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 November 3, 2007
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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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St. Louis, Missouri
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63103
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(Address of principal executive offices)
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(Zip Code)
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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 or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated filer
o
Non-accelerated filer
þ
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 $0.0001 per share, 6,655,856 shares issued and outstanding as of December
14, 2007.
BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKERS FOOTWEAR GROUP, INC.
CONDENSED BALANCE SHEETS
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October 28,
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February 3,
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November 3,
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2006
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2007
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2007
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(Unaudited)
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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180,341
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$
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407,346
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$
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247,518
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Accounts receivable
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1,622,942
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1,352,936
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|
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1,307,162
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Other receivables
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1,523,585
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1,140,168
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249,923
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Inventories
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27,499,098
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24,102,006
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21,634,947
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Prepaid expenses and other current assets
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768,816
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|
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713,810
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1
,
033,448
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Prepaid income taxes
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|
|
2,106,998
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|
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|
1,129,637
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2
,
160,169
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|
Deferred income taxes
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|
1,900,252
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|
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1,963,670
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|
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Total current assets
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35,602,032
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30,809,573
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|
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26,633,167
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Property and equipment, net
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50,192,784
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51,021,077
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45,386,007
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Deferred income taxes
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404,918
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424,139
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Other assets
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919,255
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904,070
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1,191,508
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Total assets
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$
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87,118,989
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|
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$
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83,158,859
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$
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73,210,682
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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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7,125,245
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$
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8,134,642
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$
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10,288,561
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Accrued expenses
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9,262,779
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9,004,436
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9,138,948
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Sales tax payable
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658,173
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757,868
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571,274
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Deferred income
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1,197,382
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1,332,473
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1,203,143
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Revolving credit facility
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19,806,713
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13,099,304
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21,186,579
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Current maturities of capital lease obligations
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232,854
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189,807
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94,149
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|
|
|
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Total current liabilities
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38,283,146
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|
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32,518,530
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42,482,654
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Subordinated convertible debentures
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4,000,000
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Obligations under capital leases, less current maturities
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94,149
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57,863
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Accrued rent liabilities
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9,042,805
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9,415,617
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10,213,248
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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 October
28, 2006 and February 3, 2007, and 6,655,856 shares
outstanding at November 3, 2007
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649
|
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649
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|
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665
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Additional paid-in capital
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36,520,249
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36,571,423
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36,923,876
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Retained earnings (accumulated deficit)
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|
3,177,991
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|
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|
4,594,777
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(20,409,761
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)
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Total shareholders equity
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39,698,889
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|
41,166,849
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16,514,780
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|
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|
|
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|
Total liabilities and shareholders equity
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|
$
|
87,118,989
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|
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$
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83,158,859
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|
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$
|
73,210,682
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|
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|
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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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Thirty-nine
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Thirty-nine
|
