UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended August 4, 2007
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the transition period from
to
Commission File Number: 000-50563
BAKERS FOOTWEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
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Missouri
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43-0577980
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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2815 Scott Avenue,
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St. Louis, Missouri
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63103
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(Address of principal executive offices)
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(Zip Code)
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(314) 621-0699
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
þ
Yes
o
No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated filer
o
Non-accelerated filer
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Stock, par value $0.0001 per share, 6,493,035 shares issued and outstanding as of September
14, 2007.
BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAKERS FOOTWEAR GROUP, INC.
CONDENSED BALANCE SHEETS
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|
|
|
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|
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|
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|
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July 29,
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February 3,
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August 4,
|
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|
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2006
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|
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2007
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2007
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(Unaudited)
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(Unaudited)
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Assets
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Current assets:
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|
|
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|
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|
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|
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Cash and cash equivalents
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|
$
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191,747
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|
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$
|
407,346
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|
|
$
|
192,576
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|
Accounts receivable
|
|
|
1,067,429
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|
|
|
1,352,936
|
|
|
|
1,223,857
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Other receivables
|
|
|
1,070,911
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|
|
|
1,140,168
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|
|
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789,365
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Inventories
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26,268,341
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|
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24,102,006
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|
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22,920,714
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Prepaid expenses and other current assets
|
|
|
927,486
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|
|
|
713,810
|
|
|
|
4
,
228,172
|
|
Prepaid income taxes
|
|
|
530,190
|
|
|
|
1,129,637
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|
|
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2
,
251,523
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|
Deferred income taxes
|
|
|
1,676,852
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|
|
1,963,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
31,732,956
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|
|
|
30,809,573
|
|
|
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31,606,207
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|
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|
|
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|
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|
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Property and equipment, net
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45,772,551
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51,021,077
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|
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49,245,995
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Deferred income taxes
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|
|
251,801
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|
|
|
424,139
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Other assets
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1,134,858
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904,070
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|
|
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1,270,730
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
78,892,166
|
|
|
$
|
83,158,859
|
|
|
$
|
82,122,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Liabilities and shareholders equity
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Current liabilities:
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|
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|
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|
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Accounts payable
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$
|
9,107,153
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|
|
$
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8,134,642
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|
|
$
|
10,822,480
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|
Accrued expenses
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10,262,268
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|
|
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9,004,436
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|
|
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7,442,081
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Sales tax payable
|
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|
251,936
|
|
|
|
757,868
|
|
|
|
457,958
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|
Deferred income
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|
|
1,093,467
|
|
|
|
1,332,473
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|
|
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1,194,489
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|
Revolving credit facility
|
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7,960,653
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|
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|
13,099,304
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|
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16,056,368
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|
Current maturities of capital lease obligations
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|
|
283,838
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|
|
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189,807
|
|
|
|
116,998
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|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,959,315
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|
|
|
32,518,530
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|
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|
36,090,374
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|
|
|
|
|
|
|
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|
|
|
|
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Subordinated
convertible debentures
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|
|
|
|
|
|
|
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4,000,000
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|
Obligations under capital leases, less current maturities
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|
|
127,732
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|
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|
57,863
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|
|
|
10,734
|
|
Accrued rent liabilities
|
|
|
7,755,678
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9,415,617
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|
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10,233,227
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|
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Shareholders equity:
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Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares outstanding
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|
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Common Stock, $0.0001 par value; 40,000,000 shares
authorized, 6,492,955 shares outstanding at July 29,
2006 and 6,493,035 shares outstanding at February 3,
2007 and August 4, 2007
|
|
|
649
|
|
|
|
649
|
|
|
|
649
|
|
Additional paid-in capital
|
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|
36,269,047
|
|
|
|
36,571,423
|
|
|
|
36,903,127
|
|
Retained earnings (accumulated deficit)
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|
|
5,779,745
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|
|
|
4,594,777
|
|
|
|
(5,115,179
|
)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
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|
42,049,441
|
|
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41,166,849
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31,788,597
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities and shareholders equity
|
|
$
|
78,892,166
|
|
|
$
|
83,158,859
|
|
|
$
|
82,122,932
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
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Weeks
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Ended
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|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
Net sales
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|
$
|
47,184,870
|
|
|
$
|
41,984,658
|
|
|
$
|
96,989,783
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|
|
$
|
91,240,475
|
|
Cost of merchandise sold, occupancy, and buying expenses
|
|
|
33,673,554
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|
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|
32,708,564
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|
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|
67,181,316
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|
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|
66,676,340
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Gross profit
|
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13,511,316
|
|
|
|
9,276,094
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|
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|
29,808,467
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|
|
|
24,564,135
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
10,675,399
|
|
|
|
11,213,164
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|
|
|
21,073,767
|
|
|
|
23,105,104
|
|
General and administrative
|
|
|
4,197,764
|
|
|
|
4,385,807
|
|
|
|
8,896,804
|
|
|
|
8,950,562
|
|
Loss on disposal of property and equipment
|
|
|
113,491
|
|
|
|
8,448
|
|
|
|
128,103
|
|
|
|
44,752
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
755,672
|
|
|
|
|
|
|
|
755,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,475,338
|
)
|
|
|
(7,086,997
|
)
|
|
|
(290,207
|
)
|
|
|
(8,291,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(183,954
|
)
|
|
|
(402,294
|
)
|
|
|
(296,892
|
)
|
|
|
(764,418
|
)
|
Other, net
|
|
|
10,944
|
|
|
|
25,348
|
|
|
|
33,781
|
|
|
|
37,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,648,348
|
)
|
|
|
(7,463,943
|
)
|
|
|
(553,318
|
)
|
|
|
(9,018,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
|
(621,850
|
)
|
|
|
1,280,839
|
|
|
|
(195,175
|
)
|
|
|
691,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,026,498
|
)
|
|
$
|
(8,744,782
|
)
|
|
$
|
(358,143
|
)
|
|
$
|
(9,709,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
|
|
|
|
Issued and
|
|
|
|
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Total
|
|
Balance at February 3, 2007
|
|
|
6,493,035
|
|
|
$
|
649
|
|
|
$
|
36,571,423
|
|
|
$
|
4,594,777
|
|
|
$
|
41,166,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
331,704
|
|
|
|
|
|
|
|
331,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,709,956
|
)
|
|
|
(9,709,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 4, 2007
|
|
|
6,493,035
|
|
|
$
|
649
|
|
|
$
|
36,903,127
|
|
|
$
|
(5,115,179
|
)
|
|
$
|
31,788,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(358,143
|
)
|
|
$
|
(9,709,956
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,519,864
|
|
|
|
4,330,394
|
|
Deferred income taxes
|
|
|
(296,600
|
)
|
|
|
2,387,809
|
|
Stock-based compensation expense
|
|
|
442,816
|
|
|
|
331,704
|
|
Excess income tax benefit from exercise of stock options
|
|
|
(614,392
|
)
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
128,103
|
|
|
|
44,752
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
755,672
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
232,640
|
|
|
|
479,882
|
|
Inventories
|
|
|
(270,482
|
)
|
|
|
1,181,292
|
|
Prepaid expenses and other current assets
|
|
|
324,095
|
|
|
|
(3
,
514,362
|
)
|
Prepaid income taxes
|
|
|
(530,190
|
)
|
|
|
(1,121,886
|
)
|
Other assets
|
|
|
(448,023
|
)
|
|
|
45,870
|
|
Accounts payable
|
|
|
(2,952,581
|
)
|
|
|
2,687,838
|
|
Accrued expenses and deferred income
|
|
|
(2,247,648
|
)
|
|
|
(2,000,249
|
)
|
Accrued income taxes
|
|
|
(683,572
|
)
|
|
|
|
|
Accrued rent liabilities
|
|
|
1,428,053
|
|
|
|
817,610
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,326,060
|
)
|
|
|
(3,283,630
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(10,733,819
|
)
|
|
|
(3,367,602
|
)
|
Proceeds from sale of property and equipment
|
|
|
14,663
|
|
|
|
19,783
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(10,719,156
|
)
|
|
|
(3,347,819
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Net advances under revolving credit facility
|
|
|
7,960,653
|
|
|
|
2,957,064
|
|
Proceeds
from issuance of subordinated convertible debentures
|
|
|
|
|
|
|
4,000,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(420,447
|
)
|
Proceeds from exercise of stock warrants
|
|
|
508,990
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
450,802
|
|
|
|
|
|
Excess income tax benefit from exercise of stock options
|
|
|
614,392
|
|
|
|
|
|
Principal payments under capital lease obligations
|
|
|
(222,844
|
)
|
|
|
(119,938
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
9,311,993
|
|
|
|
6,416,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(3,733,223
|
)
|
|
|
(214,770
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,924,970
|
|
|
|
407,346
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
191,747
|
|
|
$
|
192,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
1,481,896
|
|
|
$
|
71,011
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
251,008
|
|
|
$
|
687,869
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
BAKERS FOOTWEAR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
1. Basis of Presentation
The accompanying unaudited condensed financial statements contain all adjustments that
management believes are necessary to present fairly Bakers Footwear Group, Inc.s (the Companys)
financial position, results of operations and cash flows for the periods presented. Such
adjustments consist of normal recurring accruals. Certain information and disclosures normally
included in notes to financial statements have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. The Companys operations are
subject to seasonal fluctuations and, consequently, operating results for interim periods are not
necessarily indicative of the results that may be expected for other interim periods or for the
full year. The condensed financial statements should be read in conjunction with the audited
financial statements and the notes thereto contained in our Annual Report on Form 10-K for the
fiscal year ended February 3, 2007.
