UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended October 2, 2004 |
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______________________ to ___________________ |
Commission File Number: 000-50563
BAKERS FOOTWEAR GROUP, INC.
| Missouri (State of other jurisdiction of incorporation or organization) |
43-0577980 (I.R.S. Employer Identification Number) |
|
| 2815 Scott Avenue, St. Louis, Missouri (Address of principal executive offices) |
63103 (Zip Code) |
(314)621-0699
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.0001 par value, 5,102,481 shares issued and outstanding as of November 9, 2004
1
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
| October 4, 2003 |
January 3, 2004 |
October 2, 2004 |
||||||||||
| Unaudited | Unaudited | |||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 444,150 | $ | 574,475 | $ | 1,694,255 | ||||||
Accounts receivable |
846,022 | 1,051,854 | 887,159 | |||||||||
Other receivables |
137,270 | 186,011 | 91,238 | |||||||||
Inventories |
16,880,701 | 12,780,256 | 17,536,544 | |||||||||
Prepaid expenses and other current assets |
891,579 | 1,029,908 | 904,963 | |||||||||
Income tax benefit |
— | — | 1,983,921 | |||||||||
Deferred income taxes |
— | — | 1,331,879 | |||||||||
Total current assets |
19,199,722 | 15,622,504 | 24,429,959 | |||||||||
Property and equipment, net |
13,041,656 | 12,459,178 | 17,477,580 | |||||||||
Other assets |
569,670 | 922,825 | 305,243 | |||||||||
Total assets |
$ | 32,811,048 | $ | 29,004,507 | $ | 42,212,782 | ||||||
Liabilities and shareholders’ equity |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 3,622,594 | $ | 3,529,652 | $ | 8,570,535 | ||||||
Accrued expenses |
3,928,204 | 5,986,873 | 4,165,174 | |||||||||
Sales tax payable |
730,930 | 1,257,294 | 663,454 | |||||||||
Deferred income |
631,708 | 809,122 | 721,306 | |||||||||
Revolving credit agreement |
13,336,097 | 2,169,474 | — | |||||||||
Class A stock purchase warrants |
800,000 | 837,500 | — | |||||||||
Class A stock redemption obligation |
142,616 | 210,799 | — | |||||||||
Current maturities of capital lease obligations |
965,765 | 947,332 | 746,614 | |||||||||
Current maturities of long-term subordinated debt |
671,725 | 645,501 | — | |||||||||
Total current liabilities |
24,829,639 | 16,393,547 | 14,867,083 | |||||||||
Long-term subordinated debt, less current maturities |
251,872 | 214,409 | — | |||||||||
Obligations under capital leases, less current maturities |
1,555,314 | 1,347,112 | 808,700 | |||||||||
Other liabilities |
1,168,156 | 1,291,286 | 1,546,159 | |||||||||
Deferred income taxes |
— | — | 667,280 | |||||||||
Class A stock redemption obligation |
1,163,060 | 1,178,527 | — | |||||||||
Class B stock redemption obligation |
— | 506,500 | — | |||||||||
Subordinated convertible debentures |
4,900,000 | 4,500,000 | — | |||||||||
Shareholders’ equity: |
||||||||||||
Preferred stock, $0.0001 par value, 5,000,000
shares authorized, no shares outstanding |
— | — | — | |||||||||
Common stock, $0.0001 par value; 40,000,000 shares
authorized, 5,102,481 shares outstanding at October 2,
2004 |
— | — | 510 | |||||||||
Class A stock, $0.001 par value; 3,000,000 shares
authorized, 1,426,188 shares outstanding at October 4,
2003 and January 3, 2004 |
1,426 | 1,426 | — | |||||||||
Class B stock, $0.001 par value; 500,000 shares
authorized, no shares outstanding |
— | — | — | |||||||||
Class C stock, $0.001 par value; 1,500,000 shares
authorized, no shares outstanding |
— | — | — | |||||||||
Deferred stock compensation |
(2,890 | ) | — | — | ||||||||
Additional paid-in capital |
3,704,500 | 3,756,814 | 25,993,454 | |||||||||
Accumulated deficit |
(4,760,029 | ) | (185,114 | ) | (1,670,404 | ) | ||||||
Total shareholders’ equity (deficit) |
(1,056,993 | ) | 3,573,126 | 24,323,560 | ||||||||
Total liabilities and shareholders’ equity |
$ | 32,811,048 | $ | 29,004,507 | $ | 42,212,782 | ||||||
See accompanying notes.
