UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended May 1, 2010
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the transition period from
to
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Commission File Number: 000-50563
BAKERS FOOTWEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
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Missouri
(State or other jurisdiction of
incorporation or organization)
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43-0577980
(I.R.S. Employer Identification No.)
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2815 Scott Avenue,
St. Louis, Missouri
(Address of principal executive offices)
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63103
(Zip Code)
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(314) 621-0699
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þ
No
o
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
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Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Stock, par value $0.0001 per share, 7,384,056 shares issued and outstanding as of June 12,
2010.
BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKERS FOOTWEAR GROUP, INC.
CONDENSED BALANCE SHEETS
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May 2, 2009
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January 30, 2010
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May 1, 2010
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(Unaudited)
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(Unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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140,689
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$
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154,685
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$
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149,280
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Accounts receivable
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1,709,419
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1,387,358
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1,954,649
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Inventories
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22,610,030
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20,233,207
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23,248,317
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Prepaid expenses and other current assets
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1,278,864
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1,234,787
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1,000,263
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Total current assets
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25,739,002
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23,010,037
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26,352,509
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Property and equipment, net
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32,167,120
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24,757,395
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23,464,911
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Other assets
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1,011,933
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851,035
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770,942
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Total assets
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$
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58,918,055
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$
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48,618,467
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$
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50,588,362
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Liabilities and shareholders equity (deficit)
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Current liabilities:
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Accounts payable
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$
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8,771,260
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$
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10,138,635
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$
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13,217,226
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Accrued expenses
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8,190,144
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7,320,595
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8,063,352
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Subordinated secured term loan
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4,281,389
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2,785,112
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2,177,421
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Subordinated convertible debentures
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4,000,000
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4,000,000
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4,000,000
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Sales tax payable
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814,469
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1,152,277
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703,522
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Deferred income
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1,358,234
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1,366,252
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1,279,105
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Revolving credit facility
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13,835,294
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10,531,687
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13,277,150
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Total current liabilities
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41,250,790
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37,294,558
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42,717,776
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Accrued noncurrent rent liabilities
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9,666,818
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9,183,756
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9,099,492
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Shareholders equity (deficit):
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Preferred stock, $0.0001 par value, 5,000,000
shares authorized, no shares outstanding
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Common Stock, $0.0001 par value; 40,000,000
shares authorized, 7,305,856 shares
outstanding at May 2, 2009, 7,382,856 shares
outstanding at January 30, 2010 and
7,384,056 shares outstanding at May 1, 2010
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738
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738
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739
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Additional paid-in capital
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38,826,466
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39,279,600
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39,361,357
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Accumulated deficit
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(30,826,757
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(37,140,185
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(40,591,002
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Total shareholders equity (deficit)
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8,000,447
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2,140,153
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(
1,228,906
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Total liabilities and shareholders equity (deficit)
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$
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58,918,055
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$
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48,618,467
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$
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50,588,362
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See accompanying notes.
3
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Thirteen
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Thirteen
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Weeks Ended
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Weeks Ended
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May 2, 2009
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May 1, 2010
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Net sales
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$
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44,976,621
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$
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43,524,036
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Cost of merchandise sold, occupancy, and buying expenses
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32,280,181
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32,787,740
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Gross profit
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12,696,440
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10,736,296
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Operating expenses:
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Selling
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9,975,823
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9,804,288
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General and administrative
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4,339,640
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3,790,552
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Loss on disposal of property and equipment
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284,581
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51,669
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Operating loss
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(1,903,604
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(2,910,213
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Other income (expense):
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Interest expense
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(886,580
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(554,573
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Other, net
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21,516
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13,969
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Loss before income taxes
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(2,768,668
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(3,450,817
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Benefit from income taxes
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Net loss
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$
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(2,768,668
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$
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(3,450,817
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Net loss per common share
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$
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(0.39
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$
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(0.47
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See accompanying notes.
4
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)
(Unaudited)
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Common Stock
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Shares
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Additional
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Issued and
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Paid-In
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Accumulated
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Outstanding
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Amount
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Capital
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Deficit
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Total
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Balance at January 30, 2010
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7,382,856
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$
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738
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$
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39,279,600
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$
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(37,140,185
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$
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2,140,153
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Stock-based compensation expense
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81,374
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81,374
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Shares issued in connection
with exercise of stock options
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1,200
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1
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383
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384
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Net loss
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(3,450,817
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(3,450,817
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Balance at May 1, 2010
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7,384,056
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$
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739
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$
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39,361,357
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$
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(40,591,002
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$
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(1,228,906
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See accompanying notes.
5
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Thirteen
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Thirteen
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Weeks Ended
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Weeks Ended
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May 2, 2009
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May 1, 2010
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Operating activities
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Net loss
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$
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(2,768,668
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$
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(3,450,817
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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1,733,344
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1,497,100
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Accretion of debt discount
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151,607
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79,809
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Stock-based compensation expense
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127,207
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81,374
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Interest expense recognized for issuing common stock related to
amending the subordinated secured term loan
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192,500
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Loss on disposal of property and equipment
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284,581
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51,669
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Changes in operating assets and liabilities:
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Accounts receivable
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(336,032
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(403,921
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Inventories
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(1,633,678
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(3,015,110
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Prepaid expenses and other current assets
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(238,578
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234,524
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Prepaid income taxes
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(12,691
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Other assets
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(45,409
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80,093
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Accounts payable
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1,214,276
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3,078,591
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Accrued expenses and deferred income
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(63,988
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206,855
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Accrued rent liabilities
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(108,011
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(84,264
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Net cash used in operating activities
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(1,503,540
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(1,644,097
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Investing activities
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Purchase of property and equipment
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(155,379
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(420,990
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Proceeds from disposition of property and equipment
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1,335
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Net cash used in investing activities
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(155,379
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(419,655
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Financing activities
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Net advances under revolving credit facility
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2,352,432
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2,745,463
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Proceeds from exercise of stock options
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384
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Principal payments on subordinated secured term loan
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(687,500
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)
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(687,500
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Net cash provided by financing activities
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1,664,932
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2,058,347
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Net increase (decrease) in cash and cash equivalents
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6,013
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(
5,405
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Cash and cash equivalents at beginning of period
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134,676
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154,685
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Cash and cash equivalents at end of period
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$
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140,689
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$
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149,280
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Supplemental disclosures of cash flow information
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Cash paid for interest
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$
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380,835
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$
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359,891
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See accompanying notes.
6
BAKERS FOOTWEAR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
1. Basis of Presentation
The accompanying unaudited condensed financial statements contain all adjustments that
management believes are necessary to present fairly Bakers Footwear Group, Inc.s (the Companys)
financial position, results of operations and cash flows for the periods presented. Such
adjustments consist of normal recurring accruals. Certain information and disclosures normally
included in notes to financial statements have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. The Companys operations are
subject to seasonal fluctuations and, consequently, operating results for interim periods are not
necessarily indicative of the results that may be expected for other interim periods or for the
full year. The condensed financial statements should be read in conjunction with the audited
financial statements and the notes thereto contained in our Annual Report on Form 10-K for the
fiscal year ended January 30, 2010. The Company has evaluated subsequent events through the date
the financial statements were issued and filed with the Securities and Exchange Commission (SEC)
and has made disclosures of all material subsequent events in the notes to the unaudited interim
financial statements.
2. Liquidity
The Companys cash requirements are primarily for working capital, principal and interest
payments on debt obligations and capital expenditures. Historically, these cash needs have been met
by cash flows from operations, borrowings under the Companys revolving credit facility and sales
of securities. The balance on the revolving credit facility fluctuates throughout the year as a
result of seasonal working capital requirements and other uses of cash.
The Companys losses in the first quarter of fiscal year 2010 and fiscal years after 2005 have
had a significant negative impact on the Companys financial position and liquidity. As of May 1,
2010, the Company had negative working capital of $16.4 million, unused borrowing capacity under
its revolving credit facility of $1.4 million, and shareholders deficit of $1.2 million.
The Companys business plan for fiscal year 2010 continues to be based on mid-single digit
increases in comparable store sales for the remainder of the year, although comparable store sales
through June 12, 2010 are down 2.3%. Based on the business plan, the Company expects to maintain
adequate liquidity for the remainder of fiscal year 2010. The business plan reflects continued
focus on inventory management and on timely promotional activity. The plan also includes continued
control over selling, general and administrative expenses. The Company continues to work with its
landlords and vendors to arrange payment terms that are reflective of its seasonal cash flow
patterns in order to manage availability. The business plan for fiscal year 2010 reflects
improvement in cash flow, but does not indicate a return to profitability. However, there is no
assurance that the Company will achieve the sales, margin or cash flow contemplated in its business
plan.