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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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October 28, 2006
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November 3, 2007
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October 28, 2006
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November 3, 2007
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Net sales
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$
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46,552,522
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$
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40,293,957
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$
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143,542,305
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$
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131,534,432
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Cost of merchandise sold, occupancy, and buying expenses
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34,429,758
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36,784,976
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|
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101,611,074
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103,461,316
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Gross profit
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12,122,764
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3,508,981
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41,931,231
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28,073,116
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Operating expenses:
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Selling
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10,979,829
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11,228,162
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32,053,596
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34,333,266
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General and administrative
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4,987,209
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4,753,149
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13,884,013
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13,703,711
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Loss on disposal of property and equipment
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115,402
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18,205
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|
243,505
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|
62,957
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|
Impairment of long-lived assets
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|
|
|
|
|
|
2,375,497
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|
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3,131,169
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|
|
|
|
|
|
|
|
|
|
|
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Operating loss
|
|
|
(3,959,676
|
)
|
|
|
(14,866,032
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)
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|
|
(4,249,883
|
)
|
|
|
(23,157,987
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)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest expense
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(319,893
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)
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|
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(499,430
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)
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|
(616,785
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)
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|
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(1,263,848
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)
|
Other, net
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|
|
67,560
|
|
|
|
70,880
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|
|
|
101,341
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|
|
|
108,664
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss before income taxes
|
|
|
(4,212,009
|
)
|
|
|
(15,294,582
|
)
|
|
|
(4,765,327
|
)
|
|
|
(24,313,171
|
)
|
Provision for (benefit from) income taxes
|
|
|
(1,610,255
|
)
|
|
|
|
|
|
|
(1,805,430
|
)
|
|
|
691,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,601,754
|
)
|
|
$
|
(15,294,582
|
)
|
|
$
|
(2,959,897
|
)
|
|
$
|
(25,004,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.40
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(3.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.40
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(3.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Total
|
|
Balance at February 3, 2007
|
|
|
6,493,035
|
|
|
$
|
649
|
|
|
$
|
36,571,423
|
|
|
$
|
4,594,777
|
|
|
$
|
41,166,849
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
351,524
|
|
|
|
|
|
|
|
351,524
|
|
Shares issued in connection
with exercise of stock options
|
|
|
93,821
|
|
|
|
9
|
|
|
|
929
|
|
|
|
|
|
|
|
938
|
|
Issuance of restricted stock
|
|
|
69,000
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,004,538
|
)
|
|
|
(25,004,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 3, 2007
|
|
|
6,655,856
|
|
|
$
|
665
|
|
|
$
|
36,923,876
|
|
|
$
|
(20,409,761
|
)
|
|
$
|
16,514,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine
|
|
|
Thirty-nine
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,959,897
|
)
|
|
$
|
(25,004,538
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,479,438
|
|
|
|
6,483,620
|
|
Deferred income taxes
|
|
|
(673,117
|
)
|
|
|
2,387,809
|
|
Stock-based compensation expense
|
|
|
693,248
|
|
|
|
351,524
|
|
Excess income tax benefit from exercise of stock options
|
|
|
(614,542
|
)
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
243,505
|
|
|
|
62,957
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
3,131,169
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(775,547
|
)
|
|
|
936,019
|
|
Inventories
|
|
|
(1,501,239
|
)
|
|
|
2,467,059
|
|
Prepaid expenses and other current assets
|
|
|
482,765
|
|
|
|
(319,638
|
)
|
Prepaid income taxes
|
|
|
(2,106,998
|
)
|
|
|
(1,030,532
|
)
|
Other assets
|
|
|
(232,420
|
)
|
|
|
76,617
|
|
Accounts payable
|
|
|
(4,934,489
|
)
|
|
|
2,153,919
|
|
Accrued expenses and deferred income
|
|
|
(2,736,985
|
)
|
|
|
(181,412
|
)
|
Accrued income taxes
|
|
|
(683,422
|
)
|
|
|
|
|
Accrued rent liabilities
|
|
|
2,715,180
|
|
|
|
797,631
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,604,520
|
)
|
|
|
(7,687,796
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(17,341,330
|
)
|
|
|
(4,005,286
|
)
|
Proceeds from sale of property and equipment
|
|
|
126,965
|
|
|
|
19,803
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(17,214,365
|
)
|
|
|
(3,985,483
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Net advances under revolving credit facility
|
|
|
19,806,713
|
|
|
|
8,087,275
|
|
Proceeds from issuance of subordinated convertible debentures
|
|
|
|
|
|
|
4,000,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(421,248
|
)
|
Proceeds from exercise of stock warrants
|
|
|
508,990
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
451,422
|
|
|
|
938
|
|
Proceeds from issuance of restricted stock
|
|
|
|
|
|
|
7
|
|
Excess income tax benefit from exercise of stock options
|
|
|
614,542
|
|
|
|
|
|
Principal payments under capital lease obligations
|
|
|
(307,411
|
)
|
|
|
(153,521
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
21,074,256
|
|
|
|
11,513,451
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,744,629
|
)
|
|
|
(159,828
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,924,970
|
|
|
|
407,346
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
180,341
|
|
|
$
|
247,518
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
1,643,607
|
|
|
$
|
73,761
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
514,230
|
|
|
$
|
1,055,772
|
|
|
|
|
|
|
|
|
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 3, 2007.
2. Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (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. The Company will be
required to adopt SFAS No. 157 as of February 3, 2008. The Company is currently evaluating the
impact of SFAS No. 157 and has not yet determined the impact on its financial statements.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115, which will become
effective in 2008. 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 will adopt this Statement as of February 3, 2008 and is
currently evaluating if it will elect the fair value option for any of its eligible financial
instruments and other items.
3. Income Taxes
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN
48), which clarifies the accounting for uncertainty in income tax positions, as defined. FIN 48
requires, among other matters, that the Company recognize in its financial statements, the impact
of a tax position, if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The Company is subject to the provisions of FIN 48 as of
February 4, 2007, the beginning of fiscal year 2007, and has 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 Companys federal income tax returns subsequent to the
fiscal year ended January 1, 2005 remain open. As of November 3, 2007, the Company has not recorded
any unrecognized tax benefits. The Companys policy, if it had unrecognized benefits, is to
recognize accrued interest and penalties related to unrecognized tax benefits as interest expense
and other expense, respectively. The adoption of FIN 48 had no effect on the Companys financial
statements for the thirteen weeks and thirty-nine weeks ended November 3, 2007.
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
7
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 February 3, 2007 and 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