3
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| Thirteen | Thirteen | Thirty-nine | Thirty-nine | |||||||||||||
| Weeks Ended | Weeks Ended | Weeks Ended | Weeks Ended | |||||||||||||
| October 4, | October 2, | October 4, | October 2, | |||||||||||||
| 2003 |
2004 |
2003 |
2004 |
|||||||||||||
Net sales |
$ | 34,274,081 | $ | 31,589,495 | $ | 104,494,724 | $ | 104,799,251 | ||||||||
Cost of merchandise sold, occupancy, and buying expenses |
25,018,999 | 24,483,187 | 76,189,026 | 75,313,452 | ||||||||||||
Gross profit |
9,255,082 | 7,106,308 | 28,305,698 | 29,485,799 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling |
7,069,995 | 7,574,105 | 21,576,232 | 22,467,089 | ||||||||||||
General and administrative |
2,745,662 | 3,483,884 | 8,772,448 | 10,325,975 | ||||||||||||
Loss on disposal of property and equipment |
8,840 | 270,293 | 158,399 | 408,842 | ||||||||||||
Operating loss |
(569,415 | ) | (4,221,974 | ) | (2,201,381 | ) | (3,716,107 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(404,175 | ) | (191,468 | ) | (1,212,665 | ) | (766,872 | ) | ||||||||
State income tax (expense) benefit |
(10,401 | ) | — | (52,154 | ) | — | ||||||||||
Other income (expense), net |
(48,943 | ) | 58,187 | (98,970 | ) | 181,238 | ||||||||||
Loss before income taxes |
(1,032,934 | ) | (4,355,255 | ) | (3,565,170 | ) | (4,301,741 | ) | ||||||||
Benefit from income taxes |
— | (1,633,298 | ) | — | (2,608,941 | ) | ||||||||||
Net loss |
$ | (1,032,934 | ) | $ | (2,721,957 | ) | $ | (3,565,170 | ) | $ | (1,692,800 | ) | ||||
Basic loss per share |
$ | (0.73 | ) | $ | (0.53 | ) | $ | (2.33 | ) | $ | (0.37 | ) | ||||
Diluted loss per share |
$ | (0.73 | ) | $ | (0.53 | ) | $ | (2.33 | ) | $ | (0.37 | ) | ||||
Unaudited pro forma income tax information |
||||||||||||||||
Loss before income taxes |
$ | (1,022,534 | ) | $ | (3,513,016 | ) | ||||||||||
Benefit from income taxes |
(382,863 | ) | (1,317,846 | ) | ||||||||||||
Net loss |
$ | (639,671 | ) | $ | (2,195,170 | ) | ||||||||||
Net loss per common share: |
||||||||||||||||
Basic |
$ | (0.46 | ) | $ | (1.37 | ) | ||||||||||
Diluted |
$ | (0.46 | ) | $ | (1.37 | ) | ||||||||||
See accompanying notes.