In fiscal year 2008, the Company obtained net proceeds of $6.7 million from the entry into a
$7.5 million subordinated secured term loan due February 1, 2011. As of June 12, 2010, the balance
on this term loan was $2.0 million, with monthly principal and interest payments due through
February 1, 2011. Originally, the term loan agreement contained financial covenants requiring the
Company to maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the
agreement) measured each fiscal quarter. The Company has amended the loan agreement four times (May
2008, April 2009, September 2009 and March 2010) to modify these covenants in order to remain in
compliance. The March 2010 amendment completely eliminated these covenants for the remainder of the
term loan.
On May 28, 2010, subsequent to the end of the first quarter, the Company amended its senior
secured revolving credit facility. The amendment extended the maturity of the credit facility to
May 28, 2013, modified the calculation of the borrowing base, added a new adjusted EBITDA interest
coverage ratio covenant, added an obligation for the Company to extend the maturity of its
subordinated convertible debentures, and made other changes to the agreement. The Company incurred
fees and expenses of approximately $250,000 in connection with this amendment. The adjusted EBITDA
interest coverage ratio covenant requires that the ratio of the Companys adjusted EBITDA to its
interest expense (both as defined in the amendment) must be at least 1.0:1.0. The covenant will be
tested monthly on a rolling twelve month basis. The adjusted EBITDA calculation is substantially
similar to the calculation used previously in the Companys subordinated secured term loan. The
Company continues to closely monitor its availability and continues to be constrained by its
limited unused borrowing capacity. As of June 12, 2010, the balance on the revolving line of credit
was $10.5 million and unused borrowing capacity was $1.2 million.
7
Based on the Companys business plan for fiscal year 2010, the Company believes that it will
be able to comply with the monthly adjusted EBITDA coverage ratio. However, given the inherent
volatility in the Companys sales performance, there is no assurance that the Company will be able
to do so. In addition, in light of the Companys historical sales volatility and the current state
of the economy, the Company believes that there is a reasonable possibility that the Company may
not be able to comply with the financial covenants. Failure to comply would be a default under the
terms of the Companys revolving credit facility and could result in the acceleration of all of the
Companys debt obligations. If the Company is unable to comply with its financial covenants, it
will be required to seek one or more amendments or waivers from its lenders. The Company believes
that it would be able to obtain any required amendments or waivers, but can give no assurance that
it would be able to do so on favorable terms, if at all. If the Company is unable to obtain any
required amendments or waivers, the Companys lenders would have the right to exercise remedies
specified in the loan agreements, including accelerating the repayment of debt obligations and
taking collection action against the Company. If such acceleration occurred, the Company currently
has insufficient cash to pay the amounts owed and would be forced to obtain alternative financing.
As a result of these uncertainties, the Companys long-term debt obligations have been classified
as current liabilities.
The Company continues to face considerable liquidity constraints. Although the Company
believes the business plan is achievable, should the Company fail to achieve the sales or gross
margin levels anticipated, 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 its operations. In recognition of existing liquidity constraints, the Company
continues to look for additional sources of capital at acceptable terms. 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 the Company to
operate its business.
The Companys independent registered public accounting firms report issued in the Companys
most recent Annual Report on Form 10-K included an explanatory paragraph describing the existence
of conditions that raise substantial doubt about the Companys ability to continue as a going
concern, including recent losses and working capital deficiency. The financial statements do not
include any adjustments relating to the recoverability and classification of assets 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. Nasdaq Capital Market Delisting
As a result of the Companys failure to a maintain a minimum stockholders equity of $2.5
million as required by the listing rules of the Nasdaq Capital Market, the Company expects its
common stock to be delisted from the Nasdaq Capital Market in the near term, and imminent
suspension of trading pending action by Nasdaq.
The Company expects to have its common stock quoted on the OTC Bulletin Board or Pink
Sheets. However, a market maker must apply to register and quote the common stock on the OTC
Bulletin Board or Pink Sheets. The Company has held preliminary discussions with potential
market makers and believes that such market makers will be willing to do so. However, as this
process is not within the direct control of the Company, there is no assurance that the Companys
securities will be quoted on the OTC Bulletin Board or the Pink Sheets.
4. Subordinated Secured Term Loan
Effective February 4, 2008, the Company consummated a $7.5 million three-year subordinated
secured term loan (the Loan) and issued 350,000 shares of the Companys common stock as additional
consideration. The Loan matures on February 1, 2011, and requires 36 monthly payments of principal
and interest at an interest rate of 15% per annum. Net proceeds to the Company after transaction
costs were approximately $6.7 million. The Company used the net proceeds to repay amounts owed
under its senior revolving credit facility and for working capital purposes. The Loan is secured by
substantially all of the Companys assets and is subordinate to the Companys revolving credit
facility but has priority over the Companys subordinated convertible debentures.
Under the loan agreement, the Company is permitted to prepay the Loan, subject to prepayment
penalties which range between 2% and 1% of the aggregate principal balance of the Loan. The Company
is also required to make prepayments, subject to a senior subordination agreement (Senior
Subordination Agreement) related to the Companys senior revolving credit facility, on the Loan in
certain circumstances, including generally if the Company sells property and assets outside the
ordinary course of business, and upon receipt of certain extraordinary cash proceeds and upon sales
of securities.
On March 23, 2010, the Company amended the Loan to eliminate the
financial covenant for minimum adjusted EBITDA for the period February 1, 2009 to January 30, 2010
in order to maintain compliance with that covenant. The
8
amendment also eliminated the financial covenants relating to the Companys tangible net worth
(as defined in the Loan Agreement) and minimum adjusted EBITDA for the remaining term of the Loan.
Prior to the amendment described above, the Loan agreement contained financial covenants which
required 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 $1.0 million each for fiscal years 2009 and 2010.
Upon the occurrence of an event of default as defined in the loan agreement, the Lender will be
entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the Senior
Subordination Agreement, with the interest rate increasing to 17.5% per annum.
The Company allocated the net proceeds received in connection with this loan and the related
issuance of common stock based on the relative fair values of the debt and equity components of the
transaction. The fair value of the 350,000 shares of common stock issued was estimated based on the
actual market value of the Companys common stock at the time of the transaction net of a discount
to reflect that unregistered shares were issued and could not be sold on the open market until the
related required registration statement, covering these shares was declared effective by the SEC,
which occurred on May 21, 2008. 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 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 Loan and
allocated $715,000 to the value of the 350,000 shares of common stock. The Company accretes 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 recognizes such accretion as a component of interest expense.
Likewise, the Company is amortizing the related debt issuance costs using the effective interest
method and recognizes this amortization as a component of interest expense.
Scheduled principal payments, net of debt discount applied on the effective interest method
are $1,948,739 for the remainder of fiscal year 2010 subsequent to May 1, 2010, and a final
principal payment of $229,167 due on February 1, 2011.
5. Revolving Credit Facility
The Company has a revolving credit agreement with a commercial bank (Bank). This agreement
calls for a maximum line of credit of $30,000,000 subject to the calculated borrowing base as
defined in the agreement, which is based primarily on the Companys inventory level. The agreement
is secured by substantially all assets of the Company. The credit facility is senior to our
subordinated secured term loan and our subordinated convertible debentures. Interest is payable
monthly at the banks base rate plus 3.5%. An unused line fee of 0.75% per annum is payable
monthly based on the difference between the maximum line of credit and the average loan balance.
The Company had approximately $345,000, $1,900,000 and $1,435,000 of unused borrowing capacity
under the revolving credit agreement based upon the Companys borrowing base calculation as of May
2, 2009, January 30, 2010, and May 1, 2010. The agreement has certain restrictive financial and
other covenants relating to, among other things, use of funds under the facility in accordance with
the Companys business plan, prohibiting a change of control, including any person or group
acquiring beneficial ownership of 40% or more of the Companys common stock or combined voting
power (as defined in the credit facility), maintaining a minimum availability, prohibiting new
debt, restricting dividends and the repurchase of the Companys stock, and restricting certain
acquisition. The revolving credit agreement also provides that the Company can elect to fix the
interest rate on a designated portion of the outstanding balance as set forth in the agreement
based on the LIBOR (London Interbank Offered Rate) plus 4.0%.
On May 28, 2010, subsequent to the end of the first quarter, the Company amended its revolving
credit agreement. The amendment extended the maturity of the credit facility from January 31, 2011
to May 28, 2013, modified the calculation of the borrowing base, added a new adjusted EBITDA
interest coverage ratio covenant, added an obligation for the Company to extend the maturity of its
subordinated convertible debentures, and made other changes to the agreement. The Company incurred
fees and expenses of approximately $250,000 in connection with this amendment. The adjusted EBITDA
interest coverage ratio covenant requires that the ratio of the Companys adjusted EBITDA to its
interest expense (both as defined in the amendment) must be at least 1.0:1.0. The covenant will be
tested monthly on a rolling twelve month basis. The adjusted EBITDA calculation is substantially
similar to the calculation used previously in the Companys subordinated secured term loan.
