Bakers Footwear Group Inc - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Bakers Footwear Grp. (MM)	NASDAQ:BKRS	NASDAQ	Common Stock

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended August 2, 2008


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 000-50563

BAKERS FOOTWEAR GROUP, INC.

(Exact name of registrant as specified in its charter)


Missouri		43-0577980
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

2815 Scott Avenue,		63103
St. Louis, Missouri		(Zip Code)
(Address of principal executive offices)

(314) 621-0699
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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 issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.0001 per share, 7,055,856 shares issued and outstanding as of September 5, 2008.

BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q


		Page
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets		3
Condensed Statements of Operations		4
Condensed Statement of Shareholders’ Equity		5
Condensed Statements of Cash Flows		6
Notes to Condensed Financial Statements		7-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		24
Part II Other Information
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 4. Submission of Matters to a Vote of Security Holders		25
Item 6. Exhibits		25
Signatures		26
Exhibit Index		27
302 Certification by Chief Executive Officer
302 Certification by Principal Financial Officer
906 Certifications

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAKERS FOOTWEAR GROUP, INC.

CONDENSED BALANCE SHEETS


	August 4,			February 2,			August 2,
	2007			2008			2008
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	192,576		$	159,671		$	145,075
Accounts receivable		1,223,857			1,192,674			1,177,205
Other receivables		789,365			182,999			183,610
Inventories		22,920,714			18,061,941			21,559,866
Prepaid expenses and other current assets		4,228,172			697,174			971,396
Prepaid income taxes		2,251,523			1,987,621			106,415

Total current assets		31,606,207			22,282,080			24,143,567

Property and equipment, net		49,245,995			43,810,776			40,165,809
Other assets		1,270,730			1,466,095			1,156,665

Total assets	$	82,122,932		$	67,558,951		$	65,466,041


Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	10,822,480		$	7,082,214		$	6,694,455
Accrued expenses		7,442,081			9,162,561			8,130,141
Subordinated secured term loan		—			—			5,876,590
Subordinated convertible debentures		—			—			4,000,000
Sales tax payable		457,958			498,510			573,989
Deferred income		1,194,489			1,362,563			1,179,666
Revolving credit facility		16,056,368			11,184,379			10,923,753
Current maturities of capital lease obligations		116,998			57,863			10,734

Total current liabilities		36,090,374			29,348,090			37,389,328

Subordinated convertible debentures		4,000,000			4,000,000			—
Obligations under capital leases, less current maturities		10,734			—			—
Accrued rent liabilities		10,233,227			10,170,761			10,070,474

Shareholders’ equity:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares outstanding		—			—			—
Common Stock, $0.0001 par value; 40,000,000 shares authorized, 6,493,035 shares outstanding at August 4, 2007, 6,655,856 shares outstanding at February 2, 2008 and 7,055,856 shares outstanding at August 2, 2008		649			665			705
Additional paid-in capital		36,903,127			37,101,923			38,203,800
Accumulated deficit		(5,115,179	)		(13,062,488	)		(20,198,266	)

Total shareholders’ equity		31,788,597			24,040,100			18,006,239

Total liabilities and shareholders’ equity	$	82,122,932		$	67,558,951		$	65,466,041

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)


	Thirteen			Thirteen			Twenty-six			Twenty-six
	Weeks			Weeks			Weeks			Weeks
	Ended			Ended			Ended			Ended
	August 4, 2007			August 2, 2008			August 4, 2007			August 2, 2008
Net sales	$	41,984,658		$	43,568,099		$	91,240,475		$	87,105,602
Cost of merchandise sold, occupancy, and buying expenses		32,708,564			30,688,934			66,676,340			62,976,464

Gross profit		9,276,094			12,879,165			24,564,135			24,129,138
Operating expenses:
Selling		11,213,164			10,195,159			23,105,104			20,907,132
General and administrative		4,385,807			4,009,702			8,950,562			8,394,968
Loss on disposal of property and equipment		8,448			31,740			44,752			253,600
Impairment of long-lived assets		755,672			—			755,672			—

Operating loss		(7,086,997	)		(1,357,436	)		(8,291,955	)		(5,426,562	)

Other income (expense):
Interest expense		(402,294	)		(723,034	)		(764,418	)		(1,529,782	)
Other, net		25,348			41,258			37,784			43,064

Loss before income taxes		(7,463,943	)		(2,039,212	)		(9,018,589	)		(6,913,280	)

Provision for income taxes		1,280,839			222,498			691,367			222,498


Net loss	$	(8,744,782	)	$	(2,261,710	)	$	(9,709,956	)	$	(7,135,778	)


Basic loss per share	$	(1.35	)	$	(0.32	)	$	(1.50	)	$	(1.02	)

Diluted loss per share	$	(1.35	)	$	(0.32	)	$	(1.50	)	$	(1.02	)

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

Common Stock

Shares

Additional

Issued and

Paid-In

Accumulated

Outstanding

Amount

Capital

Deficit

Total

Balance at February 2, 2008

6,655,856

665

37,101,923

(13,062,488

)

24,040,100

Stock-based compensation expense

—

301,917

—

301,917

Issuance of common stock

400,000

799,960

—

800,000

Net loss

—

(7,135,778

)

(7,135,778

)

Balance at August 2, 2008

7,055,856

705

38,203,800

(20,198,266

)

18,006,239

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)


	Twenty-six			Twenty-six
	Weeks Ended			Weeks Ended
	August 4, 2007			August 2, 2008
Operating activities
Net loss	$	(9,709,956	)	$	(7,135,778	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,330,394			4,029,245
Deferred income taxes		2,387,809			—
Accretion of debt discount		—			351,590
Stock-based compensation expense		331,704			301,917
Loss on disposal of property and equipment		44,752			253,600
Impairment of long-lived assets		755,672			—
Changes in operating assets and liabilities:
Accounts receivable		479,882			14,858
Inventories		1,181,292			( 3,497,925	)
Prepaid expenses and other current assets		(3,514,362	)		(274,222	)
Prepaid income taxes		(1,121,886	)		1,881,206
Other assets		45,870			559,972
Accounts payable		2,687,838			(387,759	)
Accrued expenses and deferred income		(2,000,249	)		(1,139,838	)
Accrued rent liabilities		817,610			( 100,287	)

Net cash used in operating activities		(3,283,630	)		(5,143,421	)

Investing activities
Purchase of property and equipment		(3,367,602	)		(638,589	)
Proceeds from sale of property and equipment		19,783			711

Net cash used in investing activities		(3,347,819	)		(637,878	)

Financing activities
Net advances under revolving credit facility		2,957,064			(260,626	)
Proceeds from issuance of convertible debentures		4,000,000			—
Debt issuance costs		(420,447	)		—
Proceeds from issuance of subordinated secured term loan and common stock		—			7,025,000
Costs of issuing subordinated term loan and common stock		—			(325,542	)
Principal payments on subordinated secured term loan		—			(625,000	)
Principal payments under capital lease obligations		(119,938	)		(47,129	)

Net cash provided by financing activities		6,416,679			5,766,703


Net decrease in cash and cash equivalents		(214,770	)		(14,596	)
Cash and cash equivalents at beginning of period		407,346			159,671

Cash and cash equivalents at end of period	$	192,576		$	145,075


Supplemental disclosures of cash flow information
Cash paid for income taxes	$	71,011		$	—

Cash paid for interest	$	687,869		$	1,534,120

See accompanying notes.

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 Company’s) 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 Company’s operations are subject to seasonal fluctuations and, consequently, operating results for interim periods are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

2. Liquidity

The Company’s cash requirements are primarily for working capital, principal and interest payments on debt obligations, and capital expenditures. Historically, these cash needs have been met by cash flows from operations, borrowings under the Company’s revolving credit facility and sales of securities. The balance on the revolving credit facility fluctuates throughout the year as a result of seasonal working capital requirements and other uses of cash.

The Company’s losses in the first half of fiscal year 2008 and in fiscal year 2007 have had a significant negative impact on the Company’s financial position and liquidity. As of August 2, 2008, the Company had negative working capital of $13.2 million, unused borrowing capacity under its revolving credit facility of $1.7 million, and shareholders’ equity had declined to $18.0 million. During fiscal year 2007, the Company began addressing its liquidity issues by amending its revolving credit facility to provide for additional availability from April through September 2007, raising $3.6 million in net proceeds from issuing $4.0 million of subordinated convertible debentures in June 2007, and terminating a long-term below market lease in exchange for receiving a $5.0 million cash payment in December 2007. The Company does not believe that any of its other leases could be terminated on substantially similar terms. In fiscal year 2008, the Company obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan and the issuance of 350,000 shares of common stock. On May 9, 2008, the Company amended the subordinated secured term loan to reduce the financial covenant for minimum adjusted EBITDA for the first quarter of fiscal year 2008 and to defer principal payments until September 1, 2008. As consideration for the amendment, the Company issued an additional 50,000 shares of common stock. As of September 6, 2008, the balance on the revolving credit facility was $14.1 million and unused borrowing capacity was $0.7 million.