4
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
| Common Stock |
Voting Common Stock |
|||||||||||||||||||||||||||
| Shares | Shares | Additional | ||||||||||||||||||||||||||
| Issued and | Issued and | Paid-In | Accumulated | |||||||||||||||||||||||||
| Outstanding |
Amount |
Outstanding |
Amount |
Capital |
Deficit |
Total |
||||||||||||||||||||||
Balance at January
3, 2004 |
— | $ | — | 1,426,188 | $ | 1,426 | $ | 3,756,814 | $ | (185,114 | ) | $ | 3,573,126 | |||||||||||||||
Adjust accumulated
deficit and
shareholder
distributions to
reflect conversion
from S corporation
to C corporation |
(123,500 | ) | 185,114 | 61,614 | ||||||||||||||||||||||||
Accretion of class
A redeemable stock |
(116,854 | ) | (116,854 | ) | ||||||||||||||||||||||||
Accretion of class
B redeemable stock |
139,250 | 139,250 | ||||||||||||||||||||||||||
Exchange of Class A
and B common stock
for new common
stock |
1,965,150 | 197 | (1,426,188 | ) | (1,426 | ) | 1,874,659 | 1,873,430 | ||||||||||||||||||||
Shares issued in
connection with
Initial Public
Offering |
2,484,000 | 248 | 15,530,745 | 15,530,993 | ||||||||||||||||||||||||
Conversion of
convertible
debentures into
common stock |
653,331 | 65 | 4,954,736 | 4,954,801 | ||||||||||||||||||||||||
Net loss |
(1,692,800 | ) | (1,692,800 | ) | ||||||||||||||||||||||||
Balance at October
2, 2004 |
5,102,481 | $ | 510 | — | $ | — | $ | 25,993,454 | $ | (1,670,403 | ) | $ | 24,323,561 | |||||||||||||||
See accompanying notes.
5
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Thirty-nine | Thirty-nine | |||||||
| Weeks Ended | Weeks Ended | |||||||
| October 4, 2003 |
October 2, 2004 |
|||||||
Operating activities |
||||||||
Net loss |
$ | (3,565,170 | ) | $ | (1,692,800 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,087,280 | 2,294,738 | ||||||
Deferred income taxes |
— | (664,599 | ) | |||||
Beneficial conversion of subordinated debentures |
— | 163,333 | ||||||
Stock-based compensation expense |
220,491 | — | ||||||
Amortization of debt discount |
12,447 | 9,820 | ||||||
Accretion of stock warrants |
113,140 | 12,500 | ||||||
Loss on disposal of property and equipment |
158,399 | 408,842 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
10,964 | 259,468 | ||||||
Inventories |
(2,601,099 | ) | (4,756,288 | ) | ||||
Prepaid expenses and other current assets |
(260,795 | ) | 124,945 | |||||
Income tax benefit receivable |
— | (1,983,921 | ) | |||||
Other assets |
367,812 | 559,120 | ||||||
Accounts payable |
655,654 | 5,040,882 | ||||||
Accrued expenses and deferred income |
(536,260 | ) | (2,088,245 | ) | ||||
Other liabilities |
279,000 | 254,873 | ||||||
Net cash used in operating activities |
(3,058,137 | ) | (2,057,332 | ) | ||||
Investing activities |
||||||||
Purchase of property and equipment |
(2,018,016 | ) | (7,765,651 | ) | ||||
Proceeds from sale of property and equipment |
2,174 | 43,669 | ||||||
Net cash used in investing activities |
(2,015,842 | ) | (7,721,982 | ) | ||||
Financing activities |
||||||||
Net advances (repayments) under revolving notes payable |
6,292,879 | (2,169,474 | ) | |||||
Proceeds from initial public offering |
— | 15,530,993 | ||||||
Principal payments under capital lease obligations |
(617,587 | ) | (739,130 | ) | ||||
Principal payments of subordinated debt |
(156,214 | ) | (859,910 | ) | ||||
Payment to retire stock warrants |
— | (850,000 | ) | |||||
Cash distributions to shareholders |
(949 | ) | (13,385 | ) | ||||
Net cash provided by financing activities |
5,518,129 | 10,899,094 | ||||||
Net increase in cash and cash equivalents |
444,150 | 1,119,780 | ||||||
Cash and cash equivalents at beginning of period |
— | 574,475 | ||||||
Cash and cash equivalents at end of period |
$ | 444,150 | $ | 1,694,255 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid for income taxes |
$ | 52,155 | $ | 141,832 | ||||
Cash paid for interest |
$ | 1,140,143 | $ | 581,950 | ||||
Noncash investing and financing transactions |
||||||||
Capital lease obligations |
$ | 1,021,500 | $ | — | ||||
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 Company’s) financial position, results of operations and cash flows for the periods presented. Such adjustments consist of normal recurring accruals. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The Company’s operations are subject to seasonal fluctuations and, consequently, operating results for interim periods are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for fiscal year ended January 3, 2004.
Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
2. Initial Public Offering
On February 10, 2004, the Company completed its Initial Public Offering (IPO) and sold 2,160,000 shares of common stock at $7.75 per share. On March 12, 2004, the Company sold an additional 324,000 shares of common stock at $7.75 per share when the underwriters exercised their over-allotment option. The net proceeds to the Company were approximately $15,530,000 after deducting the underwriting discount and other expenses incurred in connection with the IPO.
The Company used the proceeds from the IPO to repay the $5,680,743 balance on its revolving credit agreement, repay $859,910 of subordinated debt, and repurchase stock warrants for $850,000. The Company used the remaining proceeds for working capital purposes, primarily for the purchase of inventory in the ordinary course of business and capital expenditures. Pending use of the remaining proceeds, the Company has invested in short-term, investment-grade, interest bearing instruments.
Effective with the IPO, all shares of the Company’s existing Class A, Class B, and Class C common stock were exchanged for shares of new common stock on a one to one basis, excluding fractional shares, and the Company’s related repurchase obligations were terminated.
The Company issued stock purchase warrants covering 216,000 shares of common stock with an exercise price of $12.7875 per share, subject to antidilution adjustments, to representatives of the underwriters. The warrants become exercisable on February 10, 2005 and expire on February 10, 2009.
The subordinated convertible debentures were converted into 653,331 shares of common stock at a conversion rate of $7.50 per share. The Company recognized a beneficial conversion expense of $163,333 for the difference between the $7.75 IPO price and the $7.50 conversion price.
3. Income Taxes
Effective January 4, 2004, the Company elected, by the consent of its shareholders, to revoke its status as an S corporation and become subject to taxation as a C corporation. Under the S corporation
7
provisions of the Internal Revenue Code, the individual shareholders included their pro rata portion of the Company’s taxable income in their personal income tax returns. Accordingly, through January 3, 2004, the Company was not subject to federal and certain state corporate income taxes. However, the Company was subject to income taxes in certain states in which it conducts business.
The pro forma information on the accompanying statement of operations for the thirteen week and thirty-nine week periods ended October 4, 2003 has been adjusted to reflect a reduction in other income (expense) for these state income tax expenses, and is presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, as if the Company had been a C corporation during that period and thus subject to federal and state income taxes.
As a result of this change in tax status, the Company recorded deferred tax assets and liabilities for the temporary differences between the book and tax basis of assets and liabilities at the time of conversion. The Company recognized a net benefit of $1,017,511 for the impact of these amounts as a component of the provision for income taxes for the thirteen weeks ended April 3, 2004.
Significant components of income tax expense (benefit) for the thirteen weeks and thirty-nine weeks ended October 2, 2004 are as follows:
| Thirteen | Thirty-nine Weeks | |||||||
| Weeks Ended | Ended | |||||||
| October 2, 2004 |
October 2, 2004 |
|||||||
Current: |
||||||||
Federal |
$ | (1,745,123 | ) | $ | (1,658,393 | ) | ||
State and local |
(312,210 | ) | (285,949 | ) | ||||
Total current |
(2,057,333 | ) | (1,944,342 | ) | ||||
Deferred: |
||||||||
Federal |
357,082 | (559,663 | ) | |||||
State and local |
66,953 | (104,936 | ) | |||||
Total deferred |
424,035 | (664,599 | ) | |||||
Total income tax expense (benefit) |
$ | (1,633,298 | ) | $ | (2,608,941 | ) | ||
The differences between income tax expense (benefit) at the statutory U.S. federal income tax rate of 34% and the amount reported in the statement of operations for the thirteen weeks and twenty-six weeks ended July 3, 2004 are as follows:
| Thirteen | Thirty-nine | |||||||
| Weeks Ended | Weeks Ended | |||||||
| October 2, 2004 |
October 2, 2004 |
|||||||
Federal income tax at 34% statutory rate |
$ | (1,480,787 | ) | $ | (1,462,592 | ) | ||
State and local taxes, net of federal income taxes |
(159,210 | ) | (147,069 | ) | ||||
Permanent differences |
6,699 | 18,231 | ||||||
Conversion from S corporation status to C corporation status |
— | (1,017,511 | ) | |||||
Total income tax expense (benefit) |
$ | (1,633,298 | ) | $ | (2,608,941 | ) | ||
Deferred income taxes arise from temporary differences in the recognition of income and expense for income tax purposes. Deferred income taxes were computed using the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes.