$4,142,287 valuation allowance against its net deferred tax assets. During the thirteen weeks ended
November 3, 2007, the Company increased the valuation allowance to $10,012,379. 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.
The balance of prepaid income taxes at November 3, 2007, consists of the calculated refund of
federal income taxes previously paid related to available net operating loss carrybacks that will
be claimed on the Companys federal income tax return for the year ended February 2, 2008 and
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.
Significant components of the provision for income tax expense (benefit) for the thirteen
weeks and thirty-nine weeks ended October 28, 2006 and November 3, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Thirty-nine
|
|
|
Thirty-nine
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,007,570
|
)
|
|
$
|
(3,771,429
|
)
|
|
$
|
(921,040
|
)
|
|
$
|
(5,602,998
|
)
|
State and local
|
|
|
(226,168
|
)
|
|
|
(828,160
|
)
|
|
|
(211,273
|
)
|
|
|
(693,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(1,233,738
|
)
|
|
|
(4,599,589
|
)
|
|
|
(1,132,313
|
)
|
|
|
(6,296,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(318,591
|
)
|
|
|
(1,075,041
|
)
|
|
|
(569,561
|
)
|
|
|
(2,092,623
|
)
|
State and local
|
|
|
(57,926
|
)
|
|
|
(195,462
|
)
|
|
|
(103,556
|
)
|
|
|
(932,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(376,517
|
)
|
|
|
(1,270,503
|
)
|
|
|
(673,117
|
)
|
|
|
(3,024,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
5,870,092
|
|
|
|
|
|
|
|
10,012,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,610,255
|
)
|
|
$
|
|
|
|
$
|
(1,805,430
|
)
|
|
$
|
691,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between income tax expense (benefit) 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
thirty-nine weeks ended October 28, 2006 and November 3, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Thirty-nine
|
|
|
Thirty-nine
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
Federal income tax at statutory rate
|
|
$
|
(1,474,204
|
)
|
|
$
|
(5,353,104
|
)
|
|
$
|
(1,667,865
|
)
|
|
$
|
(8,509,610
|
)
|
Impact of graduated Federal rates
|
|
|
42,537
|
|
|
|
152,946
|
|
|
|
47,653
|
|
|
|
243,132
|
|
State and local taxes, net of federal income taxes
|
|
|
(188,642
|
)
|
|
|
(676,339
|
)
|
|
|
(210,774
|
)
|
|
|
(1,075,170
|
)
|
Permanent differences
|
|
|
10,054
|
|
|
|
6,405
|
|
|
|
25,556
|
|
|
|
20,636
|
|
Valuation allowance
|
|
|
|
|
|
|
5,870,092
|
|
|
|
|
|
|
|
10,012,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(1,610,255
|
)
|
|
$
|
|
|
|
$
|
(1,805,430
|
)
|
|
$
|
691,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
8
Components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2006
|
|
|
February 3, 2007
|
|
|
November 3, 2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,743,647
|
|
Vacation accrual
|
|
|
422,444
|
|
|
|
426,763
|
|
|
|
425,861
|
|
Inventory
|
|
|
1,641,356
|
|
|
|
1,712,111
|
|
|
|
1,690,716
|
|
Stock-based compensation
|
|
|
423,882
|
|
|
|
443,840
|
|
|
|
580,935
|
|
Accrued rent
|
|
|
3,448,694
|
|
|
|
3,646,741
|
|
|
|
3,983,167
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(10,012,379
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,936,376
|
|
|
|
6,229,455
|
|
|
|
2,411,947
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
163,548
|
|
|
|
175,204
|
|
|
|
173,620
|
|
Property and equipment
|
|
|
3,467,658
|
|
|
|
3,666,442
|
|
|
|
2,238,327
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
3,631,206
|
|
|
|
3,841,646
|
|
|
|
2,411,947
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,305,170
|
|
|
$
|
2,387,809
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Stock-Based Compensation
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 thirty-nine weeks
ended October 28, 2006 and November 3, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine
|
|
Thirty-nine
|
|
|
Weeks Ended
|
|
Weeks Ended
|
|
|
October 28, 2006
|
|
November 3, 2007
|
Options granted
|
|
|
91,728
|
|
|
|
272,613
|
|
Weighted-average fair value of options granted
|
|
$
|
10.48
|
|
|
$
|
3.59
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
4.75% - 5.0
|
%
|
|
|
4.25%-4.5
|
%
|
Expected volatility
|
|
|
50% - 55
|
%
|
|
|
43% - 46
|
%
|
Expected option life
|
|
5 6 years
|
|
5 6 years
|
During the thirty-nine weeks ended November 3, 2007, the Company granted performance shares
that vest 36 months after issuance in amounts that depend upon the achievement of performance
objectives for net sales in fiscal year 2009 and return on average assets for the three year period
ending in fiscal year 2009. Depending upon the extent to which the performance objectives are met,
the Company will issue a total of between zero and 136,260 shares related to these grants. The
grant-date fair value of each performance share is $10.39. Compensation expense related to
performance shares is recognized ratably over the performance period based on the grant date fair
value of the performance shares expected to vest at the end of the performance period. As of
November 3, 2007, the Company estimated that no performance shares would vest at the end of the
performance period and, consequently has recognized no stock based compensation expense related to
the performance shares. The number of performance shares expected to vest is an accounting estimate
and any future changes to the estimate will be reflected in stock based compensation expense in the
period the change in estimate is made.
During the thirteen weeks ended November 3, 2007, the Company granted 69,000 restricted shares
of common stock that vest 60 months after issuance. The grant date fair value of each restricted
share is $4.52. Compensation expense related to restricted shares is recognized ratably over the
vesting period based on the grant date fair value of the restricted shares expected to vest at the
end of the vesting period. As of November 3, 2007, the Company estimated that 66,000 restricted
shares would vest at the end of the vesting period. The number of restricted shares expected to
vest is an accounting estimate and any future changes to the estimate will be reflected in stock
based compensation expense in the period the change in estimate is made.
During the thirteen weeks ended November 3, 2007, the Company granted 140,000 nonqualified
options to purchase shares of the Companys common stock at an exercise price of $4.52 per share.
The options vest 20% per year and expire ten years from the date of grant.
9
5. Earnings (Loss) Per Share
Basic earnings (loss) per common share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per common 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.
The following table sets forth the components of the computation of basic and diluted earnings
(loss) per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Thirty-nine
|
|
|
Thirty-nine
|
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
|
October 28, 2006
|
|
|
November 3, 2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share Net income (loss)
|
|
$
|
(2,601,754
|
)
|
|
$
|
(
15,294,582
|
)
|
|
$
|
(2,959,897
|
)
|
|
$
|
(25,004,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$
|
(2,601,754
|
)
|
|
$
|
(15,294,582
|
)
|
|
$
|
(2,959,897
|
)
|
|
$
|
(25,004,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted
average shares
|
|
|
6,492,969
|
|
|
|
6,498,190
|
|
|
|
6,439,345
|
|
|
|
6,494,753
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted
weighted average shares and assumed conversions
|
|
|
6,492,969
|
|
|
|
6,498,190
|
|
|
|
6,439,345
|
|
|
|
6,494,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares underlying the following securities were excluded from the diluted earnings per share
calculations because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Thirty-nine
|
|
Thirty-nine
|
|
|
Weeks
|
|
Weeks
|
|
Weeks
|
|
Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
October 28, 2006
|
|
November 3, 2007
|
|
October 28, 2006
|
|
November 3, 2007
|
Stock options
|
|
|
114,206
|
|
|
|
93,413
|
|
|
|
222,323
|
|
|
|
81,211
|
|
Restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,896
|
|
Convertible securities (1)
|
|
|
|
|
|
|
444,441
|
|
|
|
|
|
|
|
211,639
|
|
Stock purchase warrants (2)
|
|
|
42,376
|
|
|
|
|
|
|
|
113,698
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest expense related to shares underlying subordinated convertible debentures was not
added back to the diluted earnings per share calculation for the thirteen and thirty-nine
weeks ended November 3, 2007 because the shares underlying the convertible debentures were
antidilutive.
|
|
(2)
|
|
The 384,000 outstanding stock purchase warrants were excluded from the diluted earnings per
share calculation for the thirteen and thirty-nine weeks ended November 3, 2007 because they
had exercise prices that were greater than the average closing price of the Companys common
stock for those periods.
|
6. Revolving Credit Facility
The Company has a revolving credit agreement 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 (7.50% per annum at November 3, 2007)
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 $4,462,000,
$6,100,000, and $1,442,000 of unused borrowing capacity under the revolving credit agreement based
upon the Companys borrowing base calculation as of October 28, 2006, February 3, 2007, and
November 3, 2007, respectively. The agreement has certain restrictive financial and other
covenants, including a requirement that the Company maintain a minimum availability. The Company
and the bank agreed to adjust the borrowing base calculation to provide for additional availability
of $1,250,000 for the period April 20, 2007 through September 30, 2007. As of December 14, 2007,
the Company was in compliance with all of its financial
10
and other covenants and expects to remain in compliance throughout fiscal year 2007 based on
the expected execution of its business plan, which includes increased inventory and expense
control.
