BAKERS FOOTWEAR GROUP INC - FORM 10-K

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 28, 2012

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-50563

Bakers Footwear Group, Inc.

(Exact name of Registrant as Specified in its Charter)


Missouri		43-0577980
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

2815 Scott Avenue,		63103
St. Louis, Missouri		(Zip Code)
(Address of Principal Executive Offices)

Registrant’s telephone number, including area code:

(314) 621-0699

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

None

Name of each exchange on which registered:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.0001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

There is no non-voting common equity. The aggregate market value of the common stock held by nonaffiliates (based upon the closing price of $1.01 for the shares on the OTC Bulletin Board) was approximately $4,848,002, as of July 30, 2011. For this purpose, shares of the registrant’s common stock known to the registrant to be held by its executive officers, directors, certain immediate family members of the registrant’s executive officers and directors and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is required by Form 10-K and shall not be deemed to constitute an admission that any such person is an affiliate and is not necessarily conclusive for other purposes.

As of April 14, 2012 there were 9,295,916 shares of the registrant’s common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for the Registrant’s 2012 Annual Meeting of Shareholders to be filed within 120 days of the end of the Registrant’s 2011 fiscal year (the “2012 Proxy Statement”) are incorporated by reference in Part III.

TABLE OF CONTENTS


PART I
Item 1.	Business	3
Item 1A.	Risk Factors	23
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Mine Safety Disclosures	24

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	40
Item 9A.	Controls and Procedures	41
Item 9B.	Other Information	41

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	43
Item 11.	Executive Compensation	44
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	44
Item 13.	Certain Relationships and Related Transactions, and Director Independence	45
Item 14.	Principal Accounting Fees and Services	45

PART IV
Item 15.	Exhibits and Financial Statement Schedules	45

PART I

Item 1.

Business.

General

We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We sell both private label and national brand dress, casual and sport shoes, boots, sandals and accessories. We strive to create a fun, exciting and fashion oriented customer experience through an attractive store environment and an enthusiastic, well-trained sales force. Our buying teams constantly modify our product offerings to reflect widely accepted fashion trends. We strive to be the store of choice for young women between the ages of 16 and 35 who seek quality, fashionable footwear at an affordable price. We provide a high energy, fun shopping experience and attentive, personal service primarily in highly visible fashion mall locations. Our goal is to position Bakers as the fashion footwear merchandise authority for young women.

As of January 28, 2012, we operated a total of 227 stores, including 13 stores in the Wild Pair format. The Bakers stores target young women between the ages of 16 and 35. We believe this target customer is in a growing demographic segment, is extremely appearance conscious and spends a high percentage of disposable income on footwear, accessories and apparel. The Wild Pair chain offers edgier, faster fashion-forward footwear that reflects the attitude and lifestyles of young women between the ages of 17 and 29. As a result of carrying a greater proportion of national brands, Wild Pair has somewhat higher average prices than our Bakers stores. As of April 21, 2012, we operated 225 stores, including 12 Wild Pair stores.

Our fiscal year is the standard retail calendar, which closes on the Saturday closest to January 31. In this Annual Report on Form 10-K, we refer to the fiscal years ended February 2, 2008, January 31, 2009, January 30, 2010, January 29, 2011, and January 28, 2012 as “fiscal year 2007,” “fiscal year 2008,” “fiscal year 2009,” “fiscal year 2010,” and “fiscal year 2011” respectively. For more information, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Fiscal Year,” appearing elsewhere herein. When this report uses the words “Company,” “we,” “us” or “our,” these words refer to Bakers Footwear Group, Inc., unless the context otherwise requires.

Recent Developments

During fiscal 2011, our net sales decreased 0.3% compared to the prior year, reflecting strong demand for dress shoes in the spring, offset by weakness in demand for opened up footwear in the summer and for dress boots in the fall. Comparable store sales in fiscal 2011 increased 1.3%. Gross profit percentage decreased to 25.0% of sales compared to 26.7% in the prior year, reflecting the impact of weak fourth quarter sales and increased promotional activity. We recognized noncash impairment expense of $1.9 million compared to $1.4 million last year.

On December 28, 2011, we sold our rights to the Wild Pair trademark to Steven Madden, Ltd. (“Madden”). We retain a non-exclusive, royalty free license that will allow us to continue to offer Wild Pair merchandise in our stores as long as we comply with the agreement. The license is generally not transferrable. We received net proceeds of approximately $3.8 million which we recognized as gain from disposal of property and equipment in fiscal year 2011.

We incurred net losses of $11.0 million and $9.3 million in fiscal years 2011 and 2010, but achieved increases in comparable store sales of 1.3% and 1.7% in fiscal years 2011 and 2010, respectively. Fiscal year 2011 marked our fifth consecutive year of comparable store sales increases. Our losses in fiscal years after 2005 have had a significant negative impact on our financial position and liquidity. As of January 28, 2012, we had negative working capital of $15.8 million, unused borrowing capacity under our revolving credit facility of $1.6 million, and a shareholders’ deficit of $16.6 million.

On April 26, 2012, in order to maintain compliance, we amended our subordinated convertible debentures to reschedule the principal payments from four annual payments commencing June 30, 2012 to four annual payments commencing February 15, 2013 and increased the interest rate to 13% per annum from 12% per annum.

Our business plan for fiscal year 2012 is based on generally flat comparable store sales for the first half of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. Also, as part of our business plan we initiated a plan to achieve $10.0 million of margin enhancements and cost cuts. Based on the business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2012. The business plan reflects increased focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance in fiscal year 2012 compared to fiscal year 2011. The plan also includes targeted increases in selling, general and administrative expenses to support the sales plan. We will need to continue working with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns. We do not expect to achieve significant additional liquidity through further extensions of payment terms. However, there is no assurance that we will achieve the sales, margin improvements, expense reductions or improved cash flow contemplated in our business plan.

Based on our business plan for fiscal year 2012, we believe that we will be able to comply with the minimum availability or adjusted EBITDA coverage ratio covenant in our revolving credit facility and comply with the adjusted EBITDA requirement related to the scheduled principal payment on the subordinated convertible debentures in February 2013. However, given the inherent volatility in our sales performance, there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility and our recent inability to comply with the ratio requirement, we believe that there is a reasonable possibility that we may not be able to comply with the financial covenants. Failure to comply with the financial covenants of the revolving credit facility or the payment terms of the subordinated convertible debentures may result in a default under the terms of the respective instruments and could result in the acceleration of all of our debt obligations. If we are unable to comply with our financial covenants, we will be required to seek one or more additional amendments or waivers from our lenders. We believe that we would be able to obtain any required amendments or waivers, but can give no assurance that we would be able to do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against us. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to seek alternative financing.

We continue to face considerable liquidity constraints. Although we believe the business plan is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund our operations. In recognition of existing liquidity constraints, we continue to look for additional sources of capital at acceptable terms. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business. See “Item 1. Business — Risk Factors — “If we cannot maintain generally positive sales trends while successfully implementing our margin enhancement and cost reduction plan, we could fail to maintain a liquidity position adequate to support our ongoing operations.” herein.

For additional information on our loan arrangements, please see “— Liquidity and Capital Resources” herein and “Item 1. Business — Risk Factors — Our operations could be constrained by our ability to obtain funds under and terms of our revolving credit facility” and “Item 1. Business — Risk Factors — The terms of our revolving credit facility contain certain financial covenants with respect to our performance and other covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness.” herein.

Our independent registered public accounting firm’s report issued in this Annual Report on Form 10-K included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern, including our recent losses and working capital deficiency. See Note 2 to our financial statements. Our financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. We have taken several steps that we believe will be sufficient to allow us to continue as a going concern and to improve our liquidity, operating results and financial condition. See “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2011 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” herein.

As previously disclosed in a Current Report on Form 8-K filed on April 20, 2012, our Board of Directors adopted the Bakers Footwear Group, Inc. 2012 Incentive Compensation Plan and a related form of RSU Award Agreement, which provides for awards of restricted stock units covering up to 1,010,000 shares of our common stock. Awards related to all of these shares are expected to be issued in the second quarter of fiscal year 2012. Generally, the awards will be paid out in common stock only if the vesting conditions are met. These conditions require, among other things, a minimum of two years of continuous service from the date of grant and satisfaction of additional vesting triggers based on the closing price of our common stock ranging from $2 to $3 per share. The awards expire after five years if the vesting conditions are not met.

Company History

We were founded in 1926 as Weiss-Kraemer, Inc., later renamed Weiss and Neuman Shoe Co., a regional chain of footwear stores. In 1997, we were acquired principally by our current chief executive officer, Peter Edison, who had previously served in various senior management positions at Edison Brothers Stores, Inc. In June 1999, we purchased selected assets of the Bakers and Wild Pair chains, including approximately 200 store locations and inventory from Edison Brothers, which had previously filed for bankruptcy protection. We retained the majority of Bakers’ employees and key senior management and closed or re-merchandised our stores into the Bakers or Wild Pair formats. In February 2001, we changed our name to Bakers Footwear Group, Inc. In February 2004 we conducted our initial public offering.

We operate as one business segment for accounting purposes. See “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” for information regarding our revenues, assets and other financial information. We are incorporated under the laws of the State of Missouri. Our executive offices are located at 2815 Scott Avenue, St. Louis, Missouri 63103 and our telephone number is (314) 621-0699. Information on the retail website for our Bakers stores, www.bakersshoes.com, is not part of this Annual Report on Form 10-K.

Improving Comparable Store Sales and Margin Improvement

•

We strive to improve our comparable stores sales by focusing on our brands, H by Halston and Wild Pair, in our Bakers stores to provide further differentiation in our offerings and focusing on increasing customer loyalty and broadening our customer reach. We also plan to continue to expand our multi-channel sales presence. We are implementing a plan to achieve up to $10 million in margin enhancements and cost cuts. This plan includes streamlining our freight, travel, marketing, administrative and other costs appropriately reducing inventory purchases.

•

We attempt to keep our product mix fresh and on target by constantly testing new fashions and actively monitoring sell-through rates in our stores. Our team of footwear retailers, in-house designers and merchants use their industry experience, relationships with agents and branded footwear producers, and their participation in industry trade shows to analyze, interpret and translate fashion trends affecting young women into the footwear and accessory styles they desire. To complement the introduction of new merchandise, we view the majority of our styles as “core” fashion styles that carry over for multiple seasons. Our merchants make subtle changes to these styles each season to keep them fresh, while reducing our fashion risk exposure.

•

We employ a test and react strategy that constantly updates our product mix while managing inventory risk. This strategy is supported by our relationships with manufacturers, which allow our merchandising and buying teams to negotiate short lead-times, enabling us to test new styles and react relatively quickly to fashion trends and keep fast-moving inventory in stock.

•

We also seek to improve comparable store sales increases through branded and private label accessories. Accessories accounted for 11.8% of merchandise sales in fiscal year 2011 and we believe that there is significant potential to expand our accessory sales and margins.

•

Our stores sell national branded footwear and accessories because we believe that branded merchandise is important to our customers, adds credibility to our stores and drives customer traffic, increasing our overall sales volume and profitability, while reducing our overall exposure to fashion risk. We believe the presence of national branded merchandise in our product mix will also increase the sales of our private

label merchandise. We continue to add sought after brands and to enhance the value of our private label assortment. Approximately 8.0% of our net shoe sales for fiscal year 2011 consisted of branded footwear.

Web Strategy

For fiscal year 2011, our multi-channel sales were $15.4 million, a 31.2% increase over fiscal year 2010. We believe our Web presence is important in expanding our ability to reach our target customer base and enhances the services we provide our customers. Furthermore, we believe our Internet store and our social media efforts increases customer traffic at our Bakers stores and enables potential customers to locate our stores.

New Store Strategy

We have limited our store expansion plans until our liquidity improves. Over the long-term, we believe that there are substantial opportunities for us to grow our business.

We opened three stores in fiscal year 2011, four stores in fiscal year 2010 and four stores in fiscal year 2009. We do not project to open any new stores in fiscal year 2012. In selecting specific sites, we look for high traffic locations primarily in regional shopping malls. We evaluate proposed sites based on the traffic patterns, type and quality of other tenants, average sales per square foot achieved by neighboring stores, lease terms and other factors considered important with respect to a specific location. We constantly update our search for new locations.

Construction costs for new stores currently average approximately $360,000. In connection with opening a new store, we typically receive a construction allowance from the landlord, which can range from $25,000 to over $100,000.

Product Development and Merchandising

Our merchants analyze, interpret and translate current and emerging lifestyle trends into footwear and accessories for our customers. Our merchants and senior management use various methods to monitor changes in culture and fashion. Our buyers travel to major domestic and international markets, such as New York, London and Milan, to gain an understanding of fashion trends. Our merchants and senior management are also in China on a consistent basis to monitor changes in sourcing, manufacturing, pricing, and product development. We attend major footwear trade shows and analyze various information services which provide broad themes on the direction of fashion and color for upcoming seasons. We also monitor current music, television, movie and magazine themes as they relate to clothing and footwear styles.

A crucial element of our product development is our test and react strategy. We typically buy small quantities of new footwear and deliver merchandise to a cross-section of stores. We monitor sell-through rates on test merchandise and, if the tests are successful, quickly re-order product to be distributed to a larger base of stores. Frequently, we can make initial determinations as to the results of a product test. Our senior management team has extensive experience in retail and in responding to changes in our business.

In addition to our test and react strategy, we also attempt to moderate our fashion risk exposure through the national branded component of our merchandise mix. The national brands carried by our stores tend to focus on fashion basic merchandise supported by national advertising by the producer of the brand, which helps generate demand from our target customer. We hope to gain substantial brand affinity by carrying these lines. We believe that a customer who enters our store with the intent of shopping for national branded footwear will also consider the purchase of our lower price, higher gross margin private label merchandise.

Product Mix

We sell both casual and dress footwear. Casual footwear includes sport shoes, sandals, athletic shoes, outdoor footwear, casual daywear, weekend casual, casual booties and tall-shafted boots. Dress footwear includes career footwear, tailored shoes, dress shoes, special occasion shoes and dress booties.

Private Label.

Our private label merchandise, which comprised approximately 92.0% of our net shoe sales in fiscal year 2011, is generally sold under the Bakers label as well as H by Halston and Wild Pair. The retail prices of our

private label footwear generally range from $56 to $119 with most offerings in the $66 to $96 range. We are able to offer these prices without sacrificing merchandise quality, creating a high perceived value, promoting multiple sale transactions, and allowing us to build a loyal customer base. Once our management team has arrived at a consensus on fashion themes for the upcoming season, our buyers translate these themes into our merchandise.

To produce our private label footwear, we generally begin with a concept that our buying teams have discovered during their travels or that is brought to us by one of our commissioned buying agents. Working with our agents, we develop a prototype shoe, which we refer to as a sample. We control the process by focusing on key color, fabric and pattern selections, and collaborate with our buying agents to establish production deadlines. Once our buyers have approved the sample, our buying agents arrange for the purchase of necessary materials and contract with factories to manufacture the footwear to our specifications.

We establish manufacturing deadlines in order to ensure a consistent flow of inventory into the stores, emphasizing relatively short lead times. Depending upon where the shoes are produced and where the materials are sourced, we can have shoes delivered to our stores in four to 17 weeks. For more information, please see “— Sourcing and Distribution.”

Our success depends upon our customers’ perception of new and fresh merchandise. We manage our markdown exposure by re-interpreting our core product. Approximately 10-15% of our private label mix is core product, which we define as styles that carry over for multiple seasons. Our buyers make changes to core products which include colors, fabrications and modified styling to create renewed interest among our customers. We also have relationships with some producers of national brands that, from time to time, produce comparable versions of their branded footwear under our private label brands.

Our information systems are designed to identify trends by item, style, color and/or size. In response, our merchandise team generates a key-item report to more carefully monitor and support sales, including reordering additional units of certain items, if available. Merchandising teams and buyers work together to develop new styles to be presented at monthly product review and selection meetings. These new styles incorporate variations on existing styles in an effort to capitalize further on the more popular silhouettes and heel heights or entirely new styles and fabrications that respond to emerging trends or customer preferences.

H by Halston.

On January 25, 2010, we entered into a licensing agreement with the owner of the Halston trademark. Under the terms of this agreement, we have the exclusive right to manufacture and market footwear and handbags primarily under the trade name “H by Halston” for an initial, renewable term of five years. The first H by Halston shoes were delivered in May 2010 and our first significant product rollout of the H by Halston line of footwear began in September 2010. Our intention is to use H by Halston as a new platform for developing and selling moderately priced designer footwear for young women. We believe our H by Halston license can add value to Bakers with our vendors, employees and customers. It is part of a long-term trend in retailing where retailers own a captive piece of a design label. We pay royalties to the owner of the trademark based on the greater of a percentage of sales or a minimum annual royalty of $1,500,000, payable quarterly.

Wild Pair.

We continue to retain a non exclusive license to sell our Wild Pair merchandise and the transaction with Madden is not expected to change how we market or sell our Wild Pair offerings. We hope eventual offerings by Madden will complement our offerings and further promote the Wild Pair brand.

National Brands.

Our stores carry nationally recognized branded merchandise which we believe increases the attractiveness of our product offering to our target customers. Our national branded shoe sales comprised approximately 8.0% of our net shoe sales for fiscal year 2011. We believe that national branded merchandise is important to our customers, adds credibility to our stores and drives customer traffic resulting in increased customer loyalty and sales. Important national brands in our stores include Jessica Simpson^®, Chinese Laundry^®, Luichiny^®, Bearpaw^®, Blowfish^®, Mia^®, and Diba^®. We believe offering nationally recognized brands are a key element to attracting

appearance conscious young women. National branded merchandise generally sells at a higher price point than our private label merchandise but at a lower gross margin percentage, still generating greater gross profit dollars per pair and leveraging our operating costs.

Accessories.

Our branded and private label accessories include handbags, jewelry, sunglasses, ear clips and earrings, leggings, scarves and other items. Our accessory products allow us to offer the convenience of one-stop shopping to our customers, enabling them to complement their seasonal ready-to-wear clothing with color coordinated footwear and accessories. Accessories add to our overall sales and typically generate higher gross margins than our footwear.

Merchandise Mix.

The following table illustrates net sales by merchandise category as a percentage of our total net sales for fiscal years 2009-2011:


	Fiscal Year
Category	2009			2010			2011
Private Label Footwear(1)		75.4	%		78.6	%		81.1	%
National Branded Footwear		12.5	%		8.5	%		7.1	%
Accessories		12.1	%		12.9	%		11.8	%

Total		100.0	%		100.0	%		100.0	%

(1)	Private Label includes “Bakers,” “Wild Pair” and “H by Halston.”

Planning and Allocation.

We have developed a micro-merchandising strategy for each of our Bakers stores through market research and sales experience. We maintain the level and type of styles demanded by subsets of our target customers. We have categorized each of our Bakers stores as being predominantly a mainstream, fashion or urban location, and if appropriate we identify subcategories for certain stores. We have implemented a similar micro-merchandising strategy for our Wild Pair stores.

Our micro-merchandising strategy of classifying multiple stores and merchandising them similarly based upon customer demographics and historical sales trends enables our merchants to provide an appropriate merchandise mix in order to meet that particular store’s customers’ casual, weekend/club, career and special occasion needs. In determining the appropriate merchandise mix and inventory levels for a particular store, among other factors, we consider selling history, importance of branded footwear, importance of accessories, importance of aggressive fashion, the stock capacity of the store, sizing trends and color preferences.

Our merchandising plan includes sales, inventory and profitability targets for each product classification. This plan is reconciled with our store sales plan, a compilation of individual store sales projections that is developed semi-annually, but reforecast monthly. We also update the merchandising plan on a monthly basis to reflect current sales and inventory trends. The plan is then distributed throughout the merchandising department, which analyzes trends on a weekly, and sometimes daily, basis. We use the reforecast merchandising plan to adjust production orders as needed to meet inventory and sales targets. This process helps to control our inventory levels and markdowns but mainly to reallocate inventory acquisitions.

Our buyers typically order merchandise 30 to 120 days in advance of anticipated delivery. This strategy allows us to react to both the positive and negative trends and customer preferences identified through our information systems and other tracking procedures. Through this purchasing strategy, we can take advantage of positive trends by quickly replenishing our inventory of popular products. This strategy can also reduce our exposure to risk because we are less likely to be overstocked with less desirable items.

Clearance.

We utilize clearance and markdown procedures to reduce our inventory of slower moving styles. Our management monitors pricing and markdowns to facilitate the introduction of new merchandise and to maintain the freshness of our fashion image.

We have three clearance sales each year, which coincide with the end of a particular selling season. For more information regarding our selling seasons, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.” You should also refer to “— Seasonality” and to “— Risk Factors — Our overall profitability is highly dependent upon our fourth quarter results.” During a clearance sale, we systemically lower the prices in store of the items, and if not sold, to ship them to one of our 25 stores which have special clearance sections. We believe that our test and react strategy and our monitoring of inventories and consumer buying trends help us to reduce sales at clearance prices.

Stores

Store Locations and Environment.

Our stores are designed to attract customers who are intrigued by a young and contemporary lifestyle and to create an inviting, exciting atmosphere in which it is fun for them to shop in locations where they want to shop. Our stores average approximately 2,300 square feet and are primarily located in regional shopping malls. As of January 28, 2012, five of our stores, which are located in dense urban markets such as New York City and Chicago, have freestanding street locations. We believe that we are also able to operate in a wide range of shopping mall classifications.

Our stores create a clean, upscale boutique environment, featuring contemporary finishing and sophisticated details. Glass exteriors allow passersby to see easily into the store from the high visibility, high traffic locations in the malls where we have located most of our stores. The open floor design allows customers to readily view the majority of the merchandise on display while store fixtures allow for the efficient display of accessories.

Our customers use cash and third-party credit cards to purchase our products. We do not issue private credit cards or make use of complicated financing arrangements.

Following is a list of our stores by state as of January 28, 2012:


	No. Stores
Alabama		1
Arizona		2
Arkansas		2
California		37
Colorado		2
Connecticut		5
Delaware		1
Florida		18
Georgia		11
Idaho		1
Illinois		16
Indiana		2
Kansas		1
Kentucky		1
Louisiana		5
Maryland		7
Massachusetts		7
Michigan		9
Missouri		6
Nevada		4
New Hampshire		1
New Jersey		13
New Mexico		1
New York		19
North Carolina		4
Ohio		7
Oklahoma		2
Pennsylvania		5
Rhode Island		2
South Carolina		2