8
Components of the Company’s deferred tax assets and liabilities are as follows:
| October 2, 2004 |
||||
Deferred tax assets: |
||||
Vacation accrual |
$ | 316,268 | ||
Inventory |
1,015,611 | |||
Stock-based compensation |
426,634 | |||
Accrued rent |
602,058 | |||
Total deferred tax assets |
2,360,571 | |||
Deferred tax liabilities: |
||||
Property and equipment |
1,695,972 | |||
Total deferred tax liabilities |
1,695,972 | |||
Net deferred tax assets |
$ | 664,599 | ||
4. Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, establishes the use of the fair value-based method of accounting for all stock-based compensation arrangements. SFAS No. 123 permits companies to use the intrinsic value accounting method specified in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for stock-based employee compensation arrangements. The Company uses the intrinsic value-based method to account for stock-based employee compensation arrangements and complies with the disclosure provisions of SFAS No. 123.
Options to purchase 24,718 shares of common stock were granted during the thirty-nine weeks ended October 4, 2003. The Company recorded compensation expense of $2,898 and $220,491 for the thirteen weeks and thirty-nine weeks ended October 4, 2003, respectively, which represents the difference between the estimated fair value of the stock on the date of the grant compared to the $0.01 exercise price per option.
Effective with the IPO, the Company issued options to purchase 304,500 shares of common stock with an exercise price of $7.75 per share to certain employees and directors. These options vest over five years and expire after ten years. Options covering 2,800 of these shares were forfeited during the thirteen weeks and thirty-nine weeks ended October 2, 2004.
9
Had compensation cost for all options been determined based on the grant date fair values of the options in accordance with SFAS No. 123, net loss and loss per share would have been reduced to the pro forma amounts indicated below:
| Thirteen Weeks | Thirteen Weeks | Thirty-nine Weeks | Thirty-nine Weeks | |||||||||||||
| Ended October 4, | Ended October 2, | Ended October 4, | Ended October 2, | |||||||||||||
| 2003 |
2004 |
2003 |
2004 |
|||||||||||||
Net loss as reported |
$ | (1,032,934 | ) | $ | (2,721,957 | ) | $ | (3,565,169 | ) | $ | (1,692,800 | ) | ||||
Add: Stock based
compensation expense
included in net income
as reported |
2,898 | — | 220,491 | — | ||||||||||||
Deduct: Stock based
compensation expense
determined under fair
value method, net of
related income tax
effect |
(2,898 | ) | (99,826 | ) | (220,491 | ) | (266,203 | ) | ||||||||
Pro forma net loss |
$ | (1,032,934 | ) | $ | (2,821,783 | ) | $ | (3,565,169 | ) | $ | (1,959,003 | ) | ||||
| Thirteen Weeks | Thirteen Weeks | Thirty-nine Weeks | Thirty-nine Weeks | |||||||||||||
| Ended October 4, | Ended October 2, | Ended October 4, | Ended October 2, | |||||||||||||
| 2003 |
2004 |
2003 |
2004 |
|||||||||||||
Basic loss per share: |
||||||||||||||||
As reported |
$ | (0.73 | ) | $ | (0.53 | ) | $ | (2.33 | ) | $ | (0.37 | ) | ||||
Pro forma |
$ | (0.73 | ) | $ | (0.55 | ) | $ | (2.33 | ) | $ | (0.43 | ) | ||||
Diluted loss per share: |
||||||||||||||||
As reported |
$ | (0.73 | ) | $ | (0.53 | ) | $ | (2.33 | ) | |||||||