
$6.4 million for the first half of 2007. The principal sources of cash from financing activities in
the first half of 2008 were the net proceeds of approximately $6.7 million received from the entry
into the subordinated secured term loan and related issuance of 350,000 shares of common stock. The
principal sources of cash in the first half of 2007 were the net proceeds of approximately $3.6
million from the placement of subordinated convertible debentures and net draws of $3.0 million on
our revolving line of credit.
Issuance of Debt and Common Stock
On February 4, 2008 we consummated, a $7.5 million three-year subordinated secured term loan
with Private Equity Management Group, Inc. (PEM), as arranger and administrative agent on behalf of
the lender, and an affiliate of PEM, as the lender, and pursuant to a certain Second Lien Credit
Agreement (Loan Agreement). The loan matures on February 1, 2011, with interest and principal
installments originally required to be repaid over 36 months at an interest rate of 15% per annum.
As additional consideration for the Loan, PEM received 350,000 shares of our common stock
representing slightly less than 5% of our outstanding shares on a post-transaction basis. We also
paid PEM an advisory fee of $300,000 and PEMs costs and expenses.
We received aggregate gross proceeds of $7.5 million and net proceeds of approximately $6.7
million. We used the net proceeds initially to repay amounts owed under our senior revolving credit
facility and for working capital purposes. We have broad obligations to indemnify, and pay the fees
and expenses of PEM and the Lender in connection with, among other things, the enforcement,
performance and administration of the Loan Agreement and the other loan documents.
The loan is secured by substantially all of our assets. The loan is subordinate to the
Companys loan with Bank of America, N.A., the Companys senior lender, but it is senior to the
Companys $4 million in aggregate principal amount of subordinated convertible debentures due 2012.
Under the Loan Agreement, we are permitted to prepay the loan, subject to prepayment penalties
which range between 3% and 1% of the aggregate principal balance of the loan. We are also required
to make prepayments, subject to the senior subordination agreement, on the loan in certain
circumstances, including generally if we sell property and assets outside the ordinary course of
business, and upon receipt of certain extraordinary cash proceeds and upon sales of securities.
The Loan Agreement contains financial covenants which require us to maintain specified levels
of tangible net worth and adjusted EBITDA (both as defined in the Loan Agreement) each fiscal
quarter and annual limits on capital expenditures of no more than $1.5 million, $2 million and $3 million, respectively. The Loan Agreement also contains certain
other restrictive covenants, including covenants that restrict our ability to use the proceeds of
the Loan, to incur additional indebtedness, to pre-pay other indebtedness, to dispose of assets, to
effect certain corporate transactions, including specified mergers and sales of all or
substantially all of our assets, to change the nature of our business, to pay dividends (other than
in the form of common stock dividends), as well as covenants that limit transactions with
affiliates and prohibit a change of control.
20
For this purpose, a change of control is generally
defined as, among other things, a person or entity acquiring beneficial ownership of more than 50%
of our common stock, specified changes to our Board of Directors, sale of all or substantially all
of our assets or certain recapitalizations. The Loan Agreement also contains customary
representations and warranties and affirmative covenants, including provisions relating to
providing reports, inspections and appraisal, and maintenance of property and collateral.
Upon the occurrence of an event of default under the Loan Agreement, the lender will be
entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the senior
subordination agreement, with the interest rate increasing to 17.5% per annum. The Loan Agreement
generally provides for customary events of default, including default in the payment of principal
or interest or other required payments, failure to observe or perform covenants or agreements
contained in the transaction documents (excluding a registration rights agreement), materially
breaching our senior loan agreement or the terms of our Debentures, generally failure to pay when
due debt obligations (broadly defined, subject to certain exceptions) in excess of $1 million,
specified events of bankruptcy or specified judgments against us.