7. Private Placement of Subordinated Convertible Debentures
On June 26, 2007, the Company completed a private placement of $4,000,000 in aggregate
principal amount of subordinated convertible debentures. The Company received net proceeds of
$3,578,752. The debentures bear interest at a rate of 9.5% per annum, payable semi-annually, and
mature on June 30, 2012. The debentures are convertible at any time into 444,441 shares of common
stock, excluding fractional shares, based on the initial conversion price of $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. Among the
investors in the debentures are Andrew Baur and Scott Schnuck, who are directors of the Company,
Bernard Edison and Julian Edison, who are advisory directors to the Company, and an entity
affiliated with Mr. Baur. 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.
8. Impairment of Long-Lived assets
At least annually, management determines on a store-by-store basis whether any property or
equipment or any other assets have been impaired based on the criteria established in Statement of
Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
Based on these criteria, 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. The Company determines the fair value of these assets using the present value
of the estimated future cash flows over the remaining store lease period. During the thirty-nine
weeks ended November 3, 2007, the Company recorded $3,131,169, in noncash charges to earnings
related to the impairment of furniture, fixtures, and equipment, leasehold improvements, and other
assets.
9. Subsequent Event Sale of Leasehold Interest
On December 11, 2007, the Company entered into an agreement to terminate a below market operating
lease that was originally scheduled to expire in 2022, in exchange for a $5,050,000 cash payment on
December 11, 2007, and the right to continue occupying the space through January 8, 2009. The
Company used the net proceeds of approximately $5.0 million to reduce the balance on its revolving
credit facility. The Company does not believe that it has any other operating leases that could be
terminated on substantially similar terms.
11
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 elsewhere in this 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 November 3, 2007, we
operated 257 stores, including 228 Bakers stores located in 38 states. We opened six new stores,
remodeled seven stores, and closed six stores during the first thirty-nine weeks of 2007.
During the first thirty-nine weeks of 2007, our net sales decreased 8.4% compared to the first
thirty-nine weeks of 2006, and our comparable store sales decreased 14.6% as a result of weak
demand for our sandals throughout the year and slow demand for our fall boot offerings resulting
from an unseasonably warm October. In response to the lack of resonance of our product lines, in
September 2007, we aggressively reviewed our existing inventory and took pricing actions that we
believe were required to provide the freshness in product that our customers desire. The resulting
markdowns taken during our third quarter were $3.5 million higher at cost than markdowns taken
during the third quarter of 2006. This and lower leverage in our buying and occupancy costs
resulting from lower sales, caused our gross profit percentage to decrease to 21.3% of sales in the
first thirty-nine weeks of 2007 compared to 29.2% in the first thirty-nine weeks of 2006.
Comparable store sales for the first six weeks of the fourth quarter
of 2007 decreased 1.4%,
reflecting an improvement in our sales trends compared to the
preceding six quarters.
Our net loss of $25.0 million for the first thirty nine weeks of 2007 compares to a net loss
of $3.0 million in the first thirty nine weeks of 2006. As described in more detail below at
Critical Accounting Policies
Deferred Income
Taxes, we established a $10.0 million valuation
reserve against our deferred income tax assets resulting in net income tax expense of $0.7 million
for the first thirty-nine weeks of 2007. During the third quarter of 2007, we recognized $2.4
million in noncash impairment expense related to our decision to close three prototype stores
because they no longer fit within our long term strategy and will convert the locations into Wild
Pair stores in early 2008.
Our losses in the first thirty-nine weeks of 2007 have had a negative impact on our financial
position. At November 3, 2007 we had negative working capital of $15.8 million, unused borrowing
capacity under our revolving credit facility of $1.4 million, and our shareholders equity had
declined to $16.5 million. As a result of low levels of unused borrowing capacity, we obtained
additional sources of liquidity including amending to our revolving credit facility in June 2007 to
temporarily increase our unused borrowing capacity by $1.25 million through September 30, 2007, and
raising $3.6 million in net proceeds from a private placement of $4.0 million of subordinated
convertible debentures.
In September 2007, we announced that we were taking certain actions that we expect will result
in annual reductions in planned expenses of approximately $8.0 million, positively impacting
operating results in fiscal year 2008 with benefits also expected to positively affect net income
in the fourth quarter of 2007. These actions include a refocusing of our merchandising and
inventory strategy with the intent of lowering inventory levels and improving inventory turnover
metrics. In connection with these actions, we recognized approximately $3.5 million of incremental
markdown expense compared to the third quarter of 2006, recognized approximately $0.8 million in
severance expense related to staff reductions, and recognized approximately $2.4 million of
impairment expense. As of the end of the third quarter of 2007 we had reduced inventory levels
21.3% below inventory at the end of the third quarter of 2006. We also delayed most store expansion
and remodeling projects until funding for such expansion can be generated from ongoing operating
activities.
On December 11, 2007, we entered into an agreement to terminate a below market operating lease
that was originally scheduled to expire in 2022, in exchange for a $5.05 million cash payment on
December 11, 2007 and the right to continue occupying the space through January 8, 2009. We used
the net proceeds of approximately $5.0 million to reduce the balance on our revolving line of
12
credit. We do not believe that we have any other operating leases that could be terminated on
substantially similar terms. As of December 14, 2007, the balance on our revolving line of credit
was $15.3 million and unused borrowing capacity was $4.5 million).
We anticipate that our planned cash flows from operations and borrowings under our revolving
credit facility will be sufficient for our operating cash requirements for at least the next 12
months. If, however, the negative same store sales trends we experienced during the first
thirty-nine weeks of fiscal year 2007 were to continue into 2008, it could become necessary for us
to obtain additional financing in order for us to meet our operating cash requirements during the
first thirty-nine weeks of fiscal year 2008 and beyond. There is no assurance that we would be
able to obtain additional financing in such circumstances.
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 using the first-in first-out
retail inventory method. Permanent markdowns are recorded to reflect expected adjustments to retail
prices in accordance with the retail inventory method. The process of determining our expected
adjustments to retail prices requires significant judgment by management. Among other factors,
management utilizes performance metrics to evaluate the quality and freshness of inventory,
including the number of weeks of supply on hand, sell-through percentages and aging categories of
inventory by selling season, to make its best estimate of the appropriate inventory markdowns. If
market conditions are less favorable than those projected by management, additional inventory
markdowns may be required.