9
6. 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, the subordinated convertible debentures have been
classified as current liabilities. The initial conversion price was $9.00 per share. The conversion
price is subject to anti-dilution and other adjustments, including a weighted average conversion
price adjustment for certain future issuances or deemed issuances of common stock at a lower price,
subject to limitations as required under rules of the Nasdaq Stock Market. The Company can redeem
the unpaid principal balance of the debentures if the closing price of the Companys common stock
is at least $16.00 per share, subject to the adjustments and conditions in the debentures.
The debentures contain a weighted average conversion price adjustment that is triggered by
issuances or deemed issuances of the Companys common stock. As a result of the issuance of the
shares described in Note 4, 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 and on April 9, 2009 the weighted average
conversion price of the debentures decreased from $8.59 to $8.31.
On April 20, 2010, the Company amended its subordinated convertible debentures and the
related Subordinated Convertible Debenture Purchase Agreement. The amendments were made to add the
OTC Bulletin Board quotation system, the electronic quotation system operated by Pink OTC Markets
Inc., or any other electronic quotation system to the definition of Eligible Market in the
debenture documents. The debenture amendments also modify the definition of an event of default
such that an event of default would no longer occur if the Companys stock is not listed or quoted,
or is suspended from trading, on an Eligible Market for a period of five trading days.
On February 1, 2009, the Company adopted updated FASB guidance in ASC 815 Derivatives and
Hedging related to determining whether an instrument (or embedded feature) is indexed to an
entitys own stock and established a two-step process for making such determination. There was no
significant financial impact to the Company as a result of adopting this guidance. Beginning
February 1, 2009, the Company accounts separately for the fair value of the conversion feature of
the convertible debentures. As of February 1, 2009 and January 30, 2010, the Company determined
that the fair value of the conversion feature was de minimis. Significant future increases in the
value of the Companys common stock would result in an increase in the fair value of the conversion
feature which would result in expense recognition in future periods.
7. Income Taxes
In accordance with ASC 740,
Income Taxes,
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. There are significant restrictions on the consideration of future taxable income in
determining the realizability of deferred tax assets in situations where a company has experienced
a cumulative loss in recent years. When sufficient negative evidence exists that indicates that
full realization of deferred tax assets is no longer more likely than not, a valuation allowance is
established as necessary against the deferred tax assets, increasing the Companys income tax
expense in the period that such conclusion is reached. Subsequently, the valuation allowance is
adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the
future, sufficient positive evidence, such as a sustained return to profitability, arises that
would indicate that realization of deferred tax assets is once again more likely than not, any
existing valuation allowance would be reversed as appropriate, decreasing the Companys income tax
expense in the period that such conclusion is reached.
The Company has concluded that the realizability of net deferred tax assets is unlikely
and therefore maintains a valuation allowance against net deferred tax assets. As of May 1, 2010,
the Company increased the valuation allowance to $17,683,112. The Company has scheduled the
reversals of its deferred tax assets and deferred tax liabilities and has concluded that based on
the anticipated reversals a valuation allowance is necessary only for the excess of deferred tax
assets over deferred tax liabilities.
The balance of prepaid income taxes at May 1, 2010, consists of required state estimated
income tax payments. As of May 1, 2010, the Company has approximately $25.5 million of net
operating loss carryforwards that expire in 2022 available to offset future taxable income.
10
Significant components of the provision for (benefit from) income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
May 2, 2009
|
|
|
May 1, 2010
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(578,513
|
)
|
|
$
|
(857,120
|
)
|
State and local
|
|
|
(130,876
|
)
|
|
|
(187,864
|
)
|
|
|
|
|
|
|
|
Total current
|
|
|
(709,389
|
)
|
|
|
(1,044,984
|
)
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(295,596
|
)
|
|
|
(232,445
|
)
|
State and local
|
|
|
(53,745
|
)
|
|
|
(42,263
|
)
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(349,341
|
)
|
|
|
(274,708
|
)
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
1,058,730
|
|
|
|
1,319,692
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The differences between income tax expense calculated at the statutory U.S. federal income tax
rate of 35% and the amount reported in the statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
May 2, 2009
|
|
|
May 1, 2010
|
|
Federal income tax at statutory rate
|
|
$
|
(969,034
|
)
|
|
$
|
(1,207,786
|
)
|
Impact of graduated Federal rates
|
|
|
27,687
|
|
|
|
34,508
|
|
State and local taxes, net of federal income taxes
|
|
|
(122,441
|
)
|
|
|
(152,607
|
)
|
Change in valuation allowance
|
|
|
1,058,730
|
|
|
|
1,319,692
|
|
Permanent differences
|
|
|
5,058
|
|
|
|
6,193
|
|
|
|
|
|
|
|
|
Total provision for (benefit from) income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Deferred income taxes arise from temporary differences in the recognition of income and
expense for income tax purposes. Deferred income taxes were computed using the liability method and
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax purposes.
Components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2, 2009
|
|
|
January 30, 2010
|
|
|
May 1, 2010
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
8,042,038
|
|
|
$
|
8,894,200
|
|
|
$
|
9,939,184
|
|
Vacation accrual
|
|
|
389,376
|
|
|
|
396,524
|
|
|
|
401,205
|
|
Inventory
|
|
|
1,271,896
|
|
|
|
989,396
|
|
|
|
1,138,178
|
|
Stock-based compensation
|
|
|
937,845
|
|
|
|
1,116,518
|
|
|
|
1,148,254
|
|
Accrued rent
|
|
|
3,770,059
|
|
|
|
3,581,665
|
|
|
|
3,548,802
|
|
Property and equipment
|
|
|
|
|
|
|
1,496,584
|
|
|
|
1,668,187
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
14,411,214
|
|
|
|
16,474,887
|
|
|
|
17,843,810
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
224,513
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
231,965
|
|
|
|
111,467
|
|
|
|
160,698
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
456,478
|
|
|
|
111,467
|
|
|
|
160,698
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(13,954,736
|
)
|
|
|
(16,363,420
|
)
|
|
|
(17,683,112
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys federal income tax returns subsequent to the fiscal year ended January 1, 2005
remain open. As of May 1, 2010, the Company has not recorded any unrecognized tax benefits. The
Companys policy, if it had unrecognized benefits, is to recognize accrued interest and penalties
related to unrecognized tax benefits as interest expense and other expense, respectively.
8. Stock-Based Compensation
During the thirteen weeks ended May 1, 2010, the Company issued 227,000 nonqualified stock
options with a weighted average exercise price of $2.50. These options are exercisable in equal
annual installments of 20% on or after each of the first five years from
11
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 stock options granted, their grant-date weighted-average fair value, and the
significant assumptions used to determine fair-value during the thirteen weeks ended May 2, 2009
and May 1, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
May 2, 2009
|
|
|
May 1, 2010
|
|
Options granted
|
|
|
72,000
|
|
|
|
227,000
|
|
Weighted-average fair value of options granted
|
|
$
|
0.33
|
|
|
$
|
1.96
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.2
|
%
|
|
|
2.8
|
%
|
Expected volatility
|
|
|
54
|
%
|
|
|
97
|
%
|
Expected option life
|
|
6 years
|
|
|
6 years
|
|
9. Earnings 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
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
May 2, 2009
|
|
|
May 1, 2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,768,668
|
)
|
|
$
|
(3,450,817
|
)
|
|
|
|
|
|
|
|
Numerator for loss per share
|
|
|
(2,768,668
|
)
|
|
|
(3,450,817
|
)
|
|
|
|
|
|
|
|
Interest expense related to convertible debentures
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per share
|
|
$
|
(2,768,668
|
)
|
|
$
|
(3,450,817
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted average shares
|
|
|
7,163,779
|
|
|
|
7,383,076
|
|
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
|
|
|
7,163,779
|
|
|
|
7,383,076
|
|
|
|
|
|
|
|
|
The diluted earnings per share calculation for the thirteen weeks ended May 1, 2010 excludes
37,444 incremental shares related to outstanding stock options and 481,348 incremental shares
underlying convertible debentures because they are antidilutive. The diluted earnings per share
calculation for the thirteen weeks ended May 2, 2009 excludes 4,765 incremental shares related to
outstanding stock options and 469,623 incremental shares underlying convertible debentures because
they are antidilutive.
10. Commitments and Contingencies
The Company has certain contingent liabilities resulting from litigation and claims incident
to the ordinary course of business. Management believes the probable resolution of such
contingencies will not materially affect the financial position or results of operations of the
Company. The Company, in the ordinary course of store construction and remodeling, is subject to
mechanics liens on the unpaid balances of the individual construction contracts. The Company
obtains lien waivers from all contractors and subcontractors prior to or concurrent with making
final payments on such projects.
12
11. Fair Value of Financial Instruments
Effective with the second quarter of fiscal 2009, the Company adopted the provisions of ASC
825
Financial Instruments
related to interim disclosures about fair value of financial instruments.