The Company’s business plan for the remainder of fiscal year 2008 is based on moderate increases in comparable store sales through the remainder of the year. The business plan also reflects improved inventory management with a greater emphasis on core lines and on focused promotional activity. This increased focus on inventory should improve overall gross margin performance compared to fiscal year 2007. The Company has adjusted its business plan in light of year-to-date sales and its current liquidity position and has taken actions considered necessary to maintain adequate liquidity and meet the financial covenants under debt agreements. However, there is no assurance that the Company will meet the sales or margin levels contemplated in the business plan.

The Company continues to face considerable liquidity constraints. Comparable store sales for the first five weeks of the third quarter increased 2.2% and are expected to remain positive for the remainder of fiscal year 2008. Although the Company believes its business plan is achievable, should the Company fail to achieve the sales or gross margin levels it anticipates, or if the Company were to incur significant unplanned cash outlays, it would become necessary for the Company to obtain additional sources of liquidity or make further cost cuts to fund operations. However, there is no assurance that the Company would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow it to operate its business.

The Company’s $7.5 million three-year subordinated secured term loan includes certain financial covenants which require it to maintain specified levels of adjusted EBITDA and tangible net worth each fiscal quarter and provides for annual limits on capital expenditures (all as calculated in accordance with the loan agreement). The Company met all financial covenants as of the end of the second quarter of fiscal year 2008. The minimum adjusted EBITDA covenant for the first quarter of fiscal year 2008 was reduced as part of the amendment made on May 9, 2008 in order to maintain compliance at May 3, 2008.

Based on the business plan for the remainder of the year and its other actions, the Company believes that it will be able to comply with its financial covenants. However, given the inherent volatility in the Company’s sales performance, there is no assurance that it will be able to do so. Furthermore, in light of past sales results and the current state of the economy, there is a reasonable possibility that the Company may not be able to comply with the quarterly minimum adjusted EBITDA covenants. Failure to comply would be a default under the terms of the Company’s term loan and could result in the acceleration of the term loan, and possibly all of the Company’s debt obligations. If the Company is unable to comply with its financial covenants, it will be required to seek one or more amendments or waivers from its lenders. The Company obtained an amendment reducing the first quarter adjusted EBITDA covenant and believes that it would be able to obtain any additional required amendments or waivers, but there is no assurance that it would be able to do so on favorable terms, if at all. If the Company is unable to obtain any required amendments or waivers, the Company’s lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of its debt obligations and taking collection actions. If such acceleration occurred, the Company currently has insufficient cash to pay the amounts owed and would be forced to obtain alternative financing as discussed above. As a result of these uncertainties, the Company’s long-term debt obligations have been classified as current liabilities.

The Company’s independent registered public accounting firm’s report issued in its Annual Report on Form 10-K for fiscal year 2007 included an explanatory paragraph describing the existence of conditions that raise substantial doubt about the Company’s ability to continue as a going concern, including recent losses and the potential inability to comply with financial covenants. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should the Company be unable to continue as a going concern.

3. Issuance of Debt and Common Stock

Effective February 4, 2008, the Company consummated a $7.5 million three-year subordinated secured term loan (the Loan) and issued 350,000 shares of the Company’s common stock as additional consideration. The Loan matures on February 1, 2011, and requires 36 monthly payments of principal and interest at an interest rate of 15% per annum. Net proceeds to the Company after transaction costs were approximately $6.7 million. The Company used the net proceeds initially to repay amounts owed under its senior revolving credit facility and for working capital purposes. The Loan is secured by substantially all of the Company’s assets and is subordinate to the Company’s revolving credit facility but has priority over the Company’s subordinated convertible debentures. As a result of the uncertainties described in Note 2 above, the Loan has been classified as a current liability.

Under the Loan Agreement, the Company is permitted to prepay the Loan, subject to prepayment penalties which range between 3% and 1% of the aggregate principal balance of the Loan. The Company is also required to make prepayments, subject to a senior subordination agreement (Senior Subordination Agreement) related to the Company’s senior revolving credit facility, on the Loan in certain circumstances, including generally if the Company sells property and assets outside the ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales of securities.

The Loan agreement contains financial covenants which require the Company to maintain specified levels of tangible net worth and adjusted EBITDA, both as defined in the loan agreement, each fiscal quarter and annual limits on capital expenditures, as defined in the loan agreement, of no more than $1.5 million, $2 million and $3 million, for each of the fiscal years in the period ending January 28, 2011, respectively.

Upon the occurrence of an event of default as defined in the Loan Agreement, the Lender will be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the Senior Subordination Agreement, with the interest rate increasing to 17.5% per annum.

The Company allocated the net proceeds received in connection with this loan and the related issuance of common stock based on the relative fair values of the debt and equity components of the transaction. The fair value of the 350,000 shares of common stock issued was estimated based on the actual market value of the Company’s common stock at the time of the transaction net of a discount to reflect that unregistered shares were issued and could not be sold on the open market unless and until the related registration statement, discussed below, covering these shares was declared effective by the SEC. The fair value of the $7.5 million of debt was estimated based on publicly available data regarding the valuation of debt of companies with comparable credit ratings. The relative fair values of the debt and equity components were then pro rated into the net proceeds received by the Company to determine the actual amounts to be allocated to debt and to equity. Other expenses incurred by the Company relative to this transaction were allocated either to debt issuance costs or as a reduction of additional paid-in capital based on either specific identification of the particular expenses or on a pro rata basis. Based on this analysis, the Company allocated $6,150,000 to the initial value of the subordinated secured term loan and allocated $715,000 to the value of the 350,000 shares of common stock.

The Company will accrete the initial value of the debt to the nominal value of the debt over the term of the loan using the effective interest method and will recognize such accretion as a component of interest expense. Likewise, the Company will amortize the related debt issuance costs using the effective interest method and recognize this amortization as a component of interest expense.

The Company also entered into a registration rights agreement in respect of the shares issued. The Company was required to file a registration statement relating to the shares with the SEC by the earlier of 90 days of February 1, 2008 and five business days of the filing date of its annual report on Form 10-K for fiscal year 2007. The Company was also required to have the registration statement declared effective by the SEC within 120 days after February 1, 2008. If the Company did not meet these deadlines, or if the registration statement ceases to be effective for more than 60 days per year or more than 30 consecutive calendar days or if the Company’s common stock ceases to be traded on an eligible market as required, then the Company must generally pay liquidated damages in an amount equal to 2% of the value of the registrable shares remaining. The Company is required to use its reasonable best efforts to keep the registration statement continuously effective, subject to certain exceptions, until the earlier of all of the registrable securities being sold or ceasing to be registrable under the agreement, or February 1, 2010. The Company is required to pay all costs of preparing, filing and maintaining the effectiveness of the registration statement. The Company also has certain other ongoing obligations, including providing specified notices and certain information, indemnifying the investor for certain liabilities and using reasonable best efforts to timely file all required filings with the SEC and make and keep current public information about the Company.

On May 9, 2008, the Company entered into an amendment to the subordinated secured term loan which modified the first quarter 2008 minimum adjusted EBITDA financial covenant, deferred principal payments until September 1, 2008 and re-amortized the remaining principal payments. As consideration for the amendment, the Company issued 50,000 additional shares of common stock. The fair value of the 50,000 shares of common stock issued was estimated based on the actual market value of the Company’s common stock at the time of the transaction net of a discount to reflect that unregistered shares were issued and could not be sold on the open market unless and until the related registration statement, discussed above, covering these shares was declared effective by the SEC. Based on this analysis, the Company allocated $85,000 to the value of the 50,000 shares of common stock. The amendment also modified the terms of the registration rights agreement by adding the 50,000 additional shares to the registration obligations, changing the date on which the Company was required to file the registration statement, to May 12, 2008, and increasing the specified aggregate value on which liquidated damages would initially be computed to $1,096,000 from the initial specified value of $959,000. Based on the updated specified value, as of August 2, 2008, the maximum amount of liquidated damages that the Company could be required to pay would have been $394,320, which represents 18 potential monthly payments of $21,920. The Company filed the required registration statement on May 9, 2008 and the registration statement was declared effective by the SEC on May 21, 2008. The Company has not recorded a liability in connection with the registration rights agreement because, in accordance with SFAS No. 5, Accounting for Contingencies , management has concluded that it is not probable that the Company will make any payments under the liquidated damages provisions of the registration rights agreement.

4. Revolving Credit Facility

The Company has a revolving credit facility with a commercial bank with a maximum line of credit of $40,000,000 subject to the calculated borrowing base as defined in the agreement, and a maturity of August 31, 2010. The agreement is secured by substantially all assets of the Company. Interest is payable monthly at either the bank’s base rate (5.0% per annum at August 2, 2008) or, at the Company’s option, based on LIBOR (London Interbank Offered Rate, as defined in the agreement) plus 1.75% to 2.25% on a designated portion of the outstanding balance for a specified period of time. An unused line fee of 0.25% per annum is payable monthly based on the difference between the maximum line and the average loan balance. The Company had approximately $790,000, $1,456,000, and $1,737,000 of unused borrowing capacity under the revolving credit facility based upon the Company’s borrowing base calculation as of August 4, 2007, February 2, 2008, and August 2, 2008, respectively. The agreement has certain restrictive financial and other covenants, including a requirement that the Company maintain a minimum availability. As of September 5, 2008, the Company was in compliance with all of its financial and other covenants and expects to remain in compliance throughout fiscal year 2008 based on the expected execution of its business plan, as discussed in Note 2.