Store closing and impairment charges
Based on the criteria in 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, fixed assets of stores indicated to be impaired are written down to
fair value.
During the thirty-nine weeks ended November 3, 2007, we recorded $3.1 million in noncash
charges to earnings related to the impairment of furniture, fixtures, and equipment, leasehold
improvements, and other assets related to certain underperforming stores and three prototype stores
that we operated and has now determined to no longer be consistent with our strategic focus.
Stock-based compensation expense
On January 29, 2006, the beginning of fiscal year 2006, we adopted SFAS No. 123R,
Share-Based
Payment
, (SFAS 123R) which requires us to 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 restricted and performance shares
that will ultimately vest. The assumptions and
13
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.
Deferred income taxes
We calculate income taxes in accordance with SFAS No. 109
Accounting for Income Taxes
, 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 FASB Statement No. 109,
Accounting for Income Taxes
(SFAS 109), we
regularly assesses 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. Likewise,
when sufficient positive evidence exists that indicates that realization of deferred tax assets is
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 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, we concluded that the realizability of net deferred tax
assets was no longer more likely than not, and established a $4.1 million valuation allowance
against our net deferred tax assets. During the thirteen weeks ended November 3, 2007, we increased
the valuation allowance to $10.0 million to reflect the increase in net deferred tax assets in the
period. 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.
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 expense or 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.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN
48), which clarifies the accounting for uncertainty in income tax positions, as defined. FIN 48
requires, among other matters, that we recognize in our financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit, based on the
technical merits of the position. We are subject to the provisions of 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. Our federal income tax returns subsequent to the fiscal year
ended January 1, 2005 remain open. As of November 3, 2007, we have not recorded any unrecognized
tax benefits. We recognize accrued interest and penalties related to unrecognized tax benefits as
interest expense and other expense, respectively. The adoption of FIN 48 had no effect on our
financial statements for the thirty-nine weeks ended November 3, 2007.
14
Results of Operations
The following table sets forth our operating results, expressed as a percentage of sales, for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Thirty-
|
|
Thirty-
|
|
|
Weeks
|
|
Weeks
|
|
nine Weeks
|
|
nine Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
October 28,
|
|
November 3,
|
|
October 28,
|
|
November 3,
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of merchandise sold, occupancy and buying expense
|
|
|
74.0
|
|
|
|
91.3
|
|
|
|
70.8
|
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26.0
|
|
|
|
8.7
|
|
|
|
29.2
|
|
|
|
21.3
|
|
Selling expense
|
|
|
23.6
|
|
|
|
27.9
|
|
|
|
22.3
|
|
|
|
26.1
|
|
General and administrative expense
|
|
|
10.7
|
|
|
|
11.8
|
|
|
|
9.7
|
|
|
|
10.4
|
|
Loss on disposal of property and equipment
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
5.9
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(8.5
|
)
|
|
|
(36.9
|
)
|
|
|
(3.0
|
)
|
|
|
(17.6
|
)
|
Other income (expense)
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(0.7
|
)
|
|
|
(1.2
|
)
|
|
|
(0.4
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9.1
|
)
|
|
|
(38.0
|
)
|
|
|
(3.3
|
)
|
|
|
(18.5
|
)
|
Income tax expense (benefit)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5.6
|
)%
|
|
|
(38.0
|
)%
|
|
|
(2.0
|
)%
|
|
|
(19.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Thirty-
|
|
Thirty-
|
|
|
Weeks
|
|
Weeks
|
|
nine Weeks
|
|
nine Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
October 28,
|
|
November 3,
|
|
October 28,
|
|
November 3,
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
Number of stores at beginning of period
|
|
|
247
|
|
|
|
257
|
|
|
|
235
|
|
|
|
257
|
|
Stores opened during period
|
|
|
15
|
|
|
|
0
|
|
|
|
31
|
|
|
|
6
|
|
Stores closed during period
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end of period
|
|
|
261
|
|
|
|
257
|
|
|
|
261
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended November 3, 2007 Compared to Thirteen Weeks Ended October 28, 2006
Net sales.
Net sales decreased to $40.3 million for the thirteen weeks ended November 3, 2007
(third quarter 2007) from $46.6 million for the thirteen weeks ended October 28, 2006 (third
quarter 2006), a decrease of $6.3 million or 13.4%. This decrease reflected weak consumer demand
for our fall offerings. Our comparable store sales for the third quarter of 2007, including
Internet and catalog sales, decreased by 16.6% compared to a 4.2% decrease in comparable store
sales in the third quarter of 2006. Average unit selling prices decreased 5.9% while unit sales
decreased 7.9% compared to the third quarter of 2006. Our Internet and catalog sales increased 7.4%
to $2.1 million.
Gross profit.
Gross profit decreased to $3.5 million in the third quarter of 2007 from $12.1
million in the third quarter of 2006, a decrease of $8.6 million or 71.1%. As a percentage of
sales, gross profit decreased to 8.7% in the third quarter of 2007 from 26.0% in the third quarter
of 2006. In response to the lack of resonance of our product lines, in September 2007, we
aggressively reviewed our existing inventory and took pricing actions that we believe were required
to provide the freshness in product that our customers desire. The resulting markdowns taken
during our third quarter were $3.5 million higher at cost than markdowns taken during the third
quarter of 2006. This and lower leverage in our buying and occupancy costs resulting from lower
sales, caused our gross profit percentage to decrease. The decrease in gross profit consists of a
decrease of $8.1 million from reduced gross margin percentage, a decrease of $0.6 million from
lower comparable store sales, partially offset by an increase of $0.1 million from new store sales.
Permanent markdown costs increased to $8.2 million in the third quarter of 2007 from $4.7 million
in the third quarter of 2006.
Selling expense.
Selling expense increased to $11.2 million in the third quarter of 2007 from
$11.0 million in the third quarter of 2006, an increase of $0.2 million or 2.3%, and increased as a
percentage of sales to 27.9% from 23.6%. This increase was primarily the result of $0.4 million in
higher catalog production and mailing costs, $0.2 million of higher store depreciation expense,
partially offset by decreases of $0.2 million in store payroll and $0.1 million in store supplies.
15
General and administrative expense.