This guidance requires disclosures regarding fair value of financial instruments in interim
financial statements, as well as in annual financial statements. The adoption had no impact on the
Companys financial statements other than additional disclosures.
|
|
|
|
|
|
|
|
|
|
|
May 2, 2009
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
140,689
|
|
|
$
|
140,689
|
|
Revolving credit facility
|
|
|
13,835,294
|
|
|
|
13,835,294
|
|
Subordinated secured term loan
|
|
|
4,281,389
|
|
|
|
4,256,065
|
|
Subordinated convertible debentures
|
|
|
4,000,000
|
|
|
|
2,400,709
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2010
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
154,685
|
|
|
$
|
154,685
|
|
Revolving credit facility
|
|
|
10,531,687
|
|
|
|
10,531,687
|
|
Subordinated secured term loan
|
|
|
2,785,112
|
|
|
|
2,811,386
|
|
Subordinated convertible debentures
|
|
|
4,000,000
|
|
|
|
2,578,638
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2010
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
149,280
|
|
|
$
|
149,280
|
|
Revolving credit facility
|
|
|
13,277,150
|
|
|
|
13,277,150
|
|
Subordinated secured term loan
|
|
|
2,177,421
|
|
|
|
3,957,899
|
|
Subordinated convertible debentures
|
|
|
4,000,000
|
|
|
|
2,779,197
|
|
The carrying amount of cash equivalents approximates fair value because of the short maturity
of those instruments. The carrying amount of the revolving credit facility approximates fair value
because the facility has a floating interest rate. The fair values of the subordinated secured term
loan and the subordinated convertible debentures have been estimated based on current rates
available to the Company for similar debt of the same maturity.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys unaudited condensed
financial statements and notes thereto provided herein and the Companys audited financial
statements and notes thereto in our annual report on
Form 10-K
for the fiscal year ended January
30, 2010. The following Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in the forward-looking statements. The
factors that might cause such a difference also include, but are not limited to, those discussed in
our annual report on
Form 10-K
under Item 1. Business Cautionary Note Regarding Forward-Looking
Statements and Risk Factors and under Item 1. Business Risk Factors and those discussed
elsewhere in our Annual Report on
Form 10-K
and related notes thereto and elsewhere in this
quarterly report.
Overview
We are a national, mall-based, specialty retailer of distinctive footwear and accessories
targeting young women who demand quality fashion products. We feature private label and national
brand dress, casual and sport shoes, boots, sandals and accessories. As of May 1, 2010, we operated
239 stores, including 220 Bakers stores and 19 Wild Pair stores located in 36 states.
During the first quarter of fiscal year 2010, our net sales decreased 3.2% compared to the
first quarter of fiscal year 2009, reflecting an unfavorable response to our sandal assortments.
Comparable store sales in the first quarter of 2010 decreased 1.6%, compared to an increase of 4.8%
in the first quarter of 2009. Gross profit percentage decreased to 24.7% of sales in the first
quarter of 2010 compared to 28.2% in the first quarter of 2009. Our net loss for the first quarter
increased to $3.5 million from $2.8 million in the first quarter of 2009.
We incurred net losses of $9.1 million and $15.0 million in fiscal years 2009 and 2008. These
losses have had a significant negative impact on our financial position and liquidity. As of May 1,
2010, we had negative working capital of $16.4 million, unused borrowing capacity under our
revolving credit facility of $1.4 million, and a shareholders deficit of $1.2 million.
Our business plan for remainder of fiscal year 2010 is based on mid-single digit increases in
comparable store sales for the remainder of the year, although comparable store sales through June
12, 2010 are down 2.3%. Based on our business plan, we expect to maintain adequate liquidity for
the remainder of fiscal year 2010. The business plan reflects continued focus on inventory
management and on timely promotional activity. The plan also includes continued control over
selling, general and administrative expenses. We continue to work with our landlords and vendors to
arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage
availability. The business plan for fiscal year 2010 reflects improvement in cash flow, but does
not indicate a return to profitability. However, there is no assurance that we will achieve the
sales, margin or cash flow contemplated in our business plan.
In fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5
million three-year subordinated secured term loan due
February 1, 2011. As of June 12, 2010, the
balance on our term loan was $2.0 million, with monthly principal and interest payments due through
February 1, 2011. Originally, the term loan agreement contained financial covenants requiring us to
maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement)
measured each fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009,
September 2009 and March 2010) to modify these covenants in order to remain in compliance. The
March 2010 amendment completely eliminated these covenants for the remainder of the term loan.
On May 28, 2010, we amended our revolving credit agreement. The amendment extended the
maturity of the credit facility to May 28, 2013, modified the calculation of the borrowing base,
added a new adjusted EBITDA interest coverage ratio covenant, added an obligation for us to extend
the maturity of our subordinated convertible debentures, and made other changes to the agreement.
We incurred fees and expenses of approximately $250,000 in connection with this amendment. The
adjusted EBITDA interest coverage ratio covenant requires that the ratio of our adjusted EBITDA to
our interest expense (both as defined in the amendment) must be at least 1.0:1.0. The covenant
will be tested monthly on a rolling twelve month basis. The adjusted EBITDA calculation is
substantially similar to the calculation used previously in our subordinated secured term loan.
We continue to closely monitor our availability and continue to be constrained by our limited
unused borrowing capacity. As of June 12, 2010, the balance on our revolving line of credit was
$10.5 million and our unused borrowing capacity was $1.2 million.
Based on our business plan for fiscal year 2010, we believe that we will be able to comply
with the monthly adjusted EBITDA coverage ratio. However, given the inherent volatility in our
sales performance, there is no assurance that we will be able to do so. In
14
addition, in light of our historical sales volatility and the current state of the economy, we
believe that there is a reasonable possibility that we may not be able to comply with the financial
covenants. Failure to comply would be a default under the terms of the revolving credit facility
and could result in the acceleration of 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 believe that we would be able to obtain any required amendments or waivers, but can
give 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 debt obligations and
taking collection action against us. If such acceleration occurred, we currently have insufficient
cash to pay the amounts owed and would be forced to obtain alternative financing. As a result of
these uncertainties, our long-term debt obligations have been classified as current liabilities.
We continue to face considerable liquidity constraints. 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 our operations. In recognition of
existing liquidity constraints, we continue to look for additional sources of capital at acceptable
terms. 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.
As described in Note 3 to the financial statements and under Part II Item 1A. Risk
Factors We expect that our common stock will be suspended from trading on, and delisted from, Nasdaq shortly, which may
negatively impact the value of our common stock, decrease the ability of our shareholders or
potential shareholders to purchase or sell shares of our common stock and have a material adverse effect on our ability to obtain financing we expect that our common
stock will soon be delisted from Nasdaq. Delisting could limit our ability to raise capital from
the sale of securities.
Our independent registered public accounting firms report issued in our most recent Annual
Report on Form 10-K included an explanatory paragraph describing the existence of conditions that
raise substantial doubt about our ability to continue as a going concern, including our recent
losses and working capital deficiency. See Note 2 to our financial statements. Our financial
statements do not include any adjustments relating to the recoverability and classification of
assets carrying amounts or the amount of and classification of liabilities that may result should
we be unable to continue as a going concern. We have taken several steps that we believe will be
sufficient to allow us to continue as a going concern and to improve our liquidity, operating
results and financial condition.
For comparison purposes, we classify our stores as comparable or non-comparable. A new stores
sales are not included in comparable store sales until the thirteenth month of operation. Sales
from remodeled stores are excluded from comparable store sales during the period of remodeling. We
include our Internet and catalog sales (Multi-Channel 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 annually, generally during the month of January,
and adjust the recorded balance to reflect the results of the physical count. 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
15
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
Long-lived assets to be held and used are reviewed for impairment when events or
circumstances exist that indicate the carrying amount of those assets may not be recoverable. We
regularly analyze the operating results of our stores and assess the viability of under-performing
stores to determine whether they should be closed or whether their associated assets, including
furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment
tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate
start-up period, unusual nonrecurring events, and favorable trends, fixed assets of stores
indicated to be impaired are written down to fair value.
Stock-based compensation expense
We compensate certain employees with various forms of share-based payment awards and 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
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. We also make assumptions regarding the number of options and
the number of shares of restricted stock and performance shares that will ultimately vest. The
assumptions and calculations 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. 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 using the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized based on the net tax effects of temporary differences
between the carrying amounts of assets and liabilities 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.
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. Accounting standards place 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.
We have concluded that the realizability of net deferred tax assets is unlikely, and
maintain a full 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.
We anticipate that until we re-establish a pattern of continuing profitability, in accordance
with the applicable accounting guidance, we will not recognize any material income tax expense or
benefit in our statement of operations for future periods, as pretax profits or losses generally
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.
16
We regularly analyze filing positions in all of the federal and state jurisdictions where
required to file income tax returns, as well as all open tax years in these jurisdictions. Our
federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of
May 1, 2010, we have not record 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
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
May 2, 2009
|
|
|
May 1, 2010
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of merchandise sold, occupancy and buying expense
|
|
|
71.8
|
|
|
|
75.3
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28.2
|
|
|
|
24.7
|
|
Selling expense
|
|
|
22.2
|
|
|
|
22.5
|
|
General and administrative expense
|
|
|
9.7
|
|
|
|
8.7
|
|
Loss on disposal of property and equipment
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4.2
|
)
|
|
|
(6.6
|
)
|
Other income, net
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2.0
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6.2
|
)
|
|
|
(7.9
|
)
|
Benefit from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6.2
|
)%
|
|
|
(7.9
|
)%
|
|
|
|
|
|
|
|
The following table sets forth our number of stores at the beginning and end of each period
indicated and the number of stores opened and closed during each period indicated.