5. Subordinated Convertible Debentures

The Company completed a private placement of $4,000,000 in aggregate principal amount of subordinated convertible debentures on June 26, 2007. The Company received net proceeds of approximately $3.6 million. The debentures bear interest at a rate of 9.5% per annum, payable semi-annually. The principal balance of $4,000,000 is payable in full on June 30, 2012. As a result of the uncertainties described in Note 2 above, the subordinated convertible debentures have been classified as current liabilities. The initial conversion price of the debentures was $9.00 per share. The conversion price is subject to anti-dilution and other adjustments, including a weighted average conversion price adjustment for certain future issuances or deemed issuances of common stock at a lower price, subject to limitations as required under rules of the Nasdaq Stock Market. The Company can redeem the unpaid principal balance of the debentures if the closing price of the Company’s common stock is at least $16.00 per share, subject to the adjustments and conditions in the debentures.

The debentures contain a weighted average conversion price adjustment that is triggered by issuances or deemed issuances of the Company’s common stock. As a result of the issuance of the shares described in Note 3, effective February 4, 2008, the weighted average conversion price of the debentures decreased from $9.00 to $8.64 and on May 9, 2008, the weighted average conversion price of the debentures decreased from $8.64 to $8.59.

6. Income Taxes

In accordance with FASB Statement No. 109, Accounting for Income Taxes (SFAS 109), the Company regularly assesses available positive and negative evidence to determine whether it is more likely than not that its deferred tax asset balances will be recovered from (a) reversals of deferred tax liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning strategies and (d) future taxable income. SFAS 109 places significant restrictions on the consideration of future taxable income in determining the realizability of deferred tax assets in situations where a company has experienced a cumulative loss in recent years. When sufficient negative evidence exists that indicates that full realization of deferred tax assets is no longer more likely than not, a valuation allowance is established as necessary against the deferred tax assets, increasing the Company’s income tax expense in the period that such conclusion is reached. Subsequently the valuation allowance is adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the future, sufficient positive evidence, such as a sustained return to profitability, arises that would indicate that realization of deferred tax assets is once again more likely than not, any existing valuation allowance would be reversed as appropriate, decreasing the Company’s income tax expense in the period that such conclusion is reached.

At May 5, 2007, the Company had adequate available net operating loss carryback potential to support the recorded balance of net deferred tax assets. The Company’s loss before income taxes for the twenty-six weeks ended August 4, 2007 exceeded the Company’s carryback potential and was anticipated to result in a cumulative loss before income taxes for the three-year period ending February 2, 2008. Therefore, as of August 4, 2007, the Company concluded that the realizability of net deferred tax assets was no longer more likely than not, and established a valuation allowance against its net deferred tax assets. As of August 2, 2008, the Company increased the valuation allowance to $9,831,405. The Company has scheduled the reversals of its deferred tax assets and deferred tax liabilities and has concluded that based on the anticipated reversals a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

During the second quarter of fiscal year 2008, the Company received federal income tax refunds of $1.6 million from the carryback of net operating losses. The balance of prepaid income taxes at August 2, 2008, consists of refunds of state estimated income tax payments made for fiscal year 2006 that were claimed on the Company’s state income tax returns for the year ended February 3, 2007. As of August 2, 2008, the Company has approximately $14.0 million of net operating loss carryforwards that expire in 2022 available to offset future taxable income.

The Company recognized $0.2 million of income tax expense during the second quarter of fiscal year 2008 related to differences between the alternative minimum tax recognized in the income tax provision and the federal income tax return filed for fiscal year 2007.

Significant components of the provision for income tax expense for the thirteen weeks and twenty-six weeks ended August 4, 2007 and August 2, 2008 are as follows:


	Thirteen			Thirteen			Twenty-six			Twenty-six
	Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
	August 4, 2007			August 2, 2008			August 4, 2007			August 2, 2008
Current:
Federal	$	(1,609,858	)	$	(52,723	)	$	(1,831,569	)	$	(1,383,104	)
State and local		189,743			(54,856	)		135,127			(342,002	)

Total current		(1,420,115	)		(107,579	)		(1,696,442	)		(1,725,106	)

Deferred:
Federal		(752,613	)		(368,731	)		(1,017,582	)		(578,178	)
State and local		(688,720	)		(81,153	)		(736,896	)		(119,234	)

Total deferred		(1,441,333	)		(449,884	)		(1,754,478	)		(697,412	)

Valuation allowance		4,142,287			779,961			4,142,287			2,645,016

Total income tax expense	$	1,280,839		$	222,498		$	691,367		$	222,498

The differences between income tax expense at the statutory U.S. federal income tax rate of 35% and the amount reported in the statements of operations for the thirteen weeks and twenty-six weeks ended August 4, 2007 and August 2, 2008 are as follows:


	Thirteen			Thirteen			Twenty-six			Twenty-six
	Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
	August 4, 2007			August 2, 2008			August 4, 2007			August 2, 2008
Federal income tax at statutory rate	$	(2,612,380	)	$	(713,724	)	$	(3,156,506	)	$	(2,419,648	)
Impact of federal alternative minimum tax		––			222,498			––			222,498
Impact of graduated Federal rates		74,639			20,392			90,186			69,133
State and local taxes, net of federal income taxes		(330,068	)		(90,181	)		(398,831	)		(305,728	)
Permanent differences		6,361			3,552			14,231			11,227
Valuation allowance		4,142,287			779,961			4,142,287			2,645,016

Total income tax expense	$	1,280,839		$	222,498		$	691,367		$	222,498

Deferred income taxes arise from temporary differences in the recognition of income and expense for income tax purposes. Deferred income taxes were computed using the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes.

Components of the Company’s deferred tax assets and liabilities are as follows:


	August 4, 2007			February 2, 2008			August 2, 2008
Deferred tax assets:
Net operating loss carryforward	$	1,144,058		$	3,048,240		$	5,450,787
Vacation accrual		444,313			392,994			377,004
Inventory		1,514,078			1,379,621			1,439,736
Stock-based compensation		573,205			650,373			768,121
Accrued rent		3,990,959			4,049,924			3,952,312

Total deferred tax assets		7,666,613			9,521,152			11,987,960


Deferred tax liabilities:
Prepaid expenses		233,000			184,606			216,705
Property and equipment		3,291,326			2,150,157			1,939,850

Total deferred tax liabilities		3,524,326			2,334,763			2,156,555

Valuation allowance		(4,142,287	)		(7,186,389	)		(9,831,405	)

Net deferred tax assets	$	––		$	––		$	––

7. Stock-Based Compensation

During the twenty-six weeks ended August 2, 2008, the Company issued 216,500 nonqualified stock options with an exercise price of $1.95 and 94,000 nonqualified stock options with an exercise price of $1.43. These options are exercisable in equal annual installments of 20% on or after each of the first five years from the date of grant and expire ten years from the date of grant. The Company uses the Black-Scholes option pricing model to determine the fair value of stock-based compensation. The number of options granted, their grant-date weighted-average fair value, and the significant assumptions used to determine fair-value during the twenty-six weeks ended August 4, 2007 and August 2, 2008, are as follows:


	Twenty-six			Twenty-six
	Weeks Ended			Weeks Ended
	August 4, 2007			August 2, 2008
Options granted		132,613			310,500
Weighted-average fair value of options granted	$	4.99		$	0.86
Assumptions
Dividends		0	%		0	%
Risk-free interest rate		4.5	%		2.8–3.7	%
Expected volatility		43%–46	%		46	%
Expected option life	5–6 years			6 years

8. Earnings (Loss) Per Share

Basic earnings (loss) per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares and potential dilutive securities that were outstanding during the period. Potential dilutive securities consist of outstanding stock options and warrants and shares underlying the subordinated convertible debentures.

The following table sets forth the components of the computation of basic and diluted earnings (loss) per share for the periods indicated.


	Thirteen			Thirteen			Twenty-six			Twenty-six
	Weeks			Weeks			Weeks			Weeks
	Ended			Ended			Ended			Ended
	August 4, 2007			August 2, 2008			August 4, 2007			August 2, 2008
Numerator:
Net loss	$	(8,744,782	)	$	( 2,261,710	)	$	(9,709,956	)	$	(7,135,778	)

Numerator for loss per share		(8,744,782	)		(2,261,710	)		(9,709,956	)		(7,135,778	)

Interest expense related to convertible debentures		—			—			—			—
Numerator for diluted loss per share	$	(8,744,782	)	$	( 2,261,710	)	$	(9,709,956	)	$	(7,135,778	)


Denominator:		—			—			—			—
Denominator for basic earnings per share — weighted average shares		6,493,035			7,052,559			6,493,035			7,025,361
Effect of dilutive securities
Stock options		—			—			—			—
Stock purchase warrants		—			—			—			—
Convertible debentures		—			—			—			—
Denominator for diluted earnings (loss) per share — adjusted weighted average shares and assumed conversions		6,493,035			7,052,559			6,493,035			7,025,361

The diluted earnings per share calculation for the thirteen weeks ended August 2, 2008 excludes 4,690 incremental shares related to outstanding stock options and 465,656 incremental shares underlying convertible debentures because they are antidilutive. The diluted earnings per share calculation for the twenty-six weeks ended August 2, 2008 excludes 4,693 incremental shares related to outstanding stock options and 464,309 incremental shares underlying convertible debentures because they are antidilutive. The diluted earnings per share calculation for the thirteen weeks ended August 4, 2007 excludes 82,713 incremental shares related to outstanding stock options and 190,476 incremental shares underlying convertible debentures because they are antidilutive. The diluted earnings per share calculation for the twenty-six weeks ended August 4, 2007 excludes 98,770 incremental shares related to outstanding stock options and 95,238 incremental shares underlying convertible debentures because they are antidilutive.