2. Income Taxes
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN
48), which clarifies the accounting for uncertainty in income tax positions, as defined. FIN 48
requires, among other matters, that the Company recognize in its financial statements, the impact
of a tax position, if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The Company is subject to the provisions of FIN 48 as of
February 4, 2007, the beginning of fiscal year 2007, and has analyzed filing positions in all of
the federal and state jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The Companys federal income tax returns subsequent to the
fiscal year ended January 1, 2005 remain open. As of August 4, 2007, the Company has not recorded
any unrecognized tax benefits. The Companys policy, if it had
unrecognized benefits, is to recognize accrued interest and penalties related to
unrecognized tax benefits as interest expense and other expense, respectively. The adoption of FIN
48 had no effect on the Companys financial statements for the thirteen weeks and twenty-six weeks
ended August 4, 2007.
In accordance with FASB Statement No. 109,
Accounting for Income Taxes
(SFAS 109), the Company
regularly assesses available positive and negative evidence to determine whether it is more likely
than not that its deferred tax asset balances will be recovered from (a) reversals of deferred tax
liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning
strategies and (d) future taxable income. SFAS 109 places significant restrictions on the
consideration of future taxable income in determining the realizability of deferred tax assets in
situations where a company has experienced a cumulative loss in recent years. When sufficient
negative evidence exists that indicates that full realization of deferred tax assets is no longer
more likely than not, a valuation allowance is established as necessary against the deferred tax
assets, increasing the Companys income tax expense in the period that such conclusion is reached.
Likewise, when sufficient positive evidence exists that indicates that realization of deferred tax
assets is more likely than not, any existing valuation allowance would be reversed as appropriate,
decreasing the Companys income tax expense in the period that such conclusion is reached.
At February 3, 2007 and May 5, 2007, the Company had adequate available net operating loss
carryback potential to support the recorded balance of net deferred tax assets. The Companys loss
before income taxes for the twenty-six weeks ended August 4, 2007 exceeded the Companys carryback
potential and is anticipated to result in a cumulative loss before income taxes for the three year
period ending February 2, 2008. Therefore, as of August 4, 2007, the Company concluded that the
realizability of net deferred tax assets was no longer more likely than not, and established a
$4,142,287 valuation allowance against its net deferred tax assets. 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 August 4, 2007, consists of the calculated refund of
federal income taxes previously paid related to available net operating loss carrybacks and refunds
of state estimated income tax payments made for fiscal year 2006 that will be received in the
current fiscal year.
7
Significant components of the provision for income tax expense (benefit) for the thirteen
weeks and twenty-six weeks ended July 29, 2006 and August 4, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(376,659
|
)
|
|
$
|
(1,609,858
|
)
|
|
$
|
86,530
|
|
|
$
|
(1,831,569
|
)
|
State and local
|
|
|
(71,154
|
)
|
|
|
189,743
|
|
|
|
14,895
|
|
|
|
135,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(447,813
|
)
|
|
|
(1,420,115
|
)
|
|
|
101,425
|
|
|
|
(1,696,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(147,262
|
)
|
|
|
(752,613
|
)
|
|
|
(250,969
|
)
|
|
|
(1,017,582
|
)
|
State and local
|
|
|
(26,775
|
)
|
|
|
(688,720
|
)
|
|
|
(45,631
|
)
|
|
|
(736,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(174,037
|
)
|
|
|
(1,441,333
|
)
|
|
|
(296,600
|
)
|
|
|
(1,754,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
4,142,287
|
|
|
|
|
|
|
|
4,142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(621,850
|
)
|
|
$
|
1,280,839
|
|
|
$
|
(195,175
|
)
|
|
$
|
691,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between income tax expense (benefit) at the statutory U.S. federal income tax
rate of 35% and the amount reported in the statements of operations for the thirteen weeks and
twenty-six weeks ended July 29, 2006 and August 4, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
Weeks Ended
|
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
Federal income tax at statutory rate
|
|
$
|
(576,922
|
)
|
|
$
|
(2,612,380
|
)
|
|
$
|
(193,661
|
)
|
|
$
|
(3,156,506
|
)
|
Impact of graduated Federal rates
|
|
|
14,912
|
|
|
|
74,639
|
|
|
|
5,117
|
|
|
|
90,186
|
|
State and local taxes, net of federal income taxes
|
|
|
(65,934
|
)
|
|
|
(330,068
|
)
|
|
|
(22,133
|
)
|
|
|
(398,831
|
)
|
Permanent differences
|
|
|
6,094
|
|
|
|
6,361
|
|
|
|
15,502
|
|
|
|
14,231
|
|
Valuation allowance
|
|
|
|
|
|
|
4,142,287
|
|
|
|
|
|
|
|
4,142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(621,850
|
)
|
|
$
|
1,280,839
|
|
|
$
|
(195,175
|
)
|
|
$
|
691,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes arise from temporary differences in the recognition of income and
expense for income tax purposes. Deferred income taxes were computed using the liability method and
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax purposes.
Components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006
|
|
|
February 3, 2007
|
|
|
August 4, 2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,144,058
|
|
Vacation accrual
|
|
|
410,744
|
|
|
|
426,763
|
|
|
|
444,313
|
|
Inventory
|
|
|
1,495,419
|
|
|
|
1,712,111
|
|
|
|
1,514,078
|
|
Stock-based compensation
|
|
|
326,299
|
|
|
|
443,840
|
|
|
|
573,205
|
|
Accrued rent
|
|
|
2,878,465
|
|
|
|
3,646,741
|
|
|
|
3,990,959
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(4,142,287
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,110,857
|
|
|
|
6,229,455
|
|
|
|
3,524,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
229,311
|
|
|
|
175,204
|
|
|
|
233,000
|
|
Property and equipment
|
|
|
2,952,893
|
|
|
|
3,666,442
|
|
|
|
3,291,326
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
3,182,204
|
|
|
|
3,841,646
|
|
|
|
3,524,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,928,653
|
|
|
$
|
2,387,809
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
8
3. Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair value of
stock-based compensation. The number of options granted, their grant-date weighted-average fair
value, and the significant assumptions used to determine fair-value during the twenty-six weeks
ended July 29, 2006 and August 4, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Twenty-six
|
|
Twenty-six
|
|
|
Weeks Ended
|
|
Weeks Ended
|
|
|
July 29, 2006
|
|
August 4, 2007
|
Options granted
|
|
|
79,228
|
|
|
|
132,613
|
|
Weighted-average fair value of options granted
|
|
$
|
10.68
|
|
|
$
|
4.99
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
4.75% - 5.0
|
%
|
|
|
4.5
|
%
|
Expected volatility
|
|
|
50% - 55
|
%
|
|
|
43% - 46
|
%
|
Expected option life
|
|
|
5 6 years
|
|
|
|
5 6 years
|
|
During the twenty-six weeks ended August 4, 2007, the Company granted performance shares that
vest 36 months after issuance in amounts that depend upon the achievement of performance objectives
for net sales in fiscal year 2009 and return on average assets for the three year period ending in
fiscal year 2009. Depending upon the extent to which the performance objectives are met, the
Company will issue a total of between zero and 136,260 shares related to these grants. The
grant-date fair value of each performance share is $10.39. Compensation expense related to
performance shares is recognized ratably over the performance period based on the grant date fair
value of the performance shares expected to vest at the end of the performance period. As of August
4, 2007, the Company estimated that no performance shares would vest at the end of the performance
period and, consequently, reversed $30,150 in stock based compensation expense recognized during
the first quarter of fiscal year 2007 related to the performance shares. The number of performance
shares expected to vest is an accounting estimate and any future changes to the estimate will be
reflected in stock based compensation expense in the period the change in estimate is made.