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
May 3, 2008
|
|
|
May 2, 2009
|
|
Number of stores at beginning of period
|
|
|
239
|
|
|
|
238
|
|
Stores opened during period
|
|
|
1
|
|
|
|
2
|
|
Stores closed during period
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
Number of stores at end of period
|
|
|
239
|
|
|
|
239
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended May 1, 2010 Compared to Thirteen Weeks Ended May 2, 2009
Net sales.
Net sales decreased to $43.5 million for the thirteen weeks ended May 1, 2010
(first quarter 2010) from $45.0 million for the thirteen weeks ended May 2, 2009 (first quarter
2009), a decrease of $1.5 million or 3.2%. During the quarter, sales were less than expected due to
weakness in demand for our sandal line. Our comparable store sales for the first quarter of 2010,
including multi-channel sales, decreased by 1.6% compared to a 4.8% increase in comparable store
sales in the first quarter of 2009. Our unit sales decreased 8.1% and our average unit selling
prices increased 4.7% compared to the first quarter of 2009. Our multi-channel sales decreased 4.2%
to $2.7 million.
Gross profit.
Gross profit decreased to $10.7 million in the first quarter of 2010 from $12.7
million in the first quarter of 2009, a decrease of $2.0 million or 15.4%. As a percentage of sales,
gross profit decreased to 24.7% in the first quarter of 2010 from 28.2% in the first quarter of
2009 as lower comparable store sales resulted in lower leveraging of buying and occupancy costs. We
attribute the decrease in gross profit to the following components: a decrease of $1.6 million from
reduced gross margin percentage, a decrease of $0.5 million from lower comparable store sales,
partially offset by an increase of $0.1 million of incremental gross profit from new stores. Total
markdown costs were $6.3 million in the first quarter of 2010 compared to $5.6 million in the first
quarter of 2009.
Selling expense.
Selling expense decreased to $9.8 million in the first quarter of 2010 from
$10.0 million in the first quarter of 2009, a decrease of $0.2 million or 1.7%, but increased as a
percentage of sales to 22.5% from 22.2%. This decrease was primarily the result of $0.2 million in
lower store depreciation expense.
General and administrative expense.
General and administrative expense decreased to $3.8
million in the first quarter of 2010 from $4.3 million in the first quarter of 2009, a decrease of
$0.5 million or 12.7%, and decreased as a percentage of sales to 8.7% from
17
9.7%. The decrease was primarily the result of $0.4 million of lower group health insurance
costs and a net $0.1 million decrease in professional fees and travel expenses.
Interest expense.
Interest expense decreased to $0.6 million in the first quarter of 2010 from
$0.9 million in the first quarter of 2009.
Net loss
. We had a net loss of $3.5 million, 7.9% of net sales, in the first quarter of 2010
compared to a net loss of $2.8 million, 6.2% of net sales, in the first quarter of 2009.
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, principal and interest payments on
our debt, and capital expenditures. 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 quarter of fiscal year 2010 and recent years have had a significant
negative impact on our financial position and liquidity. As of May 1, 2010, we had negative working
capital of $16.4 million, unused borrowing capacity under our revolving credit facility of $1.4
million, and negative shareholders equity of $1.2 million.
Our business plan for remainder of fiscal year 2010 is based on mid-single digit increases in
comparable store sales for the remainder of the year, although comparable store sales through June
12
, 2010 are down
2.3
%. Based on our business plan, we expect to maintain adequate liquidity for
the remainder of fiscal year 2010. The business plan reflects continued focus on inventory
management and on timely promotional activity. The plan also includes continued control over
selling, general and administrative expenses. We continue to work with our landlords and vendors to
arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage
availability. The business plan for fiscal year 2010 reflects improvement in cash flow, but does
not indicate a return to profitability. However, there is no assurance that we will achieve the
sales, margin or cash flow contemplated in our business plan.
In fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5
million three-year subordinated secured term loan due February 1, 2011. As of June
12
, 2010, the
balance on our term loan was $
2.0
million, with monthly principal and interest payments due through
February 1, 2011. Originally, the term loan agreement contained financial covenants requiring us to
maintain specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement)
measured each fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009,
September 2009 and March 2010) to modify these covenants in order to remain in compliance. The
March 2010 amendment completely eliminated these covenants for the remainder of the term loan. As
consideration for the initial loan and the May 2008 amendment thereto, we issued 400,000 shares of
our common stock and paid an advisory fee of $300,000 and costs and expenses. As consideration for
the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an
additional 250,000 shares of our common stock. We did not pay any fees in connection with the March
2010 amendment.
In order to obtain our senior lenders consent to the April 2009 and September 2009
amendments to our subordinated secured term loan, we amended our credit facility in those months
and paid additional fees and expenses. On May 28, 2010, we further amended our revolving credit
facility. The May 2010 amendment extended the maturity of the credit facility to May 28, 2013,
modified the calculation of the borrowing base, added a new adjusted EBITDA interest coverage ratio
covenant, added an obligation for us to extend the maturity of its subordinated convertible
debentures, and made other changes to the agreement. We incurred fees and expenses of
approximately $250,000 in connection with this amendment. The adjusted EBITDA interest coverage
ratio covenant requires that the ratio of our adjusted EBITDA to our interest expense (both as
defined in the amendment) must be at least 1.0:1.0. The covenant will be tested monthly on a
rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the
18
calculation used previously in the Companys subordinated secured term loan. We continue to
closely monitor our availability and continue to be constrained by our limited unused borrowing
capacity. As of June 12, 2010, the balance on our revolving line of credit was $10.5 million and
our unused borrowing capacity was $2.3 million.
Based on our business plan for fiscal year 2010, we believe that we will be able to comply
with the monthly adjusted EBITDA coverage ratio. However, given the inherent volatility in our
sales performance, there is no assurance that we will be able to do so. In addition, in light of
our historical sales volatility and the current state of the economy, we believe that there is a
reasonable possibility that we may not be able to comply with the financial covenants. Failure to
comply would be a default under the terms of our revolving credit facility and could result in the
acceleration of 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
believe that we would be able to obtain any required amendments or waivers, but can give 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 debt obligations and taking
collection action against us. If such acceleration occurred, we currently have insufficient cash to
pay the amounts owed and would be forced to obtain alternative financing. As a result of these
uncertainties, our long-term debt obligations have been classified as current liabilities. Please
see Part II Item 1A. Risk Factors The terms of our revolving credit facility 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, we would have to negotiate an
amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness.
We continue to face considerable liquidity constraints. 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 our operations. In recognition of
existing liquidity constraints, we continue to look for additional sources of capital at acceptable
terms. 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.
As described in Note 3 to the financial statements and under Part II Item 1A.
Risk Factors We expect that our common stock will be suspended
from trading on, and delisted
from, Nasdaq shortly, which may
negatively impact the value of our common stock, decrease the ability of our shareholders or
potential shareholders to purchase or sell shares of our common stock
and have a material adverse effect on our ability to obtain financing we expect that our common
stock will soon be delisted from Nasdaq. Delisting could limit our ability to raise capital from
the sale of securities.
Our independent registered public accounting firms report issued in our most recent
Annual Report on Form 10-K included an explanatory paragraph describing the existence of conditions
that raise substantial doubt about our ability to continue as a going concern, including our recent
losses and working capital deficiency. See Note 2 to our financial statements. Our financial
statements do not include any adjustments relating to the recoverability and classification of
assets carrying amounts or the amount of and classification of liabilities that may result should
we be unable to continue as a going concern. We have taken several steps that we believe will be
sufficient to allow us to continue as a going concern and to improve our liquidity, operating
results and financial condition. See Item 1. Business Risk Factors The report issued by our
independent registered public accounting firm on our fiscal year 2009 financial statements contains
language expressing substantial doubt about our ability to continue as a going concern in our
Annual Report on Form 10-K for the fiscal year ended January 30, 2010.
For comparison purposes, we classify our stores as comparable or non-comparable. A new
stores sales are not included in comparable store sales until the thirteenth month of operation.
Sales from remodeled stores are excluded from comparable store sales during the period of
remodeling. We include our Internet and catalog sales (Multi-Channel Sales) as one store in
calculating our comparable store sales.