9. Fair Value Measurements

On February 3, 2008, the Company adopted SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. Adoption of this statement did not impact the Company’s financial statements.

On February 3, 2008 the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 . SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities, and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. The Company did not elect the fair value option for any of its eligible financial instruments or other items. Adoption of this statement did not impact the Company’s financial statements.

10. Contingencies

The Company was served with a lawsuit filed in federal court in the state of California by two former store managers. They claim they should have been classified as non-exempt employees under both the California Labor Code and the Fair Labor Standards Act. They filed the case as a class action on behalf of California based store managers. The Company will defend the plaintiffs’ anticipated effort to seek class certification and will vigorously defend itself in this lawsuit. At this time, the Company does not believe this matter will have a material adverse effect on its business or financial condition. The Company cannot give assurance, however, that this matter will not have a material adverse effect on its results of operations for the period in which it is resolved.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company’s unaudited condensed financial statements and notes thereto provided herein and the Company’s audited financial statements and notes thereto in our annual report on Form 10-K. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The factors that might cause such a difference also include, but are not limited to, those discussed in our Annual Report on Form 10-K under “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and under “Item 1. Business — Risk Factors” and those discussed elsewhere in our Annual Report on Form 10-K and related notes thereto and elsewhere in this quarterly report.

Overview

We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We feature private label and national brand dress, casual and sport shoes, boots, sandals and accessories. As of August 2, 2008, we operated 243 stores, including 217 Bakers stores and 26 Wild Pair stores located in 38 states.

During the first half of 2008, our net sales decreased 4.5% compared to the first half of 2007, reflecting a soft first quarter offset by an improved second quarter that benefited from strong sandal sales. Comparable store sales in the first half of 2008 decreased 3.1%, compared to a decrease of 13.6% in the first half of last year. Gross profit percentage increased to 27.7% of sales in the first half of 2008 compared to 26.9% in the first half of 2007 due to strong sandal sales and reduced markdowns while ending the first half with inventory down 6% from a year ago. Our selling, general and administrative expenses decreased 8.6%. Our net loss of $7.1 million for the first half of 2008 compares to a net loss of $9.7 million in the first half of 2007. Comparable store sales for the first five weeks of the third quarter of 2008 have increased 2.2%.

We opened one new store and closed seven stores during the first half of 2008. We currently expect to open a total of two new stores, remodel two stores and close a total of 12 to 14 stores during fiscal year 2008.

We continue to face considerable liquidity constraints. As of August 2, 2008, we had negative working capital of $13.2 million and unused borrowing capacity under our revolving credit facility of $1.7 million, and our shareholders’ equity had declined to $18.0 million. As of September 6, 2008, the balance on our revolving line of credit was $14.1 million and our unused borrowing capacity was $0.7 million. During the first quarter of 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5 million three-year subordinated secured term loan and the issuance of 350,000 shares of common stock. Also, on May, 9, 2008, we amended our subordinated secured term loan to reduce the financial covenant for minimum adjusted EBITDA for the first quarter of 2008 and to defer principal payments until September 1, 2008 for which we issued an additional 50,000 shares of common stock as consideration for the amendment.

Our business plan for fiscal year 2008 continues to be based on moderate increases in comparable store sales through the remainder of the year, improved gross margins, and expense reductions. We have adjusted our business plan in light of year-to-date sales and our current liquidity position and have taken actions we consider necessary to maintain adequate liquidity and meet the financial covenants under our debt agreements. Although we believe our business plan is achievable, in light of past sales results and the current state of the economy, there is a reasonable possibility that we may not be able to comply with the quarterly minimum adjusted EBITDA covenants. As a result, our long-term debt obligations are classified as current liabilities. If we are unable to comply with our financial covenants or otherwise maintain adequate liquidity it could be necessary for us to obtain one or more amendments or waivers from our lenders, obtain additional sources of liquidity, or make further cost cuts to fund operations. However, there is no assurance that we could accomplish these steps. Our Annual Report on Form 10-K provides additional detail about the risks of our liquidity situation and our ability to comply with our financial covenants. See also “Liquidity and Capital Resources” below.

For comparison purposes, we classify our stores as comparable or non-comparable. A new store’s sales are not included in comparable store sales until the thirteenth month of operation. Sales from remodeled stores are excluded from comparable store sales during the period of remodeling. We include our Internet and catalog sales as one store in calculating our comparable store sales.

Critical Accounting Policies

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require us to make estimates and assumptions about future events and their impact on amounts reported in our Financial Statements and related Notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. These differences could be material to the financial statements.

We believe that our application of accounting policies, and the estimates that are inherently required by these policies, are reasonable. We believe that the following significant accounting policies may involve a higher degree of judgment and complexity.

Merchandise inventories

Merchandise inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. Consideration received from vendors relating to inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying expenses after an agreement with the vendor is executed and when the related inventory is sold. We physically count all merchandise inventory on hand twice annually, generally during the months of January and July, and adjust the recorded balance to reflect the results of the physical counts. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of merchandise sold, occupancy, and buying costs. Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. In determining permanent markdowns, we consider current and recently recorded sales prices, the length of time product is held in inventory, and quantities of various product styles contained in inventory, among other factors. The process of determining our expected adjustments to retail prices requires significant judgment by management. The ultimate amount realized from the sale of inventories could differ materially from our estimates. If market conditions are less favorable than those projected, additional inventory markdowns may be required.

Store closing and impairment charges

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Disposal of Long-Lived Assets , long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. We regularly analyze the operating results of our stores and assess the viability of under-performing stores to determine whether they should be closed or whether their associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends, long-lived assets of stores indicated to be impaired are written down to fair value.

During the twenty-six weeks ended August 4, 2007, we recorded $755,672, in noncash charges to earnings related to the impairment of furniture, fixtures, and equipment, leasehold improvements, and other assets at specifically identified underperforming stores. We recognized no impairment expense during the twenty-six weeks ended August 2, 2008. We typically perform our impairment analysis closer to the end of our fiscal year in order to incorporate operating results from the important holiday season into our analysis.

Stock-based compensation expense

In accordance with SFAS No. 123R, Share-Based Payment , (SFAS 123R), we recognize compensation expense for stock-based compensation based on the grant date fair value. Stock-based compensation expense is then recognized ratably over the service period related to each grant. We used the modified prospective transition method under which financial statements covering periods prior to adoption have not been restated. We determine the fair value of stock-based compensation using the Black-Scholes option pricing model, which requires us to make assumptions regarding future dividends, expected volatility of our stock, and the expected lives of the options. Under SFAS 123R, we also make assumptions regarding the number of options and the number of performance shares that will ultimately vest. The assumptions and calculations required by SFAS 123R are complex and require a high degree of judgment. Assumptions regarding the vesting of grants are accounting estimates that must be updated as necessary with any resulting change recognized as an increase or decrease in compensation expense at the time the estimate is changed. SFAS 123R also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows and operating cash outflows.

Deferred income taxes

We calculate income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between their carrying amounts for financial reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations.

In accordance with SFAS 109, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered from (a) reversals of deferred tax liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning strategies and (d) future taxable income. SFAS 109 places significant restrictions on the consideration of future taxable income in determining the realizability of deferred tax assets in situations where a company has experienced a cumulative loss in recent years. When sufficient negative evidence exists that indicates that full realization of deferred tax assets is no longer more likely than not, a valuation allowance is established as necessary against the deferred tax assets, increasing our income tax expense in the period that such conclusion is reached. Subsequently, the valuation allowance is adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the future, sufficient positive evidence, such as a sustained return to profitability, arises that would indicate that realization of deferred tax assets is once again more likely than not, any existing valuation allowance would be reversed as appropriate, decreasing our income tax expense in the period that such conclusion is reached.

At February 3, 2007 and May 5, 2007, we had adequate available net operating loss carryback potential to support the recorded balance of net deferred tax assets. Our loss before income taxes for the twenty-six weeks ended August 4, 2007 exceeded our loss carryback potential and was anticipated to result in a cumulative loss before income taxes for the three-year period ending February 2, 2008. Based on this factor and after evaluating other available evidence, we concluded that the realizability of net deferred tax assets was no longer more likely than not, and established a valuation allowance against our net deferred tax assets. We have scheduled the reversals of our deferred tax assets and deferred tax liabilities and have concluded that based on the anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities. As of August 2, 2008, the valuation allowance is $9.8 million.

We anticipate that until we re-establish a pattern of continuing profitability, in accordance with SFAS 109, we will not recognize any material income tax benefit in our statement of operations for future periods, as pretax profits or losses will generate tax effects that will be offset by decreases or increases in the valuation allowance with no net effect on the statement of operations. If a pattern of continuing profitability is re-established and we conclude that it is more likely than not that deferred income tax assets are realizable, we will reverse any remaining valuation allowance which will result in the recognition of an income tax benefit in the period that it occurs.