4. Earnings (Loss) Per Share
Basic earnings (loss) per common share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per common share are computed
using the weighted average number of common shares and potential dilutive securities that were
outstanding during the period. Potential dilutive securities consist of outstanding stock options
and warrants.
The following table sets forth the components of the computation of basic and diluted earnings
(loss) per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
|
Thirteen
|
|
|
Twenty-six
|
|
|
Twenty-six
|
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
|
|
|
Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
|
July 29, 2006
|
|
|
August 4, 2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share Net income (loss)
|
|
$
|
(1,026,498
|
)
|
|
$
|
(
8,744,782
|
)
|
|
$
|
(358,143
|
)
|
|
$
|
(9,709,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$
|
(1,026,498
|
)
|
|
$
|
(8,744,782
|
)
|
|
$
|
(358,143
|
)
|
|
$
|
(9,709,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted
average shares
|
|
|
6,492,955
|
|
|
|
6,493,035
|
|
|
|
6,412,533
|
|
|
|
6,493,035
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted
weighted average shares and assumed conversions
|
|
|
6,492,955
|
|
|
|
6,493,035
|
|
|
|
6,412,533
|
|
|
|
6,493,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Shares underlying the following securities were excluded from the diluted earnings per share
calculations because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Twenty-six
|
|
Twenty-six
|
|
|
Weeks
|
|
Weeks
|
|
Weeks
|
|
Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
July 29, 2006
|
|
August 4, 2007
|
|
July 29, 2006
|
|
August 4, 2007
|
Stock options
|
|
|
123,806
|
|
|
|
82,713
|
|
|
|
181,051
|
|
|
|
98,770
|
|
Convertible securities (1)
|
|
|
|
|
|
|
190,476
|
|
|
|
|
|
|
|
95,238
|
|
Stock purchase warrants (2)
|
|
|
72,263
|
|
|
|
|
|
|
|
150,161
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest expense related to shares underlying subordinated convertible debentures was not
added back to the diluted earnings per share calculation for the thirteen and twenty-six
weeks ended August 4, 2007 because the shares underlying the convertible debentures were
antidilutive.
|
|
(2)
|
|
The 384,000 outstanding stock purchase warrants were excluded from the diluted earnings
per share calculation for the thirteen and twenty-six weeks ended August 4, 2007 because
they had exercise prices that were greater than the average closing price of the Companys
common stock for those periods.
|
5. Revolving Credit Facility
The Company has a revolving credit agreement with a commercial bank with a maximum line of
credit of $40,000,000 subject to the calculated borrowing base as defined in the agreement, and a
maturity of August 31, 2010. The agreement is secured by substantially all assets of the Company.
Interest is payable monthly at either the banks base rate (8.25% per annum at August 4, 2007) or,
at the Companys option, based on LIBOR (London Interbank Offered Rate, as defined in the
agreement) plus 1.75% to 2.25% on a designated portion of the outstanding balance for a specified
period of time. An unused line fee of 0.25% per annum is payable monthly based on the difference
between the maximum line and the average loan balance. The Company had approximately $10,605,000,
$6,100,000, and $790,000 of unused borrowing capacity under the revolving credit agreement based
upon the Companys borrowing base calculation as of July 29, 2006, February 3, 2007, and August 4,
2007, respectively. The agreement has certain restrictive financial and other covenants, including
a requirement that the Company maintain a minimum availability. On April 18, 2007, the bank agreed
to adjust the borrowing base calculation to provide for additional availability of $1,250,000 for
the period April 20, 2007 through May 18, 2007. On May 18, 2007, the bank agreed to extend this
additional availability through June 15, 2007. On June 13, 2007, the bank further extended this
additional availability through September 30, 2007. As of September 14, 2007, the Company was in
compliance with all of its financial and other covenants and expects to remain in compliance
throughout fiscal year 2007 based on the expected execution of its business plan, which includes
increased inventory and expense control.
6. Private Placement of Subordinated Convertible Debentures
On June 26, 2007, the Company completed a private placement of $4,000,000 in aggregate
principal amount of subordinated convertible debentures. The Company received net proceeds of
$3,579,553. The debentures bear interest at a rate of 9.5% per annum, payable semi-annually, and
mature on June 30, 2012. The debentures are convertible at any
time into 444,441 shares of common stock,
excluding fractional shares, based on the initial conversion price of $9.00 per share. The
conversion price is subject to anti-dilution and other adjustments, including a weighted average
conversion price adjustment for certain future issuances or deemed issuances of common stock at a
lower price, subject to limitations as required under rules of the Nasdaq Stock Market. Among the
investors in the debentures are Andrew Baur and Scott Schnuck, who are directors of the Company,
Bernard Edison and Julian Edison, who are advisory directors to the Company, and an entity
affiliated with Mr. Baur. The Company can redeem the unpaid
principal balance of the debentures if the closing price of the
Companys common stock is at least $16.00 per share, subject
to the adjustments and conditions in the debentures.
7. Impairment of Long-Lived assets
At least annually, management determines on a store-by-store basis whether any property or
equipment or any other assets have been impaired based on the criteria established in Statement of
Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
Based on these criteria, long-lived assets to be held and used are reviewed for
impairment when events or circumstances exist that indicate the carrying amount of those assets may
not be recoverable. The Company determines the fair value of these assets using the present value of the estimated
future cash flows over the remaining store lease period. During the twenty-six weeks ended August
4, 2007, the Company recorded $755,672, in noncash charges to earnings related to the impairment of
furniture, fixtures, and equipment, leasehold improvements, and other assets.
10
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Companys unaudited condensed
financial statements and notes thereto provided herein and the Companys audited financial
statements and notes thereto in our annual report on Form 10-K. The following Managements
Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. The factors that might cause such a difference
also include, but are not limited to, those discussed in our Annual Report on Form 10-K under Item
1. Business Cautionary Note Regarding Forward-Looking Statements and Risk Factors and under
Item 1. Business Risk Factors and those discussed elsewhere in our Annual Report on Form 10-K
and elsewhere in this report.
Overview
We are a national, mall-based, specialty retailer of distinctive footwear and accessories
targeting young women who demand quality fashion products. We feature private label and national
brand dress, casual and sport shoes, boots, sandals and accessories. As of August 4, 2007, we
operated 257 stores, including 228 Bakers stores located in 38 states. We opened six new stores,
remodeled six stores, and closed six stores during the first half of 2007. We currently expect to
remodel one additional store during the second half of fiscal year 2007.
During the first half of 2007, our net sales decreased 5.9% compared to the first half of
2006, and our comparable store sales decreased 13.6% as a result of weak demand for our sandals.