19
The following table summarizes certain key liquidity measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2, 2009
|
|
|
January 30, 2010
|
|
|
May 1, 2010
|
|
Cash
|
|
$
|
140,689
|
|
|
$
|
154,685
|
|
|
$
|
149,280
|
|
Inventories
|
|
|
22,610,030
|
|
|
|
20,233,207
|
|
|
|
23,248,317
|
|
Total current assets
|
|
|
25,739,002
|
|
|
|
23,010,037
|
|
|
|
26,352,509
|
|
Property and equipment, net
|
|
|
32,167,120
|
|
|
|
24,757,395
|
|
|
|
23,464,911
|
|
Total assets
|
|
|
58,918,055
|
|
|
|
48,618,467
|
|
|
|
50,588,362
|
|
Accounts payable
|
|
|
8,771,260
|
|
|
|
10,138,635
|
|
|
|
13,217,226
|
|
Revolving credit facility
|
|
|
13,835,294
|
|
|
|
10,531,687
|
|
|
|
13,277,150
|
|
Subordinated convertible debentures
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Subordinated secured term loan
|
|
|
4,281,389
|
|
|
|
2,785,112
|
|
|
|
2,177,421
|
|
Total current liabilities
|
|
|
41,250,790
|
|
|
|
37,294,558
|
|
|
|
42,717,776
|
|
Total shareholders equity (deficit)
|
|
|
8,000,447
|
|
|
|
2,140,153
|
|
|
|
(1,228,906
|
)
|
Net working capital
|
|
|
(15,511,788
|
)
|
|
|
(14,284,521
|
)
|
|
|
(16,365,267
|
)
|
Unused borrowing capacity*
|
|
|
346,891
|
|
|
|
1,928,913
|
|
|
|
1,437,474
|
|
|
|
|
*
|
|
as calculated under the terms of our revolving credit facility
|
Operating activities
Cash used in operating activities was $1.6 million in the first quarter of 2010 compared to
$1.5 million in the first quarter of 2009. Besides our net loss of $3.5 million, the most
significant use of cash in operating activities in the first quarter of 2009 relates to a $3.0
million seasonal increase in inventory from the beginning of the year, and a $0.4 million increase
in accounts receivable offset by a $3.1 million increase in accounts payable and $0.2 million
increase in accrued expenses and deferred income. The most significant uses of cash in operating
activities in the first quarter of 2009, relate to a net loss of $2.8 million, a $1.6 million
seasonal increase in inventory from the beginning of the year, offset by a $1.2 million increase in
accounts payable.
Inventories at May 1, 2010 were $3.0 million higher than at January 30, 2010, and $0.6
million, or 2.8%, higher than at May 2, 2009. Although we believe that at May 1, 2010, 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 $0.4 million in the first quarter of 2010 compared to
$0.2 million for the first quarter of 2009. During each quarter, cash used in investing activities
substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements
for both new and remodeled stores.
As of June 12, 2010, we have opened two new stores and closed one store in fiscal year 2010.
We currently anticipate that our capital expenditures in fiscal year 2010, primarily related to new
stores, store remodelings, distribution and general corporate activities, will be approximately
$1.0 million.
Financing activities
Cash provided by financing activities was $2.1 million in the first quarter of 2010 compared
to $1.7 million for the first quarter of 2009. The principal source of cash in the first quarter of
2010 was the net draws of $2.7 million on our revolving line of credit partially offset by the
principal payments on the subordinated secured term loan. In the first quarter of fiscal year 2009,
the principal source of cash was the net draws of $2.4 million on our revolving line of credit
partially offset by the principal payments on the subordinated secured term loan.
Revolving Credit Facility
We have a $30 million senior secured revolving credit facility with Bank of America, N.A which
expires at the end of fiscal year 2010. On May 28, 2010, we amended our revolving credit agreement.
The amendment, extended the maturity of the credit facility to May 28, 2013, modified the
calculation of the borrowing base, added a new adjusted EBITDA interest coverage ratio covenant,
added an obligation for the Company to extend the maturity of its subordinated convertible
debentures by May 2012, added an early
20
termination fee, and made other changes to the agreement. The adjusted EBITDA interest
coverage ratio covenant requires that the ratio of our adjusted EBITDA to our interest expense
(both as defined in the amendment) must be at least 1.0:1.0. The covenant will be tested monthly
on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the
calculation used previously in our subordinated secured term loan.
Amounts borrowed under the facility continue to bear interest at a rate equal to the base rate
(as defined in the agreement) plus a margin amount between 3.0% and 3.5%. Under the agreement, the
base rate equals the greater of the banks prime rate, the federal funds rate plus 0.50% or the
Libor rate plus 1.0% (all as defined in the agreement).
The revolving credit facility also allows us to apply an interest rate based on Libor (as
defined in the agreement) plus a margin amount to a designated portion of the outstanding balance
as set forth in the agreement. The Libor margin (as defined in the agreement) ranges from 3.5% to
4.0%. Following the occurrence of any event of default, the bank may increase the rate by an
additional two percentage points.
The unused line fee is 0.75% per annum. The unused line fee is payable monthly based on the
difference between the revolving credit ceiling and the average loan balance under 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 of $30 million.
Amounts borrowed under the credit facility continue to be secured by substantially all of our
assets. If contingencies related to early termination of the revolving credit facility were to
occur, or if we request and receive an accommodation from the lender in connection with the
facility, we may be required to pay additional fees. We may be required to pay an early
termination fee of up to $150,000 under the May 2010 amendment in the event we terminate the
facility within 24 months.
The credit facility includes financial, reporting and other covenants relating to, among other
things, use of funds under the facility in accordance with the 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 combined voting power (as defined in the credit facility), maintaining a
minimum availability, prohibiting new debt, restricting dividends and the repurchase of our stock,
and restricting certain acquisitions. In the event that we violate any of these covenants,
including the monthly adjusted EBITDA interest coverage financial covenant or the obligation to
extend the maturity of our subordinated convertible debentures (both as described above), 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 a result of certain sales of our common
stock), the bank would have the right to accelerate repayment of all amounts outstanding under the
agreement, or to commence foreclosure proceedings on our assets.
We had balances under our revolving credit facility of $13.3 million, $10.5 million and $13.8
million as of May 1, 2010, January 30, 2010 and May 2, 2009, respectively. We had approximately
$1.4 million, $1.9 million and $0.3 million in unused borrowing capacity calculated under the
provisions of our revolving credit facility as of May 1, 2010, January 30, 2010, and May 2, 2009,
respectively. During the first quarters of fiscal years 2010 and 2009, the highest outstanding
balances on our revolving credit facility were $15.4 million and $15.7 million, respectively. We
primarily have used the borrowings on our revolving credit facility for working capital purposes
and capital expenditures.
Subordinated Secured Term Loan
We have a 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,
pursuant to a Second Lien Credit Agreement dated February 4, 2008. The loan matures on February 1,
2011. The loan is secured by substantially all of our assets. The loan is subordinate to our senior
secured credit facility with Bank of America, N.A., our senior lender, but it is senior to our $4
million in aggregate principal amount of subordinated convertible debentures due 2012.
Originally, the loan agreement contained financial covenants requiring us to maintain
specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement) each
fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009, September 2009
and March 2010) to modify these covenants in order to remain in compliance. The March 2010
amendment completely eliminated these covenants for the remainder of the term loan. As
consideration for the initial loan and the May 2008 amendment thereto, PEM received 400,000 shares
of our common stock, an advisory fee of $300,000 and PEMs costs and expenses. As consideration for
the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an
additional 250,000 shares of our common stock. We did not pay any fees in connection with the March
2010 amendment.
21
We entered into the loan in February 2008. At that time, we received aggregate gross
proceeds of $7.5 million and net proceeds of approximately $6.7 million from the term loan. We used
the net proceeds initially to repay amounts owed under our senior credit facility and for working
capital purposes. We also 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.
Under the loan agreement, we continue to be permitted to prepay the Loan, subject to a
prepayment penalty which is now 1% of the aggregate principal balance of the Loan. We are also
required to make prepayments, subject to our senior subordination agreement with PEM and our senior
lender, on the term 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 still contains a financial covenant which sets an annual limit of $1
million for capital expenditures. The loan agreement also contains certain other restrictive
covenants, including covenants that restrict our ability 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 the registration rights agreement), materially
breaching our credit facility with our senior lender or the terms of our subordinated convertible
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 have granted certain registration rights to PEM with respect to the initial 400,000 shares
described above, including the potential payments of liquidated damages in certain circumstances in
relating to the timing and effectiveness of the registration statement. As required, we filed the
registration statement at our expense and the SEC declared the registration statement effective
within the required time periods, and our potential liability for liquidated damages ended on
February 1, 2010. 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. We did not grant PEM any registration rights with respect to the 250,000
additional shares issued in connection with the April 2009 amendment to the term loan.
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
22
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 650,000 shares of common stock in connection with our
subordinated secured term loan, the conversion price of the Debentures decreased from $9.00 to
$8.31, making the Debentures convertible into 481,347 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. In April 2010,
the debenture documents were amended to remove our de-listing from the Nasdaq Stock Market as an
event of default. Please see Part II Item 1A. Risk Factors We expect that our common
stock will be suspended from trading on, and delisted from, Nasdaq shortly, which may negatively
impact the value of our common stock, decrease the ability of our shareholders or potential
shareholders to purchase or sell shares of our common stock, and have a material adverse effect on
our ability to obtain financing.