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48), as of February 4, 2007, the beginning of fiscal year 2007, and we have analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The adoption of FIN 48 had no effect on our financial statements for the thirteen weeks ended May 5, 2007. Our federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of August 2, 2008, we have not recorded any unrecognized tax benefits. Our policy, if we had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

Results of Operations

The following table sets forth our operating results, expressed as a percentage of sales, for the periods indicated.


	Thirteen			Thirteen			Twenty-			Twenty-
	Weeks			Weeks			six Weeks			six Weeks
	Ended			Ended			Ended			Ended
	August 4,			August 2,			August 4,			August 2,
	2007			2008			2007			2008
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of merchandise sold, occupancy and buying expense		77.9			70.4			73.1			72.3

Gross profit		22.1			29.6			26.9			27.7
Selling expense		26.7			23.4			25.3			24.0
General and administrative expense		10.5			9.2			9.8			9.6
Loss on disposal of property and equipment		—			0.1			0.1			0.3
Impairment of long-lived assets		1.8			—			0.8			—

Operating loss		(16.9	)		(3.1	)		(9.1	)		(6.2	)
Other income, net		0.1			0.1			0.1			0.1
Interest expense		(1.0	)		(1.7	)		(0.8	)		(1.8	)

Loss before income taxes		(17.8	)		(4.7	)		(9.8	)		(7.9	)
Provision for income taxes		3.0			0.5			0.8			0.3

Net loss		(20.8	)%		( 5.2	)%		(10.6	)%		(8.2	)%

The following table sets forth our number of stores at the beginning and end of each period indicated and the number of stores opened and closed during each period indicated.

Thirteen

Twenty-

Weeks

six Weeks

Ended

August 4,

August 2,

August 4,

August 2,

2007

2008

2007

2008

Number of stores at beginning of period

258

249

257

249

Stores opened during period

Stores closed during period

)

Number of stores at end of period

257

243

257

243

Thirteen Weeks Ended August 2, 2008 Compared to Thirteen Weeks Ended August 4, 2007

Net sales. Net sales increased to $43.6 million for the thirteen weeks ended August 2, 2008 (second quarter 2008) from $42.0 million for the thirteen weeks ended August 4, 2007 (second quarter 2007), an increase of $1.6 million or 3.8%. This increase reflected strong sandal sales. Our comparable store sales for the second quarter of 2008, including Internet and catalog sales, increased by 6.4% compared to an 18.3% decrease in comparable store sales in the second quarter of 2007. Average unit selling prices increased 12.7% while unit sales decreased 7.8% compared to the second quarter of 2007. Our Internet and catalog sales decreased 1.5% to $1.9 million. We did not issue a catalog during the second quarter of 2008 compared to one catalog issued in the second quarter of 2007.

Gross profit. Gross profit increased to $12.9 million in the second quarter of 2008 from $9.3 million in the second quarter of 2007, an increase of $3.6 million or 38.8%. As a percentage of sales, gross profit increased to 29.6% in the second quarter of 2008 from 22.1% in the second quarter of 2007 primarily as a result of strong regular price sales across all categories of footwear and reduced markdowns. The increase in gross profit is attributable to an increase of $3.1 million from improved gross margin percentage, an increase of $0.7 million from higher comparable store sales, partially offset by an decrease of $0.3 million from net store closings. Permanent markdown costs decreased to $2.9 million in the second quarter of 2008 from $4.0 million in the second quarter of 2007 .

Selling expense. Selling expense decreased to $10.2 million in the second quarter of 2008 from $11.2 million in the second quarter of 2007, a decrease of $1.0 million or 9.1%, and decreased as a percentage of sales to 23.4% from 26.7%. This decrease was primarily the result of $0.3 million of lower catalog production and mailing costs, $0.3 million decrease in store payroll expenses, and $0.2 million in lower store depreciation expense, due to a reduction in store count.

General and administrative expense. General and administrative expense decreased to $4.0 million in the second quarter of 2008 from $4.4 million in the second quarter of 2007, a decrease of $0.4 million or 8.6%, and decreased as a percentage of sales to 9.2% from 10.5%. The decrease was due primarily to a $0.3 million decrease in administrative salaries and benefits compared to the second quarter of 2007.

Impairment of long-lived assets . Based on the criteria in SFAS No. 144, Accounting for the Disposal of Long-Lived Assets , long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. During the second quarter of 2007 we recognized $0.8 million in noncash charges related to the impairment of fixed assets and other assets at specific underperforming stores. We recognized no impairment expense in the second quarter of 2008.

Interest expense. Interest expense increased to $0.7 million in the second quarter of 2008 from $0.4 million in the second quarter of 2007, an increase of $0.3 million. The increase in interest expense reflects the interest on our subordinated secured term loan entered into in February 2008 and our subordinated convertible debentures issued in June 2007. The increase was slightly offset by the decrease in our borrowings under our revolving credit facility compared to the prior year.

Income tax expense. We recognized income tax expense of $0.2 million in the second quarter of 2008 compared to income tax expense of $1.3 million in the second quarter of 2008. The income tax expense for the second quarter of 2007 reflects the establishment of a $4.1 million valuation reserve against net deferred tax assets as a result of accumulated pre-tax losses. The income tax expense in the second quarter of 2008 reflects differences between the alternative minimum tax recognized in the income tax provision and the income tax return filed for fiscal year 2007.

Net loss . We had a net loss of $2.3 million in the second quarter of 2008 compared to a net loss of $8.7 million in the second quarter of 2007.

Twenty-six Weeks Ended August 2, 2008 Compared to Twenty-six Weeks Ended August 4, 2007

Net sales. Net sales decreased to $87.1 million for the twenty-six weeks ended August 2, 2008 (first half 2008) from $91.2 million for the twenty-six weeks ended August 4, 2007 (first half 2007), a decrease of $4.1 million or 4.5%. This decrease reflected weak customer response to early spring offerings impacted by unseasonable cool weather and an early Easter holiday offset by strong sandal sales during the summer months. Our comparable store sales for the first half of 2008, including Internet and catalog sales, decreased by 3.1% compared to a 13.6% decrease in comparable store sales in the first half of 2007. Average unit selling prices increased 7.7% and unit sales decreased 11.3% compared to the first half of 2007. Our Internet and catalog sales decreased 6.3% to $4.3 million for the first half of 2008. We issued one catalog during the first half of 2008 compared to three catalogs issued in the first half of 2007.

Gross profit. Gross profit decreased to $24.1 million in the first half of 2008 from $24.6 million in the first half of 2007, a decrease of $0.5 million or 1.8%. As a percentage of sales, gross profit increased to 27.7% in the first half of 2008 from 26.9% in the first half of 2007. We attribute the decrease in gross profit dollars to the following components: a decrease of $0.5 million due to net store closings, a decrease of $0.6 million from lower comparable store sales, partially offset by our improved margin percentage of $0.7 million. Permanent markdown costs decreased to $5.8 million in the first half of 2008 from $7.0 million in the first half of 2007 as a result of stronger regular price sales across all categories of footwear and lower inventory levels in 2008.

Selling expense. Selling expense decreased to $20.9 million in the first half of 2008 from $23.1 million in the first half of 2007, a decrease of $2.2 million or 9.5%, and decreased as a percentage of sales to 24.0% from 25.3%. This decrease reflects a $1.0 million reduction in marketing and catalog expense as we published one catalog in the first half of 2008 down from three catalogs in the first half of 2007. Store salaries and commissions decreased $0.8 million and store depreciation expense decreased $0.3 million reflecting our reduced store count.

General and administrative expense. General and administrative expense decreased to $8.4 million in the first half of 2008 from $9.0 million in the first half of 2007, a decrease of $0.6 million or 6.2% and decreased as a percentage of sales to 9.7% from 9.8%.

Impairment of long-lived assets . Based on the criteria in SFAS No. 144, Accounting for the Disposal of Long-Lived Assets , long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. During the first half of 2007 we recognized $0.8 million in noncash charges related to the impairment of fixed assets and other assets at specific underperforming stores. We recognized no impairment expense in the first half of 2008.

Interest expense. Interest expense increased to $1.5 million in the first half of 2008 from $0.8 million in the first half of 2007, an increase of $0.7 million. The increase in interest expense reflects the interest on our subordinated secured term loan entered into in February 2008 and our subordinated convertible debentures issued in June 2007. The increase was slightly offset by the decrease in our borrowings under our revolving credit facility compared to the prior year.

Income tax expense. We recognized $0.2 million in income tax expense compared to income tax expense of $0.7 million in the first half of 2007. The income tax expense in the first half of 2008 reflects differences between the income tax provision and the income tax return filed for fiscal year 2007. The income tax expense for the first half of 2007 reflects the establishment of a $4.1 million valuation reserve against net deferred tax assets as a result of accumulated pre-tax losses.

Net loss . We had a net loss of $7.1 million in the first half of 2008 compared to a net loss of $9.7 million in the first half of 2007.