Second quarter sales decreased 11.0% as June and July sales were significantly lower than we had
anticipated. Lower leverage in our buying and occupancy costs caused our gross profit percentage
to decrease to 26.9% of sales in the first half of 2007 compared to 30.7% in the first half of
2006. Our selling, general and administrative expenses increased 7.0% and we recognized a $0.8
million noncash impairment expense related to certain underperforming stores, resulting in a loss
before income taxes of $9.0 million. In addition, as described in more detail below at
Critical Accounting Policies
Deferred Income
Taxes, we established a $4.1 million valuation
reserve against our deferred income tax assets that resulted in net income tax expense of $0.7
million for the first half of 2007. Our net loss of $9.7 million for the first half of 2007
compares to a net loss of $0.4 million in the first half of 2006. Sales at the beginning of the
second half of 2007 continue to be lower than sales in the same period last year. Comparable store
sales for August are down 14.3%.
Our losses in the first half of 2007 have had a negative impact on our financial position. At
August 4, 2007 we had negative working capital of $4.5 million and unused borrowing capacity under
our revolving credit facility of $0.8 million (as of September 14, 2007, we had unused borrowing
capacity of $0.9 million). As a result of low levels of unused borrowing capacity, we obtained
additional sources of liquidity including amending to our revolving
credit facility in June 2007 to
temporarily increase our unused borrowing capacity by $1.25 million through September 30, 2007, and
raising $3.6 million in net proceeds from a private placement of $4.0 million of subordinated
convertible debentures. We have reduced inventory levels below those of the prior year and have
modified our business plan to further reduce overhead and operating expenses. We also delayed most
store expansion and remodeling projects until funding for such expansion can be generated from
ongoing operating activities.
We anticipate that our planned cash flows from operations and borrowings under our revolving
credit facility will be sufficient for our operating cash requirements for at least the next 12
months. If, however, the negative same store sales trends we experienced during the first half of fiscal year
2007 were to continue into 2008, it could become necessary for us
to obtain additional financing in order for us to meet our operating cash requirements during the
first half of fiscal year 2008 and beyond.
For comparison purposes, we classify our stores as comparable or non-comparable. A new stores
sales are not included in comparable store sales until the thirteenth month of operation. Sales
from remodeled stores are excluded from comparable store sales during the period of remodeling. We
include our Internet and catalog sales as one store in calculating our comparable store sales.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting
principles, which require us to make estimates and assumptions about future events and their impact
on amounts reported in our Financial Statements and related Notes. Since future events and their
impact cannot be determined with certainty, the actual results will inevitably differ from our
estimates. These differences could be material to the financial statements.
11
We believe that our application of accounting policies, and the estimates that are inherently
required by these policies, are reasonable. We believe that the following significant accounting
policies may involve a higher degree of judgment and complexity.
Merchandise inventories
Merchandise inventories are valued at the lower of cost or market using the first-in first-out
retail inventory method. Permanent markdowns are recorded to reflect expected adjustments to retail
prices in accordance with the retail inventory method. The process of determining our expected
adjustments to retail prices requires significant judgment by management. Among other factors,
management utilizes performance metrics to evaluate the quality and freshness of inventory,
including the number of weeks of supply on hand, sell-through percentages and aging categories of
inventory by selling season, to make its best estimate of the appropriate inventory markdowns. If
market conditions are less favorable than those projected by management, additional inventory
markdowns may be required.
Store closing and impairment charges
Based on the criteria in Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Disposal of Long-Lived Assets
, long-lived assets to be held and used are
reviewed for impairment when events or circumstances exist that indicate the carrying amount of
those assets may not be recoverable. We regularly analyze the operating results of our stores and
assess the viability of under-performing stores to determine whether they should be closed or
whether their associated assets, including furniture, fixtures, equipment, and leasehold
improvements, have been impaired. Asset impairment tests are performed at least annually, on a
store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring
events, and favorable trends, fixed assets of stores indicated to be impaired are written down to
fair value.
During the twenty-six weeks ended August 4, 2007, we recorded $755,672, in noncash charges to
earnings related to the impairment of furniture, fixtures, and equipment, leasehold improvements,
and other assets at specific identified underperforming stores.
Stock-based compensation expense
On January 29, 2006, the beginning of fiscal year 2006, we adopted SFAS No. 123R,
Share-Based
Payment
, (SFAS 123R) which requires us to recognize compensation expense for stock-based
compensation based on the grant date fair value. Stock-based compensation expense is then
recognized ratably over the service period related to each grant. We used the modified prospective
transition method under which financial statements covering periods prior to adoption have not been
restated. We determine the fair value of stock-based compensation using the Black-Scholes option
pricing model, which requires us to make assumptions regarding future dividends, expected
volatility of our stock, and the expected lives of the options. Under SFAS 123R we also make
assumptions regarding the number of options and the number of performance shares that will
ultimately vest. The assumptions and calculations required by SFAS 123R are complex and require a
high degree of judgment. Assumptions regarding the vesting of grants are accounting estimates that
must be updated as necessary with any resulting change recognized as an increase or decrease in
compensation expense at the time the estimate is changed.
Deferred income taxes
We calculate income taxes in accordance with SFAS No. 109
Accounting for Income Taxes
, which
requires the use of the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized based on the difference between their carrying amounts for financial
reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are
measured using the tax rates in effect in the years when those temporary differences are expected
to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations
of existing tax law and other published guidance as applied to our operations.
In accordance with FASB Statement No. 109,
Accounting for Income Taxes
(SFAS 109), we
regularly assesses available positive and negative evidence to determine whether it is more likely
than not that our deferred tax asset balances will be recovered from (a) reversals of deferred tax
liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning
strategies and (d) future taxable income. SFAS 109 places significant restrictions on the
consideration of future taxable income in determining the realizability of deferred tax assets in
situations where a company has experienced a cumulative loss in recent years. When sufficient
negative evidence exists that indicates that full realization of deferred tax assets is no longer
more likely than not, a valuation allowance is established as necessary against the deferred tax
assets, increasing our income tax expense in the period that such conclusion is reached. Likewise,
when sufficient positive evidence exists that indicates that realization of deferred tax assets is
more likely than not,
12
any existing valuation allowance would be reversed as appropriate, decreasing our income tax
expense in the period that such conclusion is reached.
At February 3, 2007 and May 5, 2007, we had adequate available net operating loss carryback
potential to support the recorded balance of net deferred tax assets. Our loss before income taxes
for the twenty-six weeks ended August 4, 2007 exceeded our carryback potential and is anticipated
to result in a cumulative loss before income taxes for the three year period ending February 2,
2008. Therefore, as of August 4, 2007, we concluded that the realizability of net deferred tax
assets was no longer more likely than not, and established a $4.1 million valuation allowance
against our net deferred tax assets. We have scheduled the reversals of our deferred tax assets
and deferred tax liabilities and have concluded that based on the anticipated reversals a valuation
allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.
We anticipate that until we re-establish a pattern of continuing profitability, in accordance
with SFAS 109, we will not recognize any material income tax expense or benefit in our statement of
operations for future periods, as pretax profits or losses will generate tax effects that will be
offset by decreases or increases in the valuation allowance with no net effect on the statement of
operations. If a pattern of continuing profitability is re-established and we conclude that it is
more likely than not that deferred income tax assets are realizable, we will reverse any remaining
valuation allowance which will result in the recognition of an income tax benefit in the period
that it occurs.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN
48), which clarifies the accounting for uncertainty in income tax positions, as defined. FIN 48
requires, among other matters, that we recognize in our financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit, based on the
technical merits of the position. We are subject to the provisions of FIN 48 as of February 4,
2007, the beginning of fiscal year 2007, and we have analyzed filing positions in all of the
federal and state jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. Our federal income tax returns subsequent to the fiscal
year ended January 1, 2005 remain open. As of May 5, 2007, we have not recorded any unrecognized
tax benefits. We recognize accrued interest and penalties related to unrecognized tax benefits as
interest expense and other expense, respectively. The adoption of FIN 48 had no effect on our
financial statements for the thirteen weeks ended May 5, 2007.