2005 Private Placement of Common Stock and Warrants
In connection with our 2005 private placement of common stock and warrants, we issued warrants
to purchase a total of 375,000 shares of common stock, subject to anti-dilution and other
adjustments. The warrants had an exercise price of $10.18 per share and contained cashless exercise
and call provisions. Through January 30, 2010, warrants underlying 112,500 shares of common stock
had been exercised, generating net proceeds to us of $1,145,250. On April 8, 2010, the remaining
262,500 warrants expired.
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. Through May 1, 2010, warrants
underlying 94,500 shares of common stock were tendered in cashless exercise transactions under
which we issued 35,762 shares of common stock. On February 10, 2009, all unexercised warrants
expired. Demand and piggyback registration rights ended on February 10, 2009 and February 10, 2010,
respectively.
Off-Balance Sheet Arrangements
At May 1, 2010, January 30, 2010, and May 2, 2009, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities or variable interest entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity,
market or credit risk that could otherwise have arisen if we had engaged in such relationships.
23
Contractual Obligations
The following table summarizes our contractual obligations as of May 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
3 -5 Years
|
|
|
5 Years
|
|
Long-term debt obligations(1)
|
|
$
|
7,415,132
|
|
|
$
|
2,837,743
|
|
|
$
|
4,577,389
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations (2)
|
|
|
130,421,655
|
|
|
|
24,672,278
|
|
|
|
44,726,429
|
|
|
|
34,992,588
|
|
|
|
26,030,360
|
|
Purchase obligations (3)
|
|
|
33,677,687
|
|
|
|
28,052,687
|
|
|
|
3,000,000
|
|
|
|
2,625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,514,474
|
|
|
$
|
55,562,708
|
|
|
$
|
52,303,818
|
|
|
$
|
37,617,588
|
|
|
$
|
26,030,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes principal and interest payments on our subordinated convertible debentures and our
subordinated secured term loan. As discussed in Note 2 to the financial statements, these
instruments are classified as current liabilities on our balance sheet.
|
|
(2)
|
|
Includes minimum payment obligations related to our store leases.
|
|
(3)
|
|
Includes merchandise on order, minimum royalty payments, and payment obligations relating to
store construction and miscellaneous service contracts.
|
Recent Accounting Pronouncements
None.
Impact of Inflation
Overall, we do not believe that inflation has had a material adverse impact on our business or
operating results during the periods presented. We cannot give assurance, however, that our
business will not be affected by inflation in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this report. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures
provided reasonable assurance that the disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act and in
accumulating and communicating such information to management, including the Companys Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal Control Over Financial Reporting.
The Companys management, with the participation of
the Companys Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
Companys internal control over financial reporting to determine whether any changes occurred
during the Companys first fiscal quarter ended May 1, 2010 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
Based on that evaluation, there has been no such change during the Companys first quarter of
fiscal year 2010.
24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various lawsuits and claims arising in the ordinary
course of business. Although the outcomes of these lawsuits and claims are uncertain, we do not
believe any of them will have a material adverse effect on our business, financial condition or
results of operations.
ITEM 1A. RISK FACTORS
The following risk factor disclosure is in addition to the risk factor disclosure in our
Annual Report on Form 10-K for the fiscal year ended January 30, 2010 previously filed with the
SEC. Please see the information set forth under Item 1. Business Cautionary Note Regarding
Forward-Looking Statements and Risk Factors and under Item 1. Business Risk Factors in our
most recently filed Annual Report on Form 10-K and those discussed elsewhere in our Annual Report
on Form 10-K and related notes thereto and elsewhere in this quarterly report.
We expect that our common stock will be suspended from trading on, and delisted from, Nasdaq
shortly, which may negatively impact the value of our common stock, decrease the ability of our
shareholders or potential shareholders to purchase or sell shares of our common stock, and have a
material adverse effect on our ability to obtain financing.
The Nasdaq Stock Market (Nasdaq) has minimum requirements that a company must meet in order
to remain listed on The Nasdaq Capital Market where our common stock is currently listed. These
requirements include maintaining a minimum stockholders equity of $2.5 million.
As previously reported, on December 14, 2009 we received a staff deficiency letter from Nasdaq
informing us that, based on our stockholders deficit as reported in our Quarterly Report on Form
10-Q filed on December 9, 2009, we did not meet, as of October 31, 2009, the $2,500,000 minimum
stockholders equity required for continued listing on the Nasdaq. In response to this letter, we
submitted a plan of compliance to Nasdaq. On January 21, 2010 Nasdaq granted us an extension until
March 29, 2010 to demonstrate compliance with this standard. On March 29, 2010, after we reported
our fourth quarter results showing stockholders equity of $2.1 million, we received a staff
deficiency letter from Nasdaq stating that the Company did not meet the minimum stockholders
equity requirement within the extension period. If we would not have appealed this determination,
our common stock would have been suspended from trading at the open of business on April 7, 2010
and our securities would have been removed from listing and registration on Nasdaq. We requested a
hearing on April 2, 2010, which was held on May 6, 2010. As a result of the hearing, Nasdaq gave
us until June 15, 2010 to demonstrate compliance with the
requirement, but we were not able to do so.
We do not expect to be granted any additional time to regain compliance.
As a result, we expect to receive this week, a notification from Nasdaq that our common stock
will be delisted from Nasdaq, and that within two business days of such notification, our common
stock will be suspended from trading on Nasdaq. We have no further plans to appeal the
determination. Thereafter, we expect that Nasdaq will complete the delisting process by filing a
Form 25-NSE Notification of Delisting with the SEC. There is no assurance that we will be ever
again listed on Nasdaq or on another national securities exchange.
Upon suspension of the trading of our common stock on Nasdaq,
we expect one or more market makers to quote our common stock on the Pink Sheets. In addition, we anticipate that our common stock
will begin trading on the OTC Bulletin Board, a regulated quotation service for trading in
over-the-counter equity securities. However, a market maker must apply to register and quote the
common stock for the OTC Bulletin Board in accordance with SEC Rule 15c2-11, and such application
on Form 211 must be cleared by the Financial Industry Regulatory Authority. We have held
preliminary discussions with potential market makers and believe that such market makers will be
willing to do so. Since this process is not within our direct control, however, there is no
assurance that our common stock will be quoted on the OTC Bulletin Board.
For trades of our common stock on the over-the-counter market, selling our common stock could
be more difficult because smaller quantities of shares would likely be bought and sold,
transactions could be delayed, security analysts coverage of us may be reduced, and our common
stock may trade at a lower market price than it otherwise would. In addition, in the event our
common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which
may discourage broker-dealers from effecting transactions in our common stock, further limiting the
liquidity of our common stock. Also, our shareholders would no longer have the benefit of Nasdaqs
restrictions on dilution and we may engage in potentially dilutive transactions without complying
with Nasdaqs shareholder approval rules.
25
The negative publicity surrounding the receipt of the notice from Nasdaq, suspension of
trading in our common stock in Nasdaq, and subsequent delisting will likely have a material adverse
effect on the price of our common stock, our ability to raise capital, whether debt or equity, and
will likely cause a negative perception of, and confidence in, us by our investors, customers,
vendors, creditors and employees. These factors could have a material adverse effect on the
trading price, liquidity, volatility, value and marketability of our common stock and could have a
material adverse effect on our ability to obtain adequate financing for the continuation of our
operations.
The terms of our revolving credit facility 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, we would have to negotiate an amendment to the loan agreement or the lender could
accelerate the repayment of our indebtedness.
Our revolving credit facility contains a financial covenant that requires us to maintain a
minimum ratio of adjusted EBITDA to interest expense (both as defined in the agreement) calculated
monthly on a rolling twelve month basis and includes other financial and customary covenants which,
among other things require us to maintain a minimum availability, restrict our business activities
and our ability to incur debt, make acquisitions, pay dividends, and repurchase our stock. We are
also required to extend the maturity of our subordinated convertible debentures to a date beyond
the maturity of the revolving credit facility.
There is no assurance that we will be able to comply with this financial covenant. In light of
our historical sales volatility and the current state of the economy, we believe that there is a
reasonable possibility that we may not be able to comply with our minimum adjusted EBITDA interest
coverage ratio covenant. In the event that we were to violate any of the covenants in our credit
facility, 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 a result of certain sales
of our common stock), the lender would have the right to accelerate repayment of all amounts
outstanding under the credit agreement, or to commence foreclosure proceedings on our assets. Any
acceleration in the repayment of our indebtedness or related foreclosure could adversely affect our
business.
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 thirteen weeks ended May 1, 2010.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. [RESERVED]
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Exhibit Index herein.
26
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: June 15, 2010
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BAKERS FOOTWEAR GROUP, INC.