Seasonality and Quarterly Fluctuations

Our operating results are subject to significant seasonal variations. Our quarterly results of operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of these seasonal variances, in particular our principal selling seasons. We have five principal selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Sales and operating results in our third quarter are typically much weaker than in our other quarters. Quarterly comparisons may also be affected by the timing of sales promotions and costs associated with remodeling stores, opening new stores, or acquiring stores.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, capital expenditures and principal payments on our debt obligations. Historically, these cash needs have been met by cash flows from operations, borrowings under our revolving credit facility and sales of securities. As discussed below in “Financing Activities” the balance on our revolving credit facility fluctuates throughout the year as a result of our seasonal working capital requirements and our other uses of cash.

Our losses in the first half of fiscal year 2008 and fiscal year 2007 have had a significant negative impact on our financial position and liquidity. At August 2, 2008 we had negative working capital of $13.2 million and unused borrowing capacity under our revolving credit facility of $1.7 million and our shareholders’ equity had declined to $18.0 million. During fiscal year 2007, we began addressing our liquidity issues by amending our revolving credit facility to temporarily increase our unused borrowing capacity from April through September 2007, raising $3.6 million in net proceeds from a private placement of $4.0 million of aggregate principal amount of subordinated convertible debentures in June 2007 and terminating a long-term below market operating lease in exchange for receiving a $5.0 million cash payment in December 2007. We do not believe that we have other leases which could be terminated on substantially similar terms. In fiscal year 2008, we obtained $6.7 million in net proceeds from a $7.5 million subordinated secured term loan and the issuance of 350,000 shares of common stock. On May 9, 2008, we amended the subordinated secured term loan to reduce the financial covenant for minimum adjusted EBITDA for the first quarter of fiscal year 2008 and to defer principal payments until September 1, 2008. As of September 6, 2008, the balance on our revolving credit facility was $14.1 million and unused borrowing capacity was $0.7 million. We have reduced inventory levels below those of the prior year and have modified our business plan to reduce overhead and operating expenses. We also delayed most store expansion and remodeling projects until funding for such expansion can be generated from ongoing operating activities. See “Item 1. – Business – Risk Factors—Our operations and expansion plans could be constrained by our ability to obtain funds under the terms of our revolving credit facility” in our Annual Report on Form 10-K.

Our business plan for the remainder of fiscal year 2008 is based on moderate increases in comparable store sales continuing through the remainder of the year. Our business plan also reflects improved inventory management with a greater emphasis on core lines and on focused promotional activity. We expect this increased focus on inventory should improve overall gross margin performance compared to fiscal year 2007. We have limited our planned capital expenditures for fiscal year 2008 to opening two new stores and remodeling two stores. However, there is no assurance that the we will meet the sales or margin levels contemplated in the business plan.

We continue to face considerable liquidity constraints. Comparable store sales for the first five weeks of the third quarter increased 2.2%. Although we believe our business plan is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund operations. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. See “Item 1. Business — Risk Factors — If our sales trends do not improve, we could fail to maintain a liquidity position adequate to support our ongoing operations” in our Annual Report on Form 10-K.

Our $7.5 million three-year subordinated secured term loan includes certain financial covenants which require us to maintain specified levels of adjusted EBITDA and tangible net worth each fiscal quarter and provides for annual limits on capital expenditures (all as calculated in accordance with the loan agreement).

The minimum adjusted EBITDA covenant for the first quarter of fiscal year 2008 was reduced as part of the May 9, 2008 amendment. Based on the business plan for the remainder of the year and other actions, we believe that we will be able to comply with our financial covenants. However, given the inherent volatility in our sales performance, there is no assurance that we will be able to do so. Furthermore, in light of our recent sales results and the current state of the economy, there is a reasonable possibility that we may not be able to comply with the quarterly minimum adjusted EBITDA covenants. Failure to comply would be a default under the terms of our term loan and could result in the acceleration of the term loan, and possibly all of our debt obligations. If we are unable to comply with our financial covenants, we will be required to seek one or more amendments or waivers from our lenders. We obtained an amendment adjusting the first quarter adjusted EBITDA covenant and believe that we would be able to obtain any additional required amendments or waivers, but there is no assurance that we would be able to do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of our debt obligations and taking collection actions. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to obtain alternative financing as discussed above. As a result of these uncertainties, our long-term debt obligations have been classified as current liabilities. Please see “Item 1. Business — Risk Factors — The terms of our three-year subordinated secured term loan contain certain financial covenants with respect to our performance and other covenants that restrict our activities. If we are unable to comply with these covenants, the lender could accelerate the repayment of our indebtedness and subject us to a cross-default under our credit facility” in our Annual Report on Form 10-K.

Our independent registered public accounting firm’s report issued in our Annual Report on Form 10-K for fiscal year 2007 included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern, including recent losses and the potential inability to comply with financial covenants. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. See “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2007 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” in our Annual Report on Form 10-K.

The following table summarizes certain key liquidity measurements as of the dates indicated:


	August 4, 2007			February 2, 2008			August 2, 2008
Cash	$	192,576		$	159,671		$	145,075
Inventories		22,920,714			18,061,941			21,559,866
Total current assets		31,606,207			22,282,080			24,143,567
Property and equipment, net		49,245,995			43,810,776			40,165,809
Total assets		82,122,932			67,558,951			65,466,041
Revolving credit facility		16,056,368			11,184,379			10,923,753
Subordinated convertible debentures		4,000,000			4,000,000			4,000,000
Subordinated secured term loan		—			—			5,876,590
Total current liabilities		36,090,374			29,348,090			37,389,328
Total shareholders’ equity		31,788,597			24,040,100			18,006,239
Net working capital		(4,484,167	)		(7,066,010	)		(13,245,761	)
Unused borrowing capacity*		789,734			1,455,865			1,737,378


*		as calculated under the terms of our revolving credit facility

Operating activities

Cash used in operating activities was $5.1 million in the first half of 2008 compared to cash used in operating activities of $3.3 million in the first half of 2007. Besides our net loss of $7.1 million, the most significant use of cash in operating activities in the first half of 2008 primarily relates to a $3.5 million increase in inventory partially offset by significant noncash expenses ($4.0 million of depreciation, and $0.3 million of stock-based compensation expense). The most significant uses of cash in operating activities in the first half of 2007, relate to a net loss of $9.7 million, $3.5 million increase in prepaid expenses (principally due to the timing of rent payments relative to the end of our fiscal 2007 second quarter) partially offset by a $1.2 million reduction in inventory and significant noncash expenses ($4.3 million of depreciation, $0.8 million of impairment expense, $0.7 million of income tax expense, and $0.3 million of stock-based compensation expense).

Inventories at August 2, 2008 were $3.5 million, or 19.4% higher than at February 2, 2008 but were $1.4 million, or 5.9%, lower than at August 4, 2007. Although we believe that at August 2, 2008, inventory levels and valuations are appropriate given current and anticipated sales trends, there is always the possibility that fashion trends could change suddenly. We monitor our inventory levels closely and will take appropriate actions, including taking additional markdowns, as necessary, to maintain the freshness of our inventory.

Investing activities

Cash used in investing activities was $0.6 million in the first half of 2008 compared to $3.3 million for the first half of 2007. During each period, cash used in investing activities substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements for both new and remodeled stores.

We have limited our planned capital expenditures for fiscal year 2008 to opening two new stores and remodeling two stores. Our future capital expenditures will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. We continuously evaluate our future capital expenditure plans and adjust planned expenditures, as necessary, based on business conditions. As of September 6, 2008, we have opened two new stores in fiscal year 2008. We currently anticipate that our capital expenditures in fiscal year 2008, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $2.0 million. Capital expenditures for a new store typically range from $300,000 to over $500,000. We generally receive landlord allowances in connection with new stores ranging from $25,000 to $100,000. The average cash investment in inventory for a new store generally ranges from $45,000 to $75,000, depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as marketing, salaries, supplies, rent and utilities are expensed as incurred. Remodeling the average existing store into the new format typically costs approximately $350,000.

Financing activities

Cash provided by financing activities was $5.8 million in the first half of 2008 compared to $6.4 million for the first half of 2007. The principal sources of cash from financing activities in the first half of 2008 were the net proceeds of approximately $6.7 million received from the entry into the subordinated secured term loan and related issuance of 350,000 shares of common stock. The principal sources of cash in the first half of 2007 were the net proceeds of approximately $3.6 million from the placement of subordinated convertible debentures and net draws of $3.0 million on our revolving line of credit.

Issuance of Debt and Common Stock

On February 4, 2008 we consummated, a $7.5 million three-year subordinated secured term loan with Private Equity Management Group, Inc. (PEM), as arranger and administrative agent on behalf of the lender, and an affiliate of PEM, as the lender, and pursuant to a certain Second Lien Credit Agreement (Loan Agreement). The loan matures on February 1, 2011, with interest and principal installments originally required to be repaid over 36 months at an interest rate of 15% per annum. As additional consideration for the Loan, PEM received 350,000 shares of our common stock representing slightly less than 5% of our outstanding shares on a post-transaction basis. We also paid PEM an advisory fee of $300,000 and PEM’s costs and expenses.

We received aggregate gross proceeds of $7.5 million and net proceeds of approximately $6.7 million. We used the net proceeds initially to repay amounts owed under our senior revolving credit facility and for working capital purposes. We have broad obligations to indemnify, and pay the fees and expenses of PEM and the Lender in connection with, among other things, the enforcement, performance and administration of the Loan Agreement and the other loan documents.