We also entered into a registration rights agreement with PEM in respect of the shares issued
to PEM. We were required to file a registration statement relating to the shares with the SEC by
the earlier of 90 days of February 1, 2008 and five business days of the filing date of our annual
report on Form 10-K for fiscal year 2007. We are also required to have the registration statement
declared effective by the SEC within 120 days after February 1, 2008. If we did not meet these
deadlines, or if the registration statement ceases to be effective for more than 60 days per year
or more than 30 consecutive calendar days or if our common stock ceases to be traded on an eligible
market as required, then we must generally pay PEM liquidated damages in an amount equal to 2% of
the value of the registrable shares remaining (based on an initial aggregate value of $959,000) for
each 30 day period (prorated for partial periods). We are required to use our reasonable best
efforts to keep the registration statement continuously effective, subject to certain exceptions,
until the earlier of all of the registrable securities being sold or ceasing to be registrable
under the agreement, or February 1, 2010. We are required to pay all costs of preparing, filing
and maintaining the effectiveness of the registration statement. We also have certain other
ongoing obligations, including providing PEM specified notices and certain information,
indemnifying PEM for certain liabilities and using reasonable best efforts to timely file all
required filings with the SEC and make and keep current public information about us.
On May 9, 2008, we entered into an amendment to the subordinated secured term which modified
the first quarter 2008 minimum adjusted EBITDA financial covenant, deferred principal payments
until September 1, 2008 and re-amortized the remaining principal payments. As consideration for the
amendment, we issued 50,000 additional shares of common stock. The amendment also modified the
terms of the registration rights agreement by adding the 50,000 additional shares to the
registration obligations, changing the date on which we were required to file the registration
statement, to May 12, 2008, and increased the specified aggregate value on which liquidated damages
would initially be computed to $1,096,000 from the initial specified value of $959,000. Based on
the updated specified value, as of August 2, 2008, the maximum amount of liquidated damages that we
could be required to pay would have been $394,560, which represents 18 potential monthly payments
of $21,920. We filed the required registration statement on May 9, 2008 and the registration
statement was declared effective by the SEC on May 21, 2008. We have not recorded a liability in
connection with the registration rights agreement because, in accordance with SFAS No. 5,
Accounting for Contingencies
, we have concluded that it is not probable that we will make any
payments under the liquidated damages provisions of the registration rights agreement.
Revolving Credit Facility
We have a secured revolving credit facility with Bank of America, N.A. (successor-by-merger to
Fleet Retail Finance Inc.). with a revolving credit ceiling of $40.0 million with a maturity date
of August 31, 2010. Amounts borrowed under the facility bear interest at a rate equal to the base
rate (as defined in the agreement), which was 5.0% per annum as of August 2, 2008, 6.0% per annum
as of February 2, 2008 and 8.25% annum as of August 4, 2007. Following the occurrence of any event
of default, the interest rate may be increased by an additional two percentage points. The
revolving credit facility also allows us to apply an interest rate based on LIBOR (London Interbank
Offered Rate, as defined in the agreement) plus a margin rate of 1.75% to 2.25% per annum to a
designated portion of the outstanding balance as set forth in the agreement. The aggregate amount
that we may borrow under the agreement at any time is further limited by a formula, which is based
substantially on our inventory level but cannot be greater than the revolving credit ceiling. The
agreement is secured by substantially all of our assets. In connection with the administration of
the agreement, we are required to pay a facility fee of $2,000 per month. In addition, an unused
line fee of 0.25% per annum is payable monthly based on the difference
between the revolving credit ceiling and the average loan balance under the agreement. If
contingencies related to early termination of the revolving credit facility were to occur, or if we
were to request and receive an accommodation from the lender in connection with the facility, we
may be required to pay additional fees.