Results of Operations
The following table sets forth our operating results, expressed as a percentage of sales, for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Twenty-
|
|
Twenty-
|
|
|
Weeks
|
|
Weeks
|
|
six Weeks
|
|
six Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of merchandise sold, occupancy and buying expense
|
|
|
71.4
|
|
|
|
77.9
|
|
|
|
69.3
|
|
|
|
73.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28.6
|
|
|
|
22.1
|
|
|
|
30.7
|
|
|
|
26.9
|
|
Selling expense
|
|
|
22.6
|
|
|
|
26.7
|
|
|
|
21.7
|
|
|
|
25.3
|
|
General and administrative expense
|
|
|
8.9
|
|
|
|
10.5
|
|
|
|
9.2
|
|
|
|
9.8
|
|
Loss on disposal of property and equipment
|
|
|
0.2
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3.1
|
)
|
|
|
(16.9
|
)
|
|
|
(0.3
|
)
|
|
|
(9.1
|
)
|
Other income (expense)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(0.4
|
)
|
|
|
(1.0
|
)
|
|
|
(0.3
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3.5
|
)
|
|
|
(17.8
|
)
|
|
|
(0.6
|
)
|
|
|
(9.8
|
)
|
Income tax expense (benefit)
|
|
|
(1.3
|
)
|
|
|
3.0
|
|
|
|
(0.2
|
)
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2.2
|
)%
|
|
|
(
20.8
|
)%
|
|
|
(0.4
|
)%
|
|
|
(10.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table sets forth our number of stores at the beginning and end of each period
indicated and the number of stores opened and closed during each period indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen
|
|
Thirteen
|
|
Twenty-
|
|
Twenty-
|
|
|
Weeks
|
|
Weeks
|
|
six Weeks
|
|
six Weeks
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
Number of stores at beginning of period
|
|
|
245
|
|
|
|
258
|
|
|
|
235
|
|
|
|
257
|
|
Stores opened during period
|
|
|
4
|
|
|
|
0
|
|
|
|
16
|
|
|
|
6
|
|
Stores closed during period
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end of period
|
|
|
247
|
|
|
|
257
|
|
|
|
247
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended August 4, 2007 Compared to Thirteen Weeks Ended July 29, 2006
Net sales.
Net sales decreased to $42.0 million for the thirteen weeks ended August 4, 2007
(second quarter 2007) from $47.2 million for the thirteen weeks ended July 29, 2006 (second quarter
2006), a decrease of $5.2 million or 11.0%. This decrease reflected weak consumer demand for our
sandals and a lack of a strong fashion trend during the quarter. Our comparable store sales for the
second quarter of 2007, including Internet and catalog sales, decreased by 18.3% compared to a 6.4%
decrease in comparable store sales in the second quarter of 2006. Average unit selling prices
decreased 3.0% while unit sales decreased 9.0% compared to the second quarter of 2006. Our Internet
and catalog sales increased 18.9% to $2.0 million.
Gross profit.
Gross profit decreased to $9.3 million in the second quarter of 2007 from $13.5
million in the second quarter of 2006, a decrease of $4.2 million or 31.4%. As a percentage of
sales, gross profit decreased to 22.1% in the second quarter of 2007 from 28.6% in the second
quarter of 2006 primarily as a result of lower leverage in our buying and occupancy costs. In
both 2007 and 2006, our margins were also negatively effected by markdowns taken as a result of
soft demand for our sandals. The decrease in gross profit is attributable to a decrease of $3.1
million from reduced gross margin percentage, a decrease of $1.8 million from lower comparable
store sales, partially offset by an increase of $0.7 million from new store sales. Permanent
markdown costs decreased to $4.0 million in the second quarter of 2007 from $4.2 million in the
second quarter of 2006 as a result of lower inventory levels in 2007.
Selling expense.
Selling expense increased to $11.2 million in the second quarter of 2007 from
$10.7 million in the second quarter of 2006, an increase of $0.5 million or 5.0%, and increased as
a percentage of sales to 26.7% from 22.6%. This increase was primarily the result of $0.4 million
in higher store depreciation expense, and $0.1 million of higher catalog production and mailing
costs.
General and administrative expense.
General and administrative expense increased to $4.4
million in the second quarter of 2007 from $4.2 million in the second quarter of 2006, an increase
of $0.2 million or 4.5%, and increased as a percentage of sales to 10.5% from 8.9%. The increase
was due primarily to a $0.2 million increase in administrative salaries and benefits compared to
the second quarter of 2006.
Impairment of long-lived assets
. Based on the criteria in SFAS No. 144,
Accounting for the
Disposal of Long-Lived Assets
, long-lived assets to be held and used are reviewed for impairment
when events or circumstances exist that indicate the carrying amount of those assets may not be
recoverable. During the second quarter of 2007 we recognized $0.8 million in noncash charges
related to the impairment of fixed assets and other assets at specific underperforming stores.
Interest expense.
Interest expense increased to $0.4 million in the second quarter of 2007
from $0.2 million in the second quarter of 2005, an increase of $0.2 million. The increase in
interest expense reflects an increase in the average borrowings on our revolving credit facility
and interest on our subordinated convertible debentures issued in June 2007.
Income tax expense (benefit).
We recognized income tax expense of $1.3 million in the second
quarter of 2007 compared to an income tax benefit of $0.6 million for the second quarter of 2006.
The income tax expense for the second quarter of 2007 reflects the establishment of a $4.1 million
valuation reserve against net deferred tax assets as a result of recent pre-tax losses. See
Critical Accounting Policies
Deferred Income Taxes
above for further description.
Net loss
. We had a net loss of $8.7 million in the second quarter of 2007 compared to a net
loss of $1.0 million in the second quarter of 2006.
14
Twenty-six Weeks Ended August 4, 2007 Compared to Twenty-six Weeks Ended July 29, 2006
Net sales.
Net sales decreased to $91.2 million for the twenty-six weeks ended August 4, 2007
(first half 2007) from $97.0 million for the twenty-six weeks ended July 29, 2006 (first half
2006), a decrease of $5.8 million or 5.9%. This decrease reflected weak consumer demand for our
sandals and a lack of a strong fashion trend during the period. Our comparable store sales for the
first half of 2007, including Internet and catalog sales, decreased by 13.6% compared to a 3.6%
decrease in comparable store sales in the first half of 2006. Average unit selling prices decreased
2.2% and unit sales decreased 4.0% compared to the first half of 2006. Our Internet and catalog
sales increased 29.5% to $4.6 million for the first half of 2007.
Gross profit.
Gross profit decreased to $24.6 million in the first half of 2007 from $29.8
million in the first half of 2006, a decrease of $5.2 million or 17.6%. As a percentage of sales,
gross profit decreased to 26.9% in the first half of 2007 from 30.7% in the first half of 2006
primarily as a result of lower leverage in our buying and occupancy costs. In both 2007 and 2006,
our margins were also negatively effected by markdowns taken as a result of soft demand for our
sandals. We attribute the decrease in gross profit to the following components: a decrease of $3.9
million from reduced gross margin percentage, a decrease of $3.2 million from lower comparable
store sales, partially offset by an increase of $1.9 million from new store sales. Permanent
markdown costs decreased to $7.0 million in the first half of 2007 from $7.5 million in the first
half of 2006 as a result of lower inventory levels in 2007.
Selling expense.
Selling expense increased to $23.1 million in the first half of 2007 from
$21.1 million in the first half of 2006, an increase of $2.0 million or 9.6%, and increased as a
percentage of sales to 25.3% from 21.7%. This increase was primarily the result of the increased
number of stores we operated and includes and $0.5 million in higher store salaries and
commissions, $0.9 million in higher store depreciation expense, and $0.7 million of increased
catalog production and mailing costs.
General and administrative expense.
General and administrative expense increased to $9.0
million in the first half of 2007 from $8.9 million in the first half of 2006, an increase of $0.1
million or 0.6% and increased as a percentage of sales to 9.8% from 9.2%.