The loan is secured by substantially all of our assets. The loan is subordinate to the Company’s loan with Bank of America, N.A., the Company’s senior lender, but it is senior to the Company’s $4 million in aggregate principal amount of subordinated convertible debentures due 2012.

Under the Loan Agreement, we are permitted to prepay the loan, subject to prepayment penalties which range between 3% and 1% of the aggregate principal balance of the loan. We are also required to make prepayments, subject to the senior subordination agreement, on the loan in certain circumstances, including generally if we sell property and assets outside the ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales of securities.

The Loan Agreement contains financial covenants which require us to maintain specified levels of tangible net worth and adjusted EBITDA (both as defined in the Loan Agreement) each fiscal quarter and annual limits on capital expenditures of no more than $1.5 million, $2 million and $3 million, respectively. The Loan Agreement also contains certain other restrictive covenants, including covenants that restrict our ability to use the proceeds of the Loan, to incur additional indebtedness, to pre-pay other indebtedness, to dispose of assets, to effect certain corporate transactions, including specified mergers and sales of all or substantially all of our assets, to change the nature of our business, to pay dividends (other than in the form of common stock dividends), as well as covenants that limit transactions with affiliates and prohibit a change of control.

For this purpose, a change of control is generally defined as, among other things, a person or entity acquiring beneficial ownership of more than 50% of our common stock, specified changes to our Board of Directors, sale of all or substantially all of our assets or certain recapitalizations. The Loan Agreement also contains customary representations and warranties and affirmative covenants, including provisions relating to providing reports, inspections and appraisal, and maintenance of property and collateral.

Upon the occurrence of an event of default under the Loan Agreement, the lender will be entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the senior subordination agreement, with the interest rate increasing to 17.5% per annum. The Loan Agreement generally provides for customary events of default, including default in the payment of principal or interest or other required payments, failure to observe or perform covenants or agreements contained in the transaction documents (excluding a registration rights agreement), materially breaching our senior loan agreement or the terms of our Debentures, generally failure to pay when due debt obligations (broadly defined, subject to certain exceptions) in excess of $1 million, specified events of bankruptcy or specified judgments against us.

We also entered into a registration rights agreement with PEM in respect of the shares issued to PEM. We were required to file a registration statement relating to the shares with the SEC by the earlier of 90 days of February 1, 2008 and five business days of the filing date of our annual report on Form 10-K for fiscal year 2007. We are also required to have the registration statement declared effective by the SEC within 120 days after February 1, 2008. If we did not meet these deadlines, or if the registration statement ceases to be effective for more than 60 days per year or more than 30 consecutive calendar days or if our common stock ceases to be traded on an eligible market as required, then we must generally pay PEM liquidated damages in an amount equal to 2% of the value of the registrable shares remaining (based on an initial aggregate value of $959,000) for each 30 day period (prorated for partial periods). We are required to use our reasonable best efforts to keep the registration statement continuously effective, subject to certain exceptions, until the earlier of all of the registrable securities being sold or ceasing to be registrable under the agreement, or February 1, 2010. We are required to pay all costs of preparing, filing and maintaining the effectiveness of the registration statement. We also have certain other ongoing obligations, including providing PEM specified notices and certain information, indemnifying PEM for certain liabilities and using reasonable best efforts to timely file all required filings with the SEC and make and keep current public information about us.

On May 9, 2008, we entered into an amendment to the subordinated secured term which modified the first quarter 2008 minimum adjusted EBITDA financial covenant, deferred principal payments until September 1, 2008 and re-amortized the remaining principal payments. As consideration for the amendment, we issued 50,000 additional shares of common stock. The amendment also modified the terms of the registration rights agreement by adding the 50,000 additional shares to the registration obligations, changing the date on which we were required to file the registration statement, to May 12, 2008, and increased the specified aggregate value on which liquidated damages would initially be computed to $1,096,000 from the initial specified value of $959,000. Based on the updated specified value, as of August 2, 2008, the maximum amount of liquidated damages that we could be required to pay would have been $394,560, which represents 18 potential monthly payments of $21,920. We filed the required registration statement on May 9, 2008 and the registration statement was declared effective by the SEC on May 21, 2008. We have not recorded a liability in connection with the registration rights agreement because, in accordance with SFAS No. 5, Accounting for Contingencies , we have concluded that it is not probable that we will make any payments under the liquidated damages provisions of the registration rights agreement.

Revolving Credit Facility

We have a secured revolving credit facility with Bank of America, N.A. (successor-by-merger to Fleet Retail Finance Inc.). with a revolving credit ceiling of $40.0 million with a maturity date of August 31, 2010. Amounts borrowed under the facility bear interest at a rate equal to the base rate (as defined in the agreement), which was 5.0% per annum as of August 2, 2008, 6.0% per annum as of February 2, 2008 and 8.25% annum as of August 4, 2007. Following the occurrence of any event of default, the interest rate may be increased by an additional two percentage points. The revolving credit facility also allows us to apply an interest rate based on LIBOR (London Interbank Offered Rate, as defined in the agreement) plus a margin rate of 1.75% to 2.25% per annum to a designated portion of the outstanding balance as set forth in the agreement. The aggregate amount that we may borrow under the agreement at any time is further limited by a formula, which is based substantially on our inventory level but cannot be greater than the revolving credit ceiling. The agreement is secured by substantially all of our assets. In connection with the administration of the agreement, we are required to pay a facility fee of $2,000 per month. In addition, an unused line fee of 0.25% per annum is payable monthly based on the difference between the revolving credit ceiling and the average loan balance under the agreement. If contingencies related to early termination of the revolving credit facility were to occur, or if we were to request and receive an accommodation from the lender in connection with the facility, we may be required to pay additional fees.

Our revolving credit facility includes financial and other covenants relating to, among other things, use of funds under the facility in accordance with our business plan, prohibiting a change of control, including any person or group acquiring beneficial ownership of 40% or more of our common stock or our combined voting power (as defined in the revolving credit facility), maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase of our stock and restricting certain acquisitions. In the event that we were to violate any of these covenants, or if other indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or more of our leases could be terminated (other than solely as the result of certain sales of common stock), the lender would have the right to accelerate repayment of all amounts outstanding under the agreement, or to commence foreclosure proceedings on our assets. We were in compliance with these covenants as of August 2, 2008 and expect to remain in compliance throughout fiscal year 2008 based on the expected execution of our business plan.

We had balances under our revolving credit facility of $10.9 million, $11.2 million and $16.1 million as of August 2, 2008, February 2, 2008, and August 4, 2007, respectively. We had approximately $1.7 million, $1.5 million and $0.8 million in unused borrowing capacity calculated under the provisions of our revolving credit facility as of August 2, 2008, February 2, 2008, and August 4, 2007, respectively. During the first half of fiscal years 2008 and 2007, the highest outstanding balances on our revolving credit facility were $13.3 million and $17.5 million, respectively. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.

Subordinated Convertible Debentures

On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated convertible debentures (the “Debentures”) to seven accredited investors in a private placement generating net proceeds of approximately $3.6 million, which were used to repay amounts owed under our revolving credit facility. The Debentures are nonamortizing, bear interest at a rate of 9.5% per annum, payable semi-annually on each June 30 and December 31, and mature on June 30, 2012. Investors included corporate directors Andrew N. Baur and Scott C. Schnuck, an entity affiliated with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison.

The Debentures are convertible into shares of common stock at any time. The initial conversion price was $9.00 per share. The conversion price, and thus the number of shares into which the Debentures are convertible, is subject to anti-dilution and other adjustments. If we distribute any assets (other than ordinary cash dividends), then generally each holder is entitled to receive a like amount of such distributed property. In the event of a merger, consolidation, sale of substantially all of our assets, or reclassification or compulsory share exchange, then upon any subsequent conversion each holder will have the right to either the same property as it would have otherwise been entitled or cash in an amount equal to 100% principal amount of the Debenture, plus interest and any other amounts owed. The Debentures also contain a weighted average conversion price adjustment generally for future issuances, at prices less than the then current conversion price, of common stock or securities convertible into, or options to purchase, shares of common stock, excluding generally currently outstanding options, warrants or performance shares and any future issuances or deemed issuances pursuant to any properly authorized equity compensation plans. In accordance with rules of the Nasdaq, the Debentures contain limitations on the number of shares issuable pursuant to the Debentures regardless of how low the conversion price may be, including limitations generally requiring that the conversion price not be less than $8.10 per share for Debentures issued to advisory directors, corporate directors or the entity affiliated with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock in the transaction or such that following conversion, the total number of shares beneficially owned by each holder does not exceed 19.999% of our common stock. These limitations may be removed with shareholder approval.

As a result of the issuance of 350,000 shares of common stock in February 2008 in connection with our subordinated secured term loan, the conversion price of the Debentures decreased from $9.00 to $8.64, making the Debentures convertible into 462,962 shares of our common stock. As a result of the issuance of 50,000 shares of common stock in May 2008, the conversion price of the Debentures decreased from $8.64 to $8.59, making the Debentures convertible into 465,656 shares of our common stock.