21
Our revolving credit facility includes financial and other covenants relating to, among other
things, use of funds under the facility in accordance with our business plan, prohibiting a change
of control, including any person or group acquiring beneficial ownership of 40% or more of our
common stock or our combined voting power (as defined in the revolving credit facility),
maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase
of our stock and restricting certain acquisitions. In the event that we were to violate any of
these covenants, or if other indebtedness in excess of $1.0 million could be accelerated, or in the
event that 10% or more of our leases could be terminated (other than solely as the result of
certain sales of common stock), the lender would have the right to accelerate repayment of all
amounts outstanding under the agreement, or to commence foreclosure proceedings on our assets. We
were in compliance with these covenants as of August 2, 2008 and expect to remain in compliance
throughout fiscal year 2008 based on the expected execution of our business plan.
We had balances under our revolving credit facility of $10.9 million, $11.2 million and $16.1
million as of August 2, 2008, February 2, 2008, and August 4, 2007, respectively. We had
approximately $1.7 million, $1.5 million and $0.8 million in unused borrowing capacity calculated
under the provisions of our revolving credit facility as of August 2, 2008, February 2, 2008, and
August 4, 2007, respectively. During the first half of fiscal years 2008 and 2007, the highest
outstanding balances on our revolving credit facility were $13.3 million and $17.5 million,
respectively. We primarily have used the borrowings on our revolving credit facility for working
capital purposes and capital expenditures.
Subordinated Convertible Debentures
On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated
convertible debentures (the Debentures) to seven accredited investors in a private placement
generating net proceeds of approximately $3.6 million, which were used to repay amounts owed under
our revolving credit facility. The Debentures are nonamortizing, bear interest at a rate of 9.5%
per annum, payable semi-annually on each June 30 and December 31, and mature on June 30, 2012.
Investors included corporate directors Andrew N. Baur and Scott C. Schnuck, an entity affiliated
with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison.
The Debentures are convertible into shares of common stock at any time. The initial conversion
price was $9.00 per share. The conversion price, and thus the number of shares into which the
Debentures are convertible, is subject to anti-dilution and other adjustments. If we distribute any
assets (other than ordinary cash dividends), then generally each holder is entitled to receive a
like amount of such distributed property. In the event of a merger, consolidation, sale of
substantially all of our assets, or reclassification or compulsory share exchange, then upon any
subsequent conversion each holder will have the right to either the same property as it would have
otherwise been entitled or cash in an amount equal to 100% principal amount of the Debenture, plus
interest and any other amounts owed. The Debentures also contain a weighted average conversion
price adjustment generally for future issuances, at prices less than the then current conversion
price, of common stock or securities convertible into, or options to purchase, shares of common
stock, excluding generally currently outstanding options, warrants or performance shares and any
future issuances or deemed issuances pursuant to any properly authorized equity compensation plans.
In accordance with rules of the Nasdaq, the Debentures contain limitations on the number of shares
issuable pursuant to the Debentures regardless of how low the conversion price may be, including
limitations generally requiring that the conversion price not be less than $8.10 per share for
Debentures issued to advisory directors, corporate directors or the entity affiliated with Mr.
Baur, that we do not issue common stock amounting to more than 19.99% of our common stock in the
transaction or such that following conversion, the total number of shares beneficially owned by
each holder does not exceed 19.999% of our common stock. These limitations may be removed with
shareholder approval.
As a result of the issuance of 350,000 shares of common stock in February 2008 in connection
with our subordinated secured term loan, the conversion price of the Debentures decreased from
$9.00 to $8.64, making the Debentures convertible into 462,962 shares of our common stock. As a
result of the issuance of 50,000 shares of common stock in May 2008, the conversion price of the
Debentures decreased from $8.64 to $8.59, making the Debentures convertible into 465,656 shares of
our common stock.