Impairment of long-lived assets
. Based on the criteria in SFAS No. 144,
Accounting for the
Disposal of Long-Lived Assets
, long-lived assets to be held and used are reviewed for impairment
when events or circumstances exist that indicate the carrying amount of those assets may not be
recoverable. During the first half of 2007 we recognized $0.8 million in noncash charges related to
the impairment of fixed assets and other assets at specific underperforming stores.
Interest expense.
Interest expense increased to $0.8 million in the first half of 2007 from
$0.3 million in the first half of 2006, an increase of $0.5 million. The increase in interest
expense reflects an increase in the average balance outstanding on our revolving credit facility
and interest on our subordinated convertible debentures issued in June 2007.
Income tax expense (benefit).
We recognized income tax expense of $0.7 million for the first
half of 2007 compared to an income tax benefit of $0.2 million in the first half of 2006. The
income tax expense for the first half of 2007 reflects the establishment of a $4.1 million
valuation reserve against net deferred tax assets as a result of recent pre-tax losses. See
Critical Accounting Policies
Deferred Income Taxes
above for further description.
Net loss
. We had a net loss of $9.7 million in the first half of 2007 compared to a net loss
of $0.4 million in the first half of 2006.
Seasonality and Quarterly Fluctuations
Our operating results are subject to significant seasonal variations. Our quarterly results of
operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of
these seasonal variances, in particular our principal selling seasons. We have five principal
selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Sales and
operating results in our third quarter are typically much weaker than in our other quarters.
Quarterly comparisons may also be affected by the timing of sales promotions and costs associated
with remodeling stores, opening new stores, or acquiring stores.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, capital expenditures and principal
payments on our capital lease obligations. Historically, these cash needs have been met by cash
flows from operations, borrowings under our revolving credit facility and sales of securities. As
discussed below in Financing Activities the balance on our revolving credit facility fluctuates
throughout the year as a result of our seasonal working capital requirements and our other uses of
cash.
15
Our losses in the first half of 2007 have had a negative impact on our financial position. At
August 4, 2007 we had negative working capital of $4.5 million and unused borrowing capacity under
our revolving credit facility of $0.8 million (as of September 14, 2007, we had unused borrowing
capacity of $0.9 million). As a result of low levels of unused borrowing capacity, we obtained
additional sources of liquidity including amendments to our revolving credit facility to
temporarily increase our unused borrowing capacity by $1.25 million through September 30, 2007, and
raising $3.6 million in net proceeds from a private placement of $4.0 million of subordinated
convertible debentures. We have reduced inventory levels below those of the prior year and have
modified our business plan to further reduce overhead and operating expenses. We also delayed most
store expansion and remodeling projects until funding for such expansion can be generated from
ongoing operating activities. See Item 1. Business Risk FactorsOur operations and expansion
plans could be constrained by our ability to obtain funds under the terms of our revolving credit
facility in our Annual Report on Form 10-K.
We anticipate that our planned cash flows from operations and borrowings under our revolving
credit facility will be sufficient for our operating cash requirements for at least the next 12
months. If, however, the negative same store sales trends we experienced during the first half of fiscal year
2007 were to continue into 2008, it could become necessary for us
to obtain additional financing in order for us to meet our operating cash requirements during the
first half of fiscal year 2008 and beyond.
The following table summarizes certain key liquidity measurements as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2006
|
|
February 3, 2007
|
|
August 4, 2007
|
Cash
|
|
$
|
191,747
|
|
|
$
|
407,346
|
|
|
$
|
192,576
|
|
Inventories
|
|
|
26,268,341
|
|
|
|
24,102,006
|
|
|
|
22,920,714
|
|
Total current assets
|
|
|
31,732,956
|
|
|
|
30,809,573
|
|
|
|
31,606,207
|
|
Revolving Credit Facility
|
|
|
7,960,653
|
|
|
|
13,099,304
|
|
|
|
16,056,368
|
|
Total current liabilities
|
|
|
28,959,315
|
|
|
|
32,518,530
|
|
|
|
36,090,374
|
|
Net working capital
|
|
|
2,773,641
|
|
|
|
(1,708,957
|
)
|
|
|
(4,484,167
|
)
|
Property and equipment, net
|
|
|
45,772,551
|
|
|
|
51,021,077
|
|
|
|
49,245,995
|
|
Total assets
|
|
|
78,892,166
|
|
|
|
83,158,859
|
|
|
|
82,122,932
|
|
Total shareholders equity
|
|
|
42,049,441
|
|
|
|
41,166,849
|
|
|
|
31,788,597
|
|
Unused borrowing capacity*
|
|
|
10,605,184
|
|
|
|
6,100,178
|
|
|
|
789,734
|
|
|
|
|
*
|
|
as calculated under the terms of our revolving credit facility
|
Operating activities
Cash used in operating activities was $3.3 million in the first half of 2007 compared to cash
used in operating activities of $2.3 million in the first half of 2006. Besides our net loss of
$9.7 million, the most significant use of cash in operating activities in the first half of 2007
primarily relates to a $3.5 million increase in prepaid expenses (principally due to the timing of
August rent payments relative to the August 4 end of our fiscal second quarter) partially offset by
a $1.2 million reduction in inventory and significant noncash expenses ($4.3 million of
depreciation, $0.8 million of impairment expense, $0.7 million of income tax expense, and $0.3
million of stock-based compensation expense). The most significant use of cash in operating
activities in the first half of 2006 primarily relates to a $5.9 million reduction of accounts
payable, accrued expenses and accrued income taxes from the balances at the end of fiscal year
2005. Accrued employee compensation decreased $2.2 million primarily as the result of the payment
in the first quarter of 2006 of accrued incentive compensation related to fiscal year 2005. Accrued
income taxes decreased $0.7 million primarily as the result of payment of income taxes relating to
fiscal year 2005. Other accounts payable and accrued expenses decreased $3.0 million. As discussed
below in Financing Activities, cash used in operating activities in the first half of 2007 and
2006 was financed through increased borrowings on our revolving credit facility and, in 2007, the
private placement of subordinated convertible debentures.
Inventories at August 4, 2007 were $1.2 million, or 4.9% lower than at February 3, 2007 and
$3.3 million, or 12.7%, lower than at July 29, 2006, reflecting lower average inventory per store.
Although we believe that at August 4, 2007, inventory levels and valuations are appropriate given
current and anticipated sales trends, there is always the possibility that fashion trends could
change suddenly. We monitor our inventory levels closely and will take appropriate actions,
including taking additional markdowns, as necessary, to maintain the freshness of our inventory.
16
Investing activities
Cash used in investing activities was $3.3 million in the first half of 2007 compared to $10.7
million for the first half of 2006. During each period, cash used in investing activities
substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements
for both new and remodeled stores.
We currently plan to open no additional new stores in the second half of fiscal year 2007.
Our future capital expenditures will depend primarily on the number of new stores we open, the
number of existing stores we remodel and the timing of these expenditures. We continuously evaluate
our future capital expenditure plans and adjust planned expenditures, as necessary, based on
business conditions. Because we are able to identify locations, negotiate leases, and construct
stores in a relatively short period of time, we are able to maintain considerable flexibility in
the timing and extent of our capital expenditures, allowing us to exploit opportunities while
maintaining prudent working capital and overall capitalization positions. As of September 14,
2007, we have opened six new stores in fiscal year 2007. We currently anticipate that our capital
expenditures in fiscal year 2007, primarily related to new stores, store remodelings, distribution
and general corporate activities, will be approximately $5.2 million. Capital expenditures for a
new store typically range from $300,000 to over $500,000. We generally receive landlord allowances
in connection with new stores ranging from $25,000 to $100,000. The average cash investment in
inventory for a new store generally ranges from $45,000 to $75,000, depending on the size and sales
expectation of the store and the timing of the new store opening. We currently plan to remodel
approximately seven stores in fiscal year 2007, including one remodel during the second half.
Remodeling the average existing store typically costs approximately $360,000.