The Debentures generally provide for customary events of default, which could result in acceleration of all amounts owed, including default in required payments, failure to pay when due, or the acceleration of, other monetary obligations for indebtedness (broadly defined) in excess of $1 million (subject to certain exceptions), failure to observe or perform covenants or agreements contained in the transaction documents, including covenants relating to using the net proceeds, maintaining legal existence, prohibiting the sale of material assets outside of the ordinary course, prohibiting cash dividends and distributions, share repurchases, and certain payments to our officers and directors. We generally have the right, but not the obligation, to redeem the unpaid principal balance of the Debentures at any time prior to conversion if the closing price of our common stock (as adjusted for stock dividends, subdivisions or combinations) is equal to or above $16.00 per share for each of 20 consecutive trading days and certain other conditions are met. We have also agreed to provide certain piggyback and demand registration rights, until two years after the Debentures cease to be outstanding, to the holders under the Securities Act of 1933 relating to the shares of common stock issuable upon conversion of the Debentures.

2005 Private Placement of Common Stock and Warrants

In connection with our 2005 private placement of common stock and warrants, we sold warrants to purchase 250,000 shares of common stock, subject to anti-dilution and other adjustments. The warrants have an exercise price of $10.18 per share and, subject to certain conditions, expire on April 8, 2010. We also issued warrants to purchase 125,000 shares of common stock at an exercise price of $10.18 through April 8, 2010 to the placement agent. In certain circumstances, a cashless exercise provision becomes operative for the warrants issued to the investors. In the event that the closing bid price of a share of our stock equals or exceeds $25.00 per share for 20 consecutive trading days, we have the ability to call the warrants, effectively forcing their exercise into common stock. The warrants issued to the placement agent generally have the same terms and conditions, except that the cashless exercise provision is more generally available and the warrants are not subject to a call provision. Through February 2, 2008, warrants underlying 112,500 shares of common stock had been exercised, generating net proceeds to us of $1,145,250. No warrants were exercised during the thirteen and twenty-six weeks ended August 2, 2008.

In connection with our 2005 private placement, we entered into a registration rights agreement wherein we agreed to make the requisite SEC filings to achieve and subsequently maintain the effectiveness of a registration statement covering the common stock sold and the common stock issuable upon exercise of the investor warrants and the placement agent warrants issued in connection with the private placement generally through April 8, 2008. Failure to file a required registration statement or to achieve or subsequently maintain the effectiveness of a required registration statement through the required time, subject to our right to suspend use of the registration statement in certain circumstances, would have subjected us to liquidated damages in an amount up to 1% of the $8,750,000 gross proceeds of the private placement for each 30 day period or pro rata for any portion thereof in excess of our allotted time. Our potential liability for liquidated damages with respect to this registration statement ended on April 8, 2008.

We estimated the grant date fair value of the 375,000 stock purchase warrants, including the placement agent warrants, issued in connection with the private placement to be $2,160,000 using the Black-Scholes formula assuming no dividends, a risk-free interest rate of 3.5%, expected volatility of 64%, and expected warrant life of five years. Because the warrants were issued in connection with the sale of common stock and we have no obligation to settle the warrants by any means other than through the issuance of shares of our common stock we have included the fair value of the warrants as a component of shareholders’ equity.

IPO Warrants

In connection with our 2004 initial public offering, we sold to the representatives of the underwriters and their designees warrants to purchase up to an aggregate of 216,000 shares of common stock at an exercise price equal to $12.7875 per share, subject to antidilution adjustments, for a purchase price of $0.0001 per warrant for the warrants. The warrant holders may exercise the warrants as to all or any lesser number of the underlying shares of common stock at any time during the four-year period commencing on February 10, 2005. Through August 2, 2008, warrants underlying 94,500 shares of common stock were tendered in cashless exercise transactions under which we issued 35,762 shares of common stock.

Off-Balance Sheet Arrangements

At August 2, 2008, February 2, 2008, and August 4, 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could otherwise have arisen if we had engaged in such relationships.

Contractual Obligations

The following table summarizes our contractual obligations as of August 2, 2008:


	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)	$	13,770,014	$	3,993,507	$	5,390,174	$	4,386,333	$	—
Capital lease obligations (2)		17,338		17,338		—		—		—
Operating lease obligations (3)		164,857,799		24,862,423		46,491,291		40,920,813		52,583,272
Purchase obligations (4)		30,682,674		30,277,774		285,233		119,667		—

Total	$	209,327,825	$	59,151,042	$	52,166,698	$	45,426,813	$	52,583,272


(1)		Includes payment obligations relating to our subordinated convertible debentures and to our subordinated secured term loan. These instruments are classified as current liabilities on our balance sheet.

(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

None.

Effect of Inflation

Overall, we do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. We cannot give assurance, however, that our business will not be affected by inflation in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Vice President — Finance, has evaluated the effectiveness of the Company’s 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 Company’s Chief Executive Officer and Vice President — Finance have concluded that, as of the end of such period, the Company’s 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 Company’s Chief Executive Officer and Vice President — Finance, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and Vice President — Finance, conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s second fiscal quarter ended August 2, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the Company’s second quarter of fiscal year 2008.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 2, 2008 the Company was served with a class action lawsuit filed in the United States District Court for the Central District of California by two former store managers. The store managers allege that they should have been classified as non-exempt employees under both the California Labor Code and the Fair Labor Standards Act. They seek an unspecified amount of damages. The store managers filed the lawsuit on behalf of California based store managers.

The Company will defend the plaintiffs’ anticipated effort to seek class certification. Furthermore, the Company will vigorously defend itself in the underlying lawsuit. The Company does not believe that this matter will have a material adverse effect on its business or financial condition. However, the Company cannot give assurance that this lawsuit will not have a material adverse effect on its results of operations in the period in which it is resolved.

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors disclosed in our Annual Report on Form 10-K for fiscal year 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The Company does not have any programs to repurchase shares of its common stock and no such repurchases were made during the twenty-six weeks ended August 2, 2008.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The annual meeting of shareholders of the Company was held on June 17, 2008.

(b) At the annual meeting of shareholders of the Company held on June 17, 2008, action was taken with respect to the election of all five directors of the Company: 4,415,299 shares were voted for Peter A. Edison, while authority was withheld with respect to 49,302 shares;; 4,348,363 shares were voted for Andrew N. Baur, while authority was withheld with respect to 116,238 shares; 4,348,363 shares were voted for Timothy F. Finley, while authority was withheld with respect to 116,238 shares; 4,415,399 shares were voted for Harry E. Rich, while authority was withheld with respect to 49,202 shares; and 4,242,063 shares were voted for Scott C. Schnuck, while authority was withheld with respect to 222,538 shares.

(c) Shareholders also ratified the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm: 4,449,158 shares were voted in favor, 15,443 shares were voted against, no shares abstained and there were no broker non-votes. None

ITEM 6. EXHIBITS

See Exhibit Index herein

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed, on its behalf by the undersigned thereunto duly authorized.

Date: September 10, 2008


	BAKERS FOOTWEAR GROUP, INC. (Registrant)
	By:	/s/ Peter A. Edison
	Peter A. Edison
	Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) Bakers Footwear Group, Inc. (On behalf of the Registrant)


	By:	/s/ Charles R. Daniel, III
	Charles R. Daniel, III
	Vice President - Finance, Controller, Treasurer, and Secretary (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description of Exhibit
3.1		Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).

3.2		Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).

4.1		Second Lien Credit Agreement dated February 1, 2008 (“Loan Agreement”) by and among the Company, and Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.2		Note evidencing amounts borrowed by the Company under the Loan Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.3		Security Agreement dated February 1, 2008 by and among the Company, Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.4		Subordination Agreement dated February 1, 2008 by and among the Company, Bank of America, N.A. and Private Equity Management Group, Inc., in its capacity as administrative agent for the Lender named therein (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.5		Subordination Agreement dated February 1, 2008 by and among the Company, Private Equity Management Group, Inc., in its capacity as administrative agent for the Lender named therein, and the subordinated creditors named therein (incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.6		Registration Rights Agreement dated February 1, 2008 by and among the Company and Private Equity Management Group, Inc. (incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.7		Fee Letter dated February 1, 2008 between Private Equity Management Group, Inc. and the Company (incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K dated February 1, 2008 (File No. 000-50563)).

4.8		Amendment Number 1 to Loan Documents dated May 9, 2008 by and among the Company, Private Equity Management Group, Inc. and the Lender named therein (incorporated by reference to Exhibit 4.8 to the Company’s Quarterly Report on Form 10-Q for the quarter year ended May 3, 2008 filed on June 17, 2008 (File No. 000-50563)).

4.9		Letter of Consent delivered to the Company and Private Equity Management Group, Inc. by Bank of America, N.A. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated May 8, 2008 (File No. 000-50563)).

11.1		Statement regarding computation of per share earnings (incorporated by reference from Note 8 to the unaudited interim financial statements included herein).

31.1		Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).

31.2		Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Principal Financial Officer).

32.1		Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer and the Principal Financial Officer).

Trending Now

Toplists

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

Bakers Footwear Grp. (MM) (BKRS) News

BKRS Bakers Footwear Grp. (MM)

Bakers Footwear Group Inc - Quarterly Report (10-Q)

10/09/2008 11:00am

Edgar (US Regulatory)

1 Year Bakers Footwear Chart

1 Month Bakers Footwear Chart

Your Recent History

Company

Business

Popular

Get The App