The Debentures generally provide for customary events of default, which could result in
acceleration of all amounts owed, including default in required payments, failure to pay when due,
or the acceleration of, other monetary obligations for indebtedness (broadly defined) in excess of
$1 million (subject to certain exceptions), failure to observe or perform covenants or agreements
contained in the transaction documents, including covenants relating to using the net proceeds,
maintaining legal existence, prohibiting the sale of material assets outside of the ordinary
course, prohibiting cash dividends and distributions, share repurchases, and certain payments to
our officers and directors. We generally have the right, but not the obligation, to redeem the
unpaid principal balance of the Debentures at any time prior to conversion if the closing price of our common
stock (as adjusted for stock dividends, subdivisions or combinations) is equal to or above $16.00
per share for each of 20 consecutive trading days and certain other conditions are met. We have
also agreed to provide certain piggyback and demand registration rights, until two years after the
Debentures cease to be outstanding, to the holders under the Securities Act of 1933 relating to the
shares of common stock issuable upon conversion of the Debentures.
22
2005 Private Placement of Common Stock and Warrants
In connection with our 2005 private placement of common stock and warrants, we sold warrants
to purchase 250,000 shares of common stock, subject to anti-dilution and other adjustments. The
warrants have an exercise price of $10.18 per share and, subject to certain conditions, expire on
April 8, 2010. We also issued warrants to purchase 125,000 shares of common stock at an exercise
price of $10.18 through April 8, 2010 to the placement agent. In certain circumstances, a cashless
exercise provision becomes operative for the warrants issued to the investors. In the event that
the closing bid price of a share of our stock equals or exceeds $25.00 per share for 20 consecutive
trading days, we have the ability to call the warrants, effectively forcing their exercise into
common stock. The warrants issued to the placement agent generally have the same terms and
conditions, except that the cashless exercise provision is more generally available and the
warrants are not subject to a call provision. Through February 2, 2008, warrants underlying 112,500
shares of common stock had been exercised, generating net proceeds to us of $1,145,250. No warrants
were exercised during the thirteen and twenty-six weeks ended August 2, 2008.
In connection with our 2005 private placement, we entered into a registration rights agreement
wherein we agreed to make the requisite SEC filings to achieve and subsequently maintain the
effectiveness of a registration statement covering the common stock sold and the common stock
issuable upon exercise of the investor warrants and the placement agent warrants issued in
connection with the private placement generally through April 8, 2008. Failure to file a required
registration statement or to achieve or subsequently maintain the effectiveness of a required
registration statement through the required time, subject to our right to suspend use of the
registration statement in certain circumstances, would have subjected us to liquidated damages in
an amount up to 1% of the $8,750,000 gross proceeds of the private placement for each 30 day period
or pro rata for any portion thereof in excess of our allotted time. Our potential liability for
liquidated damages with respect to this registration statement ended on April 8, 2008.
We estimated the grant date fair value of the 375,000 stock purchase warrants, including the
placement agent warrants, issued in connection with the private placement to be $2,160,000 using
the Black-Scholes formula assuming no dividends, a risk-free interest rate of 3.5%, expected
volatility of 64%, and expected warrant life of five years. Because the warrants were issued in
connection with the sale of common stock and we have no obligation to settle the warrants by any
means other than through the issuance of shares of our common stock we have included the fair value
of the warrants as a component of shareholders equity.
IPO Warrants
In connection with our 2004 initial public offering, we sold to the representatives of the
underwriters and their designees warrants to purchase up to an aggregate of 216,000 shares of
common stock at an exercise price equal to $12.7875 per share, subject to antidilution adjustments,
for a purchase price of $0.0001 per warrant for the warrants. The warrant holders may exercise the
warrants as to all or any lesser number of the underlying shares of common stock at any time during
the four-year period commencing on February 10, 2005. Through August 2, 2008, warrants underlying
94,500 shares of common stock were tendered in cashless exercise transactions under which we issued
35,762 shares of common stock.
Off-Balance Sheet Arrangements
At August 2, 2008, February 2, 2008, and August 4, 2007, we did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities or variable interest entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity,
market or credit risk that could otherwise have arisen if we had engaged in such relationships.