Financing activities
Cash provided by financing activities was $6.4 million in the first half of 2007 compared to
$9.3 million for the first half of 2006. The principal sources of cash from financing activities in
the first half of 2007 was the net proceeds of approximately $3.6 million from the placement of
subordinated convertible debentures and net draws of $3.0 million on our revolving line of credit.
The principal sources of cash in the first half of 2006 were the $8.0 million draw on our revolving
credit agreement, $0.5 million from the exercise of stock warrants and $1.1 million in cash and
excess tax benefits from the exercise of employee stock options.
We have a secured revolving credit facility with Bank of America, N.A. (successor-by-merger to
Fleet Retail Finance Inc.). Effective August 31, 2006, we amended this facility to increase the
revolving credit ceiling from $25.0 million to $40.0 million and to extend the maturity of the
facility from August 31, 2008 to August 31, 2010. Amounts borrowed under the facility bear interest
at a rate equal to the base rate (as defined in the agreement), which was 8.25% per annum as of
August 4, 2007, February 3, 2007 and July 29, 2006. Following the occurrence of any event of
default, the interest rate may be increased by an additional two percentage points. The revolving
credit agreement also allows us to apply an interest rate based on LIBOR (London Interbank Offered
Rate, as defined in the agreement) plus a margin rate of 1.75% to 2.25% per annum to a designated
portion of the outstanding balance as set forth in the agreement. The aggregate amount that we may
borrow under the agreement at any time is further limited by a formula, which is based
substantially on our inventory level but cannot be greater than the revolving credit ceiling. The
agreement is secured by substantially all of our assets. In connection with the administration of
the agreement, we are required to pay a facility fee of $2,000 per month. In addition, an unused
line fee of 0.25% per annum is payable monthly based on the difference between the revolving credit
ceiling and the average loan balance under the agreement. If contingencies related to early
termination of the credit facility were to occur, or if we were to request and receive an
accommodation from the lender in connection with the facility, we may be required to pay additional
fees.
Our credit facility includes financial and other covenants relating to, among other things,
use of funds under the facility in accordance with our business plan, prohibiting a change of
control, including any person or group acquiring beneficial ownership of 30% or more of our common
stock or our combined voting power (as defined in the credit facility), maintaining a minimum
availability, prohibiting new debt, restricting dividends and the repurchase of our stock and
restricting certain acquisitions. In the event that we were to violate any of these covenants, or
if other indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or
more of our leases could be terminated (other than solely as the result of certain sales of common
stock), the lender would have the right to accelerate repayment of all amounts outstanding under
the agreement, or to commence foreclosure proceedings on our assets. We were in compliance with
these covenants as of August 4, 2007.
We had balances under our credit facility of $16.1 million, $13.1 million and $8.0 million as
of August 4, 2007, February 3, 2007, and July 29, 2006, respectively. We had approximately $0.8
million, $6.1 million and $10.6 million in unused borrowing capacity calculated under the
provisions of our credit facility as of August 4, 2007, February 3, 2007, and July 29, 2006,
respectively. During the first half of fiscal years 2007 and 2006, the highest outstanding balances
on our credit facility were $20.8 million and $8.2 million,
17
respectively. We primarily have used the borrowings on our revolving credit facility for
working capital purposes and capital expenditures.
During the first quarter of 2007, we began to experience relatively low levels of unused
borrowing capacity based on our borrowing base calculations. Consequently, we requested and the
bank agreed on April 18, 2007, to adjust the borrowing base calculation to provide for additional
borrowing capacity of $1,250,000 for the period from April 20, 2007 through May 18, 2007. This
agreement was subsequently extended through June 15, 2007, and, effective June 13, 2007, further
extended until September 30, 2007. As of September 14, 2007, we had an outstanding balance of $17.6
million and approximately $0.9 million of unused borrowing capacity, based on our borrowing base
calculations.
On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated
convertible debentures (the Debentures) to seven accredited investors in a private placement
generating net proceeds of $3.6 million, which were used to repay amounts owed under our credit
facility. The Debentures bear interest at a rate of 9.5% per annum, payable semi-annually on each
June 30 and December 31, beginning December 31, 2007. Investors included corporate directors
Andrew N. Baur and Scott C. Schnuck, an entity affiliated with Mr. Baur, and advisory directors
Bernard A. Edison and Julian Edison.
The Debentures are convertible into shares of common stock at any time. Based on the initial
conversion price of $9.00 per share, the Debentures are convertible into 444,441 shares of common
stock, after eliminating fractional shares. The conversion price, and thus the number of shares
into which the Debentures are convertible, is subject to anti-dilution and other adjustments. If
we distribute any assets (other than ordinary cash dividends), then generally each holder is
entitled to receive a like amount of such distributed 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 pursuant to any properly authorized equity compensation
plans. In accordance with rules of the Nasdaq, the Debentures contain limitations on the number of
shares issuable pursuant to the Debentures regardless of how low the conversion price may be,
including limitations generally requiring that the conversion price not be less than $8.10 per
share for Debentures issued to advisory directors, corporate directors or the entity affiliated
with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock
in the transaction or such that following conversion, the total number of shares beneficially owned
by each holder does not exceed 19.999% of our common stock. These limitations may be removed with
shareholder approval.
The Debentures generally provide for customary events of default, which could result in
acceleration of all amounts owed, including default in required payments, failure to pay when due,
or the acceleration of, other monetary obligations for indebtedness (broadly defined) in excess of
$1 million (subject to certain exceptions), failure to observe or perform covenants or agreements
contained in the transaction documents, including covenants relating to using the net proceeds,
maintaining legal existence, prohibiting the sale of material assets outside of the ordinary
course, prohibiting cash dividends and distributions, share repurchases, and certain payments to
our officers and directors. We generally have the right, but not the
obligation, to redeem the unpaid principal balance of the
Debentures at any time prior to conversion if the closing price of our common stock (as adjusted
for stock dividends, subdivisions or combinations) is equal to or above $16.00 per share for each
of 20 consecutive trading days and certain other conditions are met. We have also agreed to
provide certain piggyback and demand registration rights, until two years after the Debentures
cease to be outstanding, to the holders under the Securities Act of 1933 relating to the shares of
common stock issuable upon conversion of the Debentures.
In connection with our 2005 private placement of common stock and warrants, we sold warrants
to purchase 250,000 shares of common stock, subject to anti-dilution and other adjustments. The
warrants have an exercise price of $10.18 per share and, subject to certain conditions, expire on
April 8, 2010. We also issued warrants to purchase 125,000 shares of common stock at an exercise
price of $10.18 through April 8, 2010 to the placement agent. In certain circumstances, a cashless
exercise provision becomes operative for the warrants issued to the investors. In the event that
the closing bid price of a share of our stock equals or exceeds $25.00 per share for 20 consecutive
trading days, we have the ability to call the warrants, effectively forcing their exercise into
common stock. The warrants issued to the placement agent generally have the same terms and
conditions, except that the cashless exercise provision is more generally available and the
warrants are not subject to a call provision. Warrants underlying 50,000 shares of common stock
were exercised during the twenty-six weeks ended July 29, 2006, generating net proceeds to us of
approximately $509,000. No warrants were exercised during the thirteen and twenty-six weeks ended
August 4, 2007.
18
In connection with our 2005 private placement, we entered into a registration rights agreement
wherein we agreed to make the requisite SEC filings to achieve and subsequently maintain the
effectiveness of a registration statement covering the common stock sold and the common stock
issuable upon exercise of the investor warrants and the placement agent warrants issued in
connection with the private placement generally through April 8, 2008. Failure to file a required
registration statement or to achieve or subsequently maintain the effectiveness of a required
registration statement through the required time, subject to our right to suspend use of the
registration statement in certain circumstances, will subject us to liquidated damages in an amount
up to 1% of the $8,750,000 gross proceeds of the private placement for each 30 day period or pro
rata for any portion thereof in excess of our allotted time. On May 6, 2005, we filed a
registration statement on Form S-3 to register for resale the common stock sold and the common
stock underlying the warrants and placement agent warrants, which was declared effective on May 25,
2005. We are now required to maintain the effectiveness of the registration statement, subject to
certain exceptions, through April 8, 2008 in order to avoid paying liquidated damages. As of August
4, 2007, the maximum amount of liquidated damages that we could be required to pay was $700,000,
which represents 8 potential monthly payments of $87,500. We have not recorded a liability in
connection with the registration rights agreement because, in accordance with SFAS No. 5
Accounting
for Contingencies
, we have concluded that it is not probable that we will make any payments under
the liquidated damages provisions of the registration rights agreement.