(Registrant)
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By:
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/s/ Peter A. Edison
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Peter A. Edison
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Chairman of the Board, Chief Executive Officer
And President (Principal Executive Officer)
Bakers Footwear Group, Inc.
(On behalf of the Registrant)
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By:
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/s/ Charles R. Daniel, III
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Charles R. Daniel, III
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Executive Vice President and Chief Financial Officer,
Controller, Treasurer, and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
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27
EXHIBIT INDEX
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Exhibit No.
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Description
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3.1
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Restated Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K for the fiscal year ended
January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
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3.2
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Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the fiscal year ended January 3, 2004
filed on April 2, 2004 (File No. 000-50563)).
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4.1
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*Second Lien Credit Agreement dated February 1, 2008 (Loan Agreement) by and
among the Company, and Private Equity Management Group, Inc. and the Lender named
therein (incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K filed on October 14, 2009 (File No. 000-50563)).
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4.2
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Note evidencing amounts borrowed by the Company under the Loan Agreement
(incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form
8-K filed on February 4, 2008 (File No. 000-50563)).
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4.3
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Security Agreement dated February 1, 2008 by the Company and the Private Equity
Management Group, Inc., in its capacity as administrative agent for the Lender
Group, as defined therein (incorporated by reference to Exhibit 4.3 to the
Companys Quarterly Report on Form 10-Q filed on September 10, 2009 (File No.
000-50563)).
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4.4
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Subordination Agreement dated February 1, 2008 by and among the Company, Bank of
America, N.A. and Private Equity Management Group, Inc., in its capacity as
administrative agent for the Lender named therein (incorporated by reference to
Exhibit 4.4 to the Companys Current Report on Form 8-K filed on February 4, 2008
(File No. 000-50563)).
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4.5
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Subordination Agreement dated February 1, 2008 by and among the Company, Private
Equity Management Group, Inc., in its capacity as administrative agent for the
Lender named therein, and the subordinated creditors named therein (incorporated
by reference to Exhibit 4.5 to the Companys Current Report on Form 8-K filed on
February 4, 2008 (File No. 000-50563)).
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4.6
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Registration Rights Agreement dated February 1, 2008 by and among the Company and
Private Equity Management Group, Inc. (incorporated by reference to Exhibit 4.6
to the Companys Quarterly Report on Form 10-Q filed on September 10, 2009 (File
No. 000-50563)).
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4.7
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Fee Letter dated February 1, 2008 between Private Equity Management Group, Inc.
and the Company (incorporated by reference to Exhibit 4.7 to the Companys
Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
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4.8
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*Amendment Number 1 to Loan Documents dated as of May 9, 2008 by and among the
Company, Private Equity Management Group, Inc. and the Lender named therein
(incorporated by reference to Exhibit 4.8. to the Companys Quarterly Report on
Form 10-Q filed on September 10, 2009 (File No. 000-50563)).
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4.9
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Letter of Consent delivered to the Company and Private Equity Management Group,
Inc. by Bank of America, N.A. (incorporated by reference to Exhibit 4.3 to the
Companys Current Report on Form 8-K filed on May 9, 2008 (File No. 000-50563)).
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4.10
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Amendment Number 2 to Loan Documents dated April 9, 2009 by and among the
Company, Private Equity Management Group, Inc. and the Lender named therein
(incorporated by reference to Exhibit 4.10 to the Companys Current Report on
Form 8-K filed on April 15, 2009 (File No. 000-50563)).
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4.11
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Amendment Number 3 to Loan Documents dated as of September 3, 2009 by and among
the Company, Private Equity Management Group, Inc. and the Lender named therein
(incorporated by reference to Exhibit 4.11 to the Companys Quarterly Report on
Form 10-Q filed on September 10, 2009 (File No. 000-50563)).
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4.12
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Amendment Number 4 to Loan Documents dated March 23, 2010 by and among the
Company, Private Equity Management Group, Inc. and the Lender named therein
(incorporated by reference to Exhibit 4.12 to the Companys Current Report on
Form 8-K filed on March 25, 2010 (File No. 000-50563)).
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4.13
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Subordinated Convertible Debenture Purchase Agreement dated June 13, 2007 by and
among the Company and the Investors named therein (incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K filed on July 2, 2007
(File No. 000-50563)).
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28
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Exhibit No.
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Description
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4.14
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9.5% Subordinated Convertible Debentures issued by the Company to Investors on
June 26, 2007 (incorporated by reference to Exhibit 4.2 to the Companys Current
Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).
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4.15
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First Amendment to Subordinated Convertible Debentures and Subordinated
Convertible Debenture Purchase Agreement dated April 20, 2010 (incorporated by
reference to Exhibit 4.3 to the Companys Current Report on Form 8-K (File No.
000-50563), filed on April 20, 2010).
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10.1
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Summary of April 20, 2010 stock option grants to executive officers of the
Company (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K (File No. 000-50563), filed on April 20, 2010).
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10.2
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Form of Nonqualified Option Award Agreement under Bakers Footwear Group, Inc.
2003 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K (File No. 000-50563) filed on March 21,
2007).
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10.3
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Bakers Footwear Group, Inc. 2003 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.3 to the Companys Current Report on Form 8-K (File No.
000-50563), filed on March 21, 2007).
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10.4
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Letter to Peter Edison outlining 2010 bonus levels (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on Form 8-K (File No. 000-50563),
filed on April 20, 2010).
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10.5
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Letter to Joe VanderPluym outlining 2010 bonus levels (incorporated by reference
to Exhibit 10.5 to the Companys Current Report on Form 8-K (File No. 000-50563),
filed on April 20, 2010).
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10.6
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Letter to Mark Ianni outlining 2010 bonus levels (incorporated by reference to
Exhibit 10.6 to the Companys Current Report on Form 8-K (File No. 000-50563),
filed on April 20, 2010).
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10.7
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Letter to Stan Tusman outlining 2010 bonus levels (incorporated by reference to
Exhibit 10.7 to the Companys Current Report on Form 8-K (File No. 000-50563),
filed on April 20, 2010).
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10.8
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Letter to Charles R. Daniel, III outlining 2010 bonus levels (incorporated by
reference to Exhibit 10.8 to the Companys Current Report on Form 8-K (File No.
000-50563), filed on April 20, 2010).
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10.9
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Bakers Footwear Group, Inc. Cash Bonus Plan (incorporated by reference to Exhibit
10.2 of Amendment No. 3 to the Companys Registration Statement on Form S-1 filed
on January 8, 2004 (File No. 333-86332)).
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10.10
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Second Amended and Restated Loan and Security Agreement dated as of August 31,
2006 by and between Bank of America, N.A. and the Company (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
September 7, 2006 (File No. 000-50563)).
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10.11
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Amended and Restated Revolving Credit Note dated as of August 31, 2006 by and
between Bank of America, N.A. and the Company (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed on September 7,
2006 (File No. 000-50563)).
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10.12
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Waiver and Consent Agreement dated as of April 18, 2007 by and between Bank of
America, N.A. and the Company (incorporated by reference to Exhibit 10.14.2 to
the Companys Annual Report on Form 10-K for the fiscal year ended February 3,
2007 filed on April 24, 2007 (File No. 000-50563)).
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10.13
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First Amendment to Second Amended and Restated Loan and Security Agreement dated
as of May 17, 2007 by and between the Company and Bank of America, N.A.
(incorporated by reference to Exhibit 10.4 to the Companys Current Report on
Form 8-K filed on May 18, 2007 (File No. 000-50563)).
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10.14
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Extension Agreement dated June 26, 2007 between the Company and Bank of America,
N.A. (incorporated by reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K filed on July 2, 2007 (File No. 000-50563)).
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10.15
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Second Amendment to Second Amended and Restated Loan and Security Agreement dated
February 1, 2008 by and among the Company and Bank of America, N.A. (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
February 4, 2008 (File No. 000-50563)).
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10.16
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Third Amendment to Second Amended and Restated Loan and Security Agreement dated
April 9, 2009 by and among the Company and Bank of America, N.A. (incorporated by
reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed on
April 15, 2009 (File No. 000-50563)).
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10.17
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Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated
September 8, 2009 by and among the Company and Bank of America, N.A.
(incorporated by reference to Exhibit 10.8 to the Companys Quarterly Report on
Form 10-Q filed on September 10, 2009 (File No. 000-50563)).
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29
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Exhibit No.
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Description
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10.18
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Fifth Amendment to Second Amended and Restated Loan and Security Agreement dated
May 28, 2010 by and among the Company and Bank of America, N.A. (incorporated by
reference to Exhibit 10.9 to the Companys Current Report on Form 8-K filed on
May 28, 2010 (File No. 000-50563)).
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11.1
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Statement regarding computation of per share earnings (incorporated by reference
from Note 9 to the unaudited interim financial statements included herein).
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31.1
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Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).
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31.2
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Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer).
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32.1
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Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, executed by Chief Executive Officer and the Chief Financial Officer).
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*
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Portions are omitted pursuant to a confidential treatment request and are filed separately with
the SEC.
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30
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