23
Contractual Obligations
The following table summarizes our contractual obligations as of August 2, 2008:
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Payments due by Period
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Less than
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Contractual Obligations
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Total
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1 Year
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1 - 3 Years
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3 -5 Years
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More than 5 Years
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Long-term debt obligations (1)
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$
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13,770,014
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$
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3,993,507
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$
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5,390,174
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$
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4,386,333
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$
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Capital lease obligations (2)
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17,338
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17,338
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Operating lease obligations (3)
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164,857,799
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24,862,423
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46,491,291
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40,920,813
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52,583,272
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Purchase obligations (4)
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30,682,674
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30,277,774
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285,233
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119,667
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Total
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$
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209,327,825
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$
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59,151,042
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$
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52,166,698
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$
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45,426,813
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$
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52,583,272
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(1)
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Includes payment obligations relating to our subordinated convertible debentures and to our
subordinated secured term loan. These instruments are classified as current liabilities on our
balance sheet.
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(2)
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Includes payment obligations relating to our point of sale hardware and software leases.
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(3)
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Includes minimum payment obligations related to our store leases.
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(4)
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Includes merchandise on order and payment obligations relating to store construction and
miscellaneous service contracts.
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Recent Accounting Pronouncements
None.
Effect of Inflation
Overall, we do not believe that inflation has had a material adverse impact on our business or
operating results during the periods presented. We cannot give assurance, however, that our
business will not be affected by inflation in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Companys management, with the participation of the
Companys Chief Executive Officer and Vice President Finance, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this report. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on such evaluation, the Companys Chief Executive Officer and Vice President Finance have
concluded that, as of the end of such period, the Companys disclosure controls and procedures
provided reasonable assurance that the disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act and in
accumulating and communicating such information to management, including the Companys Chief
Executive Officer and Vice President Finance, as appropriate to allow timely decisions regarding
required disclosure.
Internal Control Over Financial Reporting.
The Companys management, with the participation of
the Companys Chief Executive Officer and Vice President Finance, conducted an evaluation of the
Companys internal control over financial reporting to determine whether any changes occurred
during the Companys second fiscal quarter ended August 2, 2008 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting. Based on that evaluation, there has been no such change during the Companys second
quarter of fiscal year 2008.
24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 2, 2008 the Company was served with a class action lawsuit filed in the United
States District Court for the Central District of California by two former store managers. The
store managers allege that they should have been classified as non-exempt employees under both the
California Labor Code and the Fair Labor Standards Act. They seek an unspecified amount of
damages. The store managers filed the lawsuit on behalf of California based store managers.
The Company will defend the plaintiffs anticipated effort to seek class certification.
Furthermore, the Company will vigorously defend itself in the underlying lawsuit. The Company does
not believe that this matter will have a material adverse effect on its business or financial
condition. However, the Company cannot give assurance that this lawsuit will not have a material
adverse effect on its results of operations in the period in which it is resolved.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors disclosed in our Annual Report on Form 10-K
for fiscal year 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The Company does not have any programs to repurchase shares of its common stock and no such
repurchases were made during the twenty-six weeks ended August 2, 2008.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of the Company was held on June 17, 2008.
(b) At the annual meeting of shareholders of the Company held on June 17, 2008, action was taken
with respect to the election of all five directors of the Company: 4,415,299 shares were voted for
Peter A. Edison, while authority was withheld with respect to 49,302 shares;; 4,348,363 shares were
voted for Andrew N. Baur, while authority was withheld with respect to 116,238 shares; 4,348,363
shares were voted for Timothy F. Finley, while authority was withheld with respect to 116,238
shares; 4,415,399 shares were voted for Harry E. Rich, while authority was withheld with respect to
49,202 shares; and 4,242,063 shares were voted for Scott C. Schnuck, while authority was withheld
with respect to 222,538 shares.