In connection with our 2004 initial public offering, we sold to the representatives of the
underwriters and their designees warrants to purchase up to an aggregate of 216,000 shares of
common stock at an exercise price equal to $12.7875 per share, subject to antidilution adjustments,
for a purchase price of $0.0001 per warrant for the warrants. The warrant holders may exercise the
warrants as to all or any lesser number of the underlying shares of common stock at any time during
the four-year period commencing on February 10, 2005. Warrants underlying 54,000 shares of common
stock were tendered in a cashless exercise transaction under which we issued 21,366 shares of
common stock during the twenty-six weeks ended July 29, 2006. No warrants were exercised during the
twenty-six weeks ended August 4, 2007.
Our ability to meet our current and anticipated operating requirements will depend on our
future performance, which, in turn, will be subject to general economic conditions and financial,
business and other factors, including factors beyond our control.
Off-Balance Sheet Arrangements
At August 4, 2007, February 3, 2007, and July 29, 2006, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities or variable interest entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity,
market or credit risk that could otherwise have arisen if we had engaged in such relationships.
Contractual Obligations
The following table summarizes our contractual obligations as of August 4, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
3 -5 Years
|
|
|
More than 5 Years
|
|
Long-term debt obligations (1)
|
|
$
|
5,993,779
|
|
|
$
|
392,667
|
|
|
$
|
771,084
|
|
|
$
|
4,770,028
|
|
|
$
|
|
|
Capital lease obligations (2)
|
|
|
152,229
|
|
|
|
140,990
|
|
|
|
11,239
|
|
|
|
|
|
|
|
|
|
Operating lease obligations (3)
|
|
|
215,344,681
|
|
|
|
23,869,101
|
|
|
|
51,414,819
|
|
|
|
48,304,668
|
|
|
|
91,756,093
|
|
Purchase obligations (4)
|
|
|
25,554,970
|
|
|
|
25,236,329
|
|
|
|
309,493
|
|
|
|
9,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
246,985,659
|
|
|
$
|
49,639,087
|
|
|
$
|
52,506,635
|
|
|
$
|
53,083,844
|
|
|
$
|
91,756,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes principal and interest payments.
|
|
(2)
|
|
Includes payment obligations relating to our point of sale hardware and software leases.
|
|
(3
|
|
Includes minimum payment obligations related to our store leases.
|
|
(4)
|
|
Includes merchandise on order and payment obligations relating to store construction and miscellaneous service contracts.
|
19
Recent Accounting Pronouncements
None.
Effect of Inflation
Overall, we do not believe that inflation has had a material adverse impact on our business or
operating results during the periods presented. We cannot give assurance, however, that our
business will not be affected by inflation in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flows may be subject to fluctuations due to changes in interest rates.
Our financing arrangements include both fixed and variable rate debt in which changes in interest
rates will impact the fixed and variable rate debt differently. A change in the interest rate of
fixed rate debt will impact the fair value of the debt, whereas a change in the interest rate on
the variable rate debt will impact interest expense and cash flows. We had $16.0 million of
outstanding borrowings under our revolving credit facility at August 4, 2007. A hypothetical
increase in interest rates of 100 basis points would result in a potential reduction in future
pre-tax earnings of approximately $0.1 million per year for every $10 million of outstanding
borrowings under the revolving credit facility. Management does not believe that the risk
associated with changing interest rates would have a material effect on our results of operations
or financial condition.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this report. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Companys disclosure controls and procedures
provided reasonable assurance that the disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act and in
accumulating and communicating such information to management, including the Companys Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal Control Over Financial Reporting.
The Companys management, with the participation of
the Companys Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
Companys internal control over financial reporting to determine whether any changes occurred
during the Companys second fiscal quarter ended August 4, 2007 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting. Based on that evaluation, there has been no such change during the Companys second
quarter of fiscal year 2007.
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors as disclosed in our Annual Report on Form
10-K for fiscal year 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The Company does not have any programs to repurchase shares of its common stock and no such
repurchases were made during the twenty-six weeks ended August 4, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of the Company was held on June 14, 2007.
20
(b) At the annual meeting of shareholders of the Company held on June 14, 2007, action was taken
with respect to the election of all six directors of the Company who were elected as follows:
5,454,701 shares were voted for Peter A. Edison, while authority was withheld with respect to
21,700 shares; 5,455,101 shares were voted for Michele A. Bergerac, while authority was withheld
with respect to 21,300 shares; 5,455,601 shares were voted for Andrew N. Baur, while authority was
withheld with respect to 20,800 shares; 5,455,101 shares were voted for Timothy F. Finley, while
authority was withheld with respect to 21,300 shares; 5,455,601 shares were voted for Harry E.
Rich, while authority was withheld with respect to 20,800 shares; and 5,421,801 shares were voted
for Scott C. Schnuck, while authority was withheld with respect to 54,600 shares.
(c) Shareholders also ratified the appointment of Ernst & Young LLP as the Companys independent
registered public accounting firm: 5,475,200 shares were voted in favor, 1,201 shares were voted
against, no shares abstained and there were no broker non-votes.
ITEM 6. EXHIBITS
See Exhibit Index herein
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Quarterly Report on Form 10-Q to be signed, on its behalf by the undersigned thereunto duly
authorized.
Date: September 18, 2007
|
|
|
|
|
|
BAKERS FOOTWEAR GROUP, INC.
(Registrant)
|
|
|
By:
|
/s/ Peter A. Edison
|
|
|
Peter A. Edison
|
|
|
Chairman of the Board of Directors and
Chief Executive Officer
(On behalf of the Registrant)
|
|
|
|
|
|
|
By:
|
/s/ Lawrence L. Spanley, Jr.
|
|
|
Lawrence L. Spanley, Jr.
|
|
|
Chief Financial Officer, Executive Vice President, Treasurer, and Secretary
(As principal financial officer)
|
|
|
22
EXHIBIT INDEX
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
3.1
|
|
Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Companys
Annual Report on Form 10-K for the fiscal year ended January
3, 2004 filed on April 2, 2004 (File No. 000-50563)).
|
|
|
|
3.2
|
|
Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Companys Annual Report on Form 10-K for
the fiscal year ended January 3, 2004 filed on April 2, 2004
(File No. 000-50563)).
|
|
|
|
10.1
|
|
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 dated June 26, 2007 (File
No. 000-50563)).
|
|
|
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10.2
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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 dated
June 26, 2007 (File No. 000-50563)).
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10.3
|
|
Subordination Agreement dated June 26, 2007 by and among the
Company, the Investors named therein and Bank of America, N.A.
(incorporated by reference to Exhibit 4.3 to the Companys
Current Report on Form 8-K dated June 26, 2007 (File No.
000-50563)).
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10.4
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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 dated
June 26, 2007 (File No. 000-50563)).
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10.5
|
|
Registration Rights Agreement dated June 26, 2007 by and among
the Company and the Investors named therein (incorporated by
reference to Exhibit 4.5 to the Companys Current Report on
Form 8-K dated June 26, 2007 (File No. 000-50563)).
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10.6
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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
dated May 18, 2007 (File No. 000-50563)).
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11.1
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|
Statement regarding computation of per share earnings
(incorporated by reference from Note 4 of the Companys
unaudited interim financial statements included herein).
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|
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31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by Chief
Executive Officer).
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31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by Chief
Financial Officer).
|
|
|
|
32.1
|
|
Section 1350 Certification (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Executive
Officer).
|
|
|
|
32.2
|
|
Section 1350 Certification (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by Chief Financial
Officer).
|
23
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