General and administrative expense decreased to $4.8
million in the third quarter of 2007 from $5.0 million in the third quarter of 2006, a decrease of
$0.2 million or 4.7%, and increased as a percentage of sales to 11.8% from 10.7%. The dollar
decrease was due primarily to a $0.4 million decrease in professional fees compared to the third
quarter of 2006 which included $0.4 million of expenses incurred in considering potential equity
financing in 2006. The decrease was partially offset by a $0.2 million increase in group health
insurance expense.
Impairment of long-lived assets
. During the third quarter of 2007 we recognized $2.4 million
in noncash charges related to the impairment of long-lived assets of three prototype stores that
the Company has determined to no longer be consistent with its strategic focus. These locations
will be converted into Wild Pair stores in 2008.
Interest expense.
Interest expense increased to $0.5 million in the third quarter of 2007 from
$0.3 million in the third quarter of 2006, an increase of $0.2 million. The increase in interest
expense reflects an increase in the average borrowings on our revolving credit facility and
interest on our subordinated convertible debentures issued in June 2007.
Income tax expense (benefit).
We established a tax valuation allowance against our net
deferred tax assets in the second quarter of 2007 and increased the valuation allowance by $5.9
million for the increase in net deferred tax assets (primarily increased net operating loss
carryforwards) in the third quarter. Consequently, we recognized no income tax benefit in the
third quarter of 2007 compared to a $1.6 million income tax benefit recognized in the third quarter
of 2006.
Net loss
. We had a net loss of $15.3 million in the third quarter of 2007 compared to a net
loss of $2.6 million in the third quarter of 2006.
Thirty-nine Weeks Ended November 3, 2007 Compared to Thirty-nine Weeks Ended October 28, 2006
Net sales.
Net sales decreased to $131.5 million for the thirty-nine weeks ended November 3,
2007 from $143.5 million for the thirty-nine weeks ended October 28, 2006, a decrease of $12.0
million or 8.4%. Our comparable store sales for the first thirty-nine weeks of 2007, including
Internet and catalog sales, decreased by 14.6% compared to a 3.8% decrease in comparable store
sales in the first thirty-nine weeks of 2006. Average unit selling prices decreased 3.4% and unit
sales decreased 5.2% compared to the first thirty-nine weeks of 2006. Our Internet and catalog
sales increased 21.8% to $6.7 million for the first three quarters of 2007.
Gross profit.
Gross profit decreased to $28.1 million in 2007 from $41.9 million in 2006, a
decrease of $13.8 million or 33.0%. As a percentage of sales, gross profit decreased to 21.3% in
2007 from 29.2% in 2006. In September 2007, we aggressively reviewed our existing inventory and
took pricing actions that we believe were required to provide the freshness in product that our
customers desire. The resulting markdowns taken during our third quarter were $3.5 million higher
at cost than markdowns taken during the third quarter of 2006. This and lower leverage in our
buying and occupancy costs resulting from lower sales, caused our gross profit percentage to
decrease. The decrease in gross profit consists of a decrease of $12.0 million from reduced gross
margin percentage, a decrease of $3.8 million from lower comparable store sales, partially offset
by an increase of $2.0 million from new store sales. Permanent markdown costs increased to $14.8
million in the first thirty-nine weeks of 2007 from $12.3 million in the first thirty-nine weeks of
2006.
Selling expense.
Selling expense increased to $34.3 million in 2007 from $32.1 million in
2006, an increase of $2.2 million or 7.1%, and increased as a percentage of sales to 26.1% from
22.3%. This increase was primarily the result of a $1.1 million increase in store depreciation,
$0.3 million increase in store payroll expenses and a $1.0 million increase in catalog production
and mailing costs. This increase was partially offset by approximately $0.2 million of decreases
in store supplies and travel expenses.
General and administrative expense.
General and administrative expense decreased to $13.7
million in 2007 from $13.9 million in 2006, a decrease of $0.2 million or 1.3% but increased as a
percentage of sales to 10.4% from 9.7%.
Impairment of long-lived assets
. During the first three quarters of 2007, we recognized $3.1
million or 2.3% of sales in noncash charges related to the impairment of fixed assets including the
write-off of three prototype stores that the Company operated and has now determined to no longer
be consistent with the Companys strategic focus.
Interest expense.
Interest expense increased to $1.3 million in 2007 from $0.6 million in
2006, an increase of $0.7 million. The increase in interest expense reflects an increase in the
average balance outstanding on our revolving credit facility and interest on our subordinated
convertible debentures issued in June 2007.
16
Income tax expense (benefit).
We recognized income tax expense of $0.7 million for the first
three quarters of 2007 compared to an income tax benefit of $1.8 million in the first three
quarters of 2006. The income tax expense for the first three quarters of 2007 reflects the
establishment of a $10.0 million valuation allowance against net deferred tax assets.
Net loss
. We had a net loss of $25.0 million in the first three quarters of 2007 compared to a
net loss of $3.0 million in the first three quarters of 2006.
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 capital lease 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 three quarters of 2007 have had a negative impact on our financial
position. At November 3, 2007 we had negative working capital of $15.8 million, unused borrowing
capacity under our revolving credit facility of $1.4 million, and our shareholders equity had
declined to $16.5 million. As a result of low levels of unused borrowing capacity, we took actions
to obtain additional sources of liquidity including amending our revolving credit facility to
temporarily increase our unused borrowing capacity by $1.25 million through September 30, 2007, and
raising $3.6 million in net proceeds from a private placement of $4.0 million of subordinated
convertible debentures.
In September 2007, we announced that we were taking certain actions that we expect will result
in annual reductions in planned expenses of approximately $8.0 million, positively impacting our
liquidity and operating results in fiscal year 2008 with benefits also expected to positively
affect net income in the fourth quarter of 2007. These actions include refocusing of our
merchandising and inventory strategy with the intent of lowering inventory levels and improving
inventory turnover metrics. As of the end of the third quarter of 2007 we had reduced inventory
levels 21.3% below inventory at the end of the third quarter of 2006. We also delayed most store
expansion and remodeling projects until funding for such expansion can be generated from ongoing
operating activities.
On December 11, 2007, we entered into an agreement to terminate a below market operating lease
that was originally scheduled to expire in 2022, in exchange for a $5,050,000 cash payment on
December 11, 2007 and the right to continue occupying the space through January 8, 2009. We used
the net proceeds of approximately $5.0 million to reduce the balance on our revolving line of
credit. We do not believe that we have any other operating leases that could be terminated on
substantially similar terms. As of December 14, 2007, the balance on our revolving line of credit
was $15.3 million and unused borrowing capacity was $4.5 million).
We anticipate that our planned cash flows from operations and borrowings under our revolving
credit facility will be sufficient for our operating cash requirements for at least the next 12
months. If, however, the negative same store sales trends we experienced during the first three
quarters of fiscal year 2007 were to continue into 2008, it could become necessary for us to obtain
additional financing in order for us to meet our operating cash requirements during the first three
quarters of fiscal year 2008 and beyond. There is no assurance that we would be able to obtain
such financing in such circumstances. 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.
17
The following table summarizes certain key liquidity measurements as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2006
|
|
February 3, 2007
|
|
November 3, 2007
|
Cash
|
|
$
|
180,341
|
|
|
$
|
407,346
|
|
|
$
|
247,518
|
|
Inventories
|
|
|
27,499,098
|
|
|
|
24,102,006
|
|
|
|
21,634,947
|
|
Total current assets
|
|
|
35,602,032
|
|
|
|
30,809,573
|
|
|
|
26,633,167
|
|
Revolving Credit Facility
|
|
|
19,806,713
|
|
|
|
13,099,304
|
|
|
|
21,186,579
|
|
Total current liabilities
|
|
|
38,283,146
|
|
|
|
32,518,530
|
|
|
|
42,482,654
|
|
Net working capital
|
|
|
(2,681,114
|
)
|
|
|
(1,708,957
|
)
|
|
|
(15,849,487
|
)
|
Property and equipment, net
|
|
|
50,192,784
|
|
|
|
51,021,077
|
|
|
|
45,386,007
|
|
Total assets
|
|
|
87,118,989
|
|
|
|
83,158,859
|
|
|
|
73,210,682
|
|
Total shareholders equity
|
|
|
39,698,889
|
|
|
|
41,166,849
|
|
|
|
16,514,780
|
|
Unused borrowing capacity*
|
|
|
4,461,921
|
|
|
|
6,100,178
|
|
|
|
1,441,896
|
|
|
|
|
*
|
|
as calculated under the terms of our revolving credit facility
|
Operating activities
Cash used in operating activities was $7.7 million in the first three quarters of 2007
compared to cash used in operating activities of $7.6 million in the first three quarters of 2006.
Our net loss of $25.0 million was significantly offset by noncash items such as $6.5 million in
depreciation expense, $3.1 million of impairment expense, and $0.4 million of stock-based
compensation expense, reductions in inventory of $2.5 million and in accounts receivable of $0.9
million, and increases in accounts payable of $2.2 million and in accrued rent of $0.8 million. The
most significant use of cash in operating activities in the first three quarters of 2006 primarily
relates to a $8.4 million reduction of accounts payable and accrued expenses from the balances at
the end of fiscal year 2005. Accrued employee compensation decreased
$2.3 million primarily as the
result of the payment in the first three quarters of 2006 of accrued incentive compensation related
to fiscal year 2005. Other accounts payable and accrued expenses
decreased $5.4 million. As
discussed below in Financing Activities, cash used in operating activities in the first three
quarters of 2007 and 2006 was financed through increased borrowings on our revolving credit
facility and, in 2007, the private placement of subordinated convertible debentures.
Inventories at November 3, 2007 were $2.5 million, or 10.2% lower than at February 3, 2007 and
$5.9 million, or 21.3%, lower than at October 28, 2006, reflecting changes in our merchandising
strategy initiated in September 2007. Although we believe that at November 3, 2007, 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.
Investing activities
Cash used in investing activities was $4.0 million in the first three quarters of 2007
compared to $17.2 million for the first three quarters of 2006. 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 currently plan to open no additional new stores in the fourth quarter of fiscal year 2007.
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. Because we are able to identify locations, negotiate leases, and construct
stores in a relatively short period of time, we are able to maintain considerable flexibility in
the timing and extent of our capital expenditures, allowing us to exploit opportunities while
maintaining prudent working capital and overall capitalization positions. As of December 14, 2007,
we have opened six new stores in fiscal year 2007. We currently anticipate that our capital
expenditures in fiscal years 2007 and 2008, primarily related to new stores, store remodeling,
distribution and general corporate activities, will be approximately $5.0 million and $4.0 million,
respectively. 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. We have remodeled seven stores in fiscal year 2007, including one remodel during the third
quarter. Remodeling the average existing store typically costs approximately $360,000.
18
Financing activities
Cash provided by financing activities was $11.5 million in the first three quarters of 2007
compared to $21.1 million for the first three quarters of 2006. The principal sources of cash from
financing activities in the first three quarters of 2007 was the net proceeds of approximately $3.6
million from the placement of subordinated convertible debentures and net draws of $8.1 million on
our revolving line of credit. The principal sources of cash in the first three quarters of 2006
were the $19.8 million draw on our revolving credit agreement, $0.5 million from the exercise of
stock warrants and $1.1 million in cash and excess tax benefits from the exercise of employee stock
options.
We have a secured revolving credit facility with Bank of America, N.A. (successor-by-merger to
Fleet Retail Finance Inc.). Effective August 31, 2006, we amended this facility to increase the
revolving credit ceiling from $25.0 million to $40.0 million and to extend the maturity of the
facility from August 31, 2008 to 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 7.50% per annum as of
November 3, 2007, February 3, 2007 and October 28, 2006. Following the occurrence of any event of
default, the interest rate may be increased by an additional two percentage points. The revolving
credit agreement 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 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.
Our 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 30% or more of our common
stock or our combined voting power (as defined in the 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 November 3, 2007.
We had balances under our credit facility of $21.2 million, $13.1 million and $19.8 million as
of November 3, 2007, February 3, 2007, and October 28, 2006, respectively. We had approximately
$1.4 million, $6.1 million and $4.5 million in unused borrowing capacity calculated under the
provisions of our credit facility as of November 3, 2007, February 3, 2007, and October 28, 2006,
respectively. During the first three quarters of fiscal years 2007 and 2006, the highest
outstanding balances on our credit facility were $21.2 million and $19.8 million, respectively. We
primarily have used the borrowings on our revolving credit facility for working capital purposes
and capital expenditures.
During the first three quarters of 2007, we began to experience relatively low levels of
unused borrowing capacity based on our borrowing base calculations. Consequently, we requested and
the bank agreed on April 18, 2007, to adjust the borrowing base calculation to provide for
additional borrowing capacity of $1,250,000 for the period from April 20, 2007 through May 18,
2007. This agreement was subsequently extended through June 15, 2007, and, effective June 13, 2007,
further extended until September 30, 2007. As of December 14, 2007, we had an outstanding balance
of $15.3 million and approximately $4.5 million of unused borrowing capacity, based on our
borrowing base calculations.
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 $3.6 million, which were used to repay amounts owed under our credit
facility. The Debentures bear interest at a rate of 9.5% per annum, payable semi-annually on each
June 30 and December 31, beginning December 31, 2007. 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. Based on the initial
conversion price of $9.00 per share, the Debentures are convertible into 444,441 shares of common
stock, after eliminating fractional shares. 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
19
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.
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.
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 October 28, 2006, warrants underlying 50,000
shares of common stock had been exercised, generating net proceeds to us of $509,000. No warrants
were exercised during the thirteen and thirty-nine weeks ended November 3, 2007.
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, will subject 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. On May 6, 2005, we filed a
registration statement on Form S-3 to register for resale the common stock sold and the common
stock underlying the warrants and placement agent warrants, which was declared effective on May 25,
2005. We are now required to maintain the effectiveness of the registration statement, subject to
certain exceptions, through April 8, 2008 in order to avoid paying liquidated damages. As of
November 3, 2007, the maximum amount of liquidated damages that we could be required to pay was
$437,500, which represents 5 potential monthly payments of $87,500. 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.
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. Warrants underlying 54,000 shares of common
stock were tendered in a cashless exercise transaction under which
20
we issued 21,366 shares of common stock during the thirty-nine weeks ended October 28, 2006.
No warrants were exercised during the thirty-nine weeks ended November 3, 2007.
Our ability to meet our current and anticipated operating requirements will depend on our
future performance, which, in turn, will be subject to general economic conditions and financial,
business and other factors, including factors beyond our control.
Off-Balance Sheet Arrangements
At November 3, 2007, February 3, 2007, and October 28, 2006, 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.
Contractual Obligations
The following table summarizes our contractual obligations as of November 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
3 -5 Years
|
|
|
More than 5 Years
|
|
Long-term debt obligations (1)
|
|
$
|
5,933,779
|
|
|
$
|
392,667
|
|
|
$
|
771,084
|
|
|
$
|
4,770,028
|
|
|
$
|
|
|
Capital lease obligations (2)
|
|
|
108,691
|
|
|
|
108,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations (3)
|
|
|
212,361,973
|
|
|
|
24,886,205
|
|
|
|
51,438,399
|
|
|
|
48,226,681
|
|
|
|
87,810,688
|
|
Purchase obligations (4)
|
|
|
26,927,484
|
|
|
|
26,303,748
|
|
|
|
529,471
|
|
|
|
94,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
245,331,927
|
|
|
$
|
51,691,311
|
|
|
$
|
52,738,954
|
|
|
$
|
53,090,974
|
|
|
$
|
87,810,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes principal and interest payments.
|
|
(2)
|
|
Includes payment obligations relating to our point of sale hardware and software leases.
|
|
(3)
|
|
Includes minimum payment obligations related to our store leases.
|
|
(4)
|
|
Includes merchandise on order and payment obligations relating to store construction and
miscellaneous service contracts.
|
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (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. We will be required
to adopt SFAS No. 157 as of February 3, 2008. We are currently evaluating the impact of SFAS No.
157 and have not yet determined the impact on our financial statements.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115, which will become
effective in 2008. 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. We will adopt this Statement as of February 3, 2008 and are currently
evaluating if we will elect the fair value option for any of our eligible financial instruments and
other items.
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.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flows may be subject to fluctuations due to changes in interest rates.
Our financing arrangements include both fixed and variable rate debt in which changes in interest
rates will impact the fixed and variable rate debt differently. A change in the interest rate of
fixed rate debt will impact the fair value of the debt, whereas a change in the interest rate on
the variable rate debt will impact interest expense and cash flows. We had $21.2 million of
outstanding borrowings under our revolving credit facility at November 3, 2007. A hypothetical
increase in interest rates of 100 basis points would result in a potential reduction in future
pre-tax earnings of approximately $0.1 million per year for every $10 million of outstanding
borrowings under the revolving credit facility. Management does not believe that the risk
associated with changing interest rates would have a material effect on our results of operations
or financial condition.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, 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 Chief Financial Officer 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 Chief Financial Officer, 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 Chief Financial Officer, conducted an evaluation of the
Companys internal control over financial reporting to determine whether any changes occurred
during the Companys third fiscal quarter ended November 3, 2007 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 third
quarter of fiscal year 2007.
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors as disclosed in our Annual Report on Form
10-K for fiscal year 2006.
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 thirty-nine weeks ended November 3, 2007.
ITEM 6. EXHIBITS
See Exhibit Index herein
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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: December 18, 2007
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BAKERS FOOTWEAR GROUP, INC.
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(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 of Directors, Chief Executive Officer and President
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(On behalf of the Registrant)
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By:
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/s/ Lawrence L. Spanley, Jr.
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Lawrence L. Spanley, Jr.
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Chief Financial Officer, Executive Vice President, Treasurer, and Secretary
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(As principal financial officer)
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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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10.1
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Summary of October 3, 2007 stock option grants and restricted
stock awards for Peter A. Edison, Mark D. Ianni, Joseph R.
Vander Pluym and Stanley K. Tusman (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K
dated October 3, 2007 (File No. 000-50563)).
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10.2
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Form of Restricted Stock Award Agreement under Bakers Footwear
Group, Inc. 2005 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.4 to the Companys Current Report on
Form 8-K dated October 3, 2007 (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 5 of the Companys
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 Chief
Financial Officer).
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32.1
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Section 1350 Certification (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Executive
Officer).
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32.2
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Section 1350 Certification (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Financial
Officer).
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