(c) Shareholders also ratified the appointment of Ernst & Young LLP as the Companys independent
registered public accounting firm: 4,449,158 shares were voted in favor, 15,443 shares were voted
against, no shares abstained and there were no broker non-votes. None
ITEM 6. EXHIBITS
See Exhibit Index herein
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Quarterly Report on Form 10-Q to be signed, on its behalf by the undersigned thereunto duly
authorized.
Date: September 10, 2008
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BAKERS FOOTWEAR GROUP, INC.
(Registrant)
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By:
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/s/ Peter A. Edison
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Peter A. Edison
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Chairman of the Board, Chief Executive Officer
and President (Principal Executive Officer)
Bakers Footwear Group, Inc.
(On behalf of the Registrant)
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By:
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/s/ Charles R. Daniel, III
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Charles R. Daniel, III
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Vice President - Finance,
Controller, Treasurer, and Secretary (Principal Financial Officer and Principal Accounting Officer)
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26
EXHIBIT INDEX
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Exhibit No.
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Description of Exhibit
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3.1
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Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Companys
Annual Report on Form 10-K for the fiscal year ended January
3, 2004 filed on April 2, 2004 (File No. 000-50563)).
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3.2
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Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Companys Annual Report on Form 10-K for
the fiscal year ended January 3, 2004 filed on April 2, 2004
(File No. 000-50563)).
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4.1
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Second Lien Credit Agreement dated February 1, 2008 (Loan
Agreement) by and among the Company, and Private Equity
Management Group, Inc. and the Lender named therein
(incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K dated February 1, 2008 (File No.
000-50563)).
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4.2
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Note evidencing amounts borrowed by the Company under the Loan
Agreement (incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K dated February 1, 2008
(File No. 000-50563)).
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4.3
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Security Agreement dated February 1, 2008 by and among the
Company, Private Equity Management Group, Inc. and the Lender
named therein (incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K dated February 1, 2008
(File No. 000-50563)).
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4.4
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Subordination Agreement dated February 1, 2008 by and among
the Company, Bank of America, N.A. and Private Equity
Management Group, Inc., in its capacity as administrative
agent for the Lender named therein (incorporated by reference
to Exhibit 4.4 to the Companys Current Report on Form 8-K
dated February 1, 2008 (File No. 000-50563)).
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4.5
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Subordination Agreement dated February 1, 2008 by and among
the Company, Private Equity Management Group, Inc., in its
capacity as administrative agent for the Lender named therein,
and the subordinated creditors named therein (incorporated by
reference to Exhibit 4.5 to the Companys Current Report on
Form 8-K dated February 1, 2008 (File No. 000-50563)).
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4.6
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Registration Rights Agreement dated February 1, 2008 by and
among the Company and Private Equity Management Group, Inc.
(incorporated by reference to Exhibit 4.6 to the Companys
Current Report on Form 8-K dated February 1, 2008 (File No.
000-50563)).
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4.7
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Fee Letter dated February 1, 2008 between Private Equity
Management Group, Inc. and the Company (incorporated by
reference to Exhibit 4.7 to the Companys Current Report on
Form 8-K dated February 1, 2008 (File No. 000-50563)).
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4.8
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Amendment Number 1 to Loan Documents dated May 9, 2008 by and
among the Company, Private Equity Management Group, Inc. and
the Lender named therein (incorporated by reference to Exhibit
4.8 to the Companys Quarterly Report on Form 10-Q for the
quarter year ended May 3, 2008 filed on June 17, 2008 (File
No. 000-50563)).
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4.9
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Letter of Consent delivered to the Company and Private Equity
Management Group, Inc. by Bank of America, N.A. (incorporated
by reference to Exhibit 4.3 to the Companys Current Report on
Form 8-K dated May 8, 2008 (File No. 000-50563)).
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11.1
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Statement regarding computation of per share earnings
(incorporated by reference from Note 8 to the unaudited
interim financial statements included herein).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by Chief
Executive Officer).
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31.2
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Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by Principal
Financial Officer).
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32.1
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Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Executive
Officer and the Principal Financial Officer).
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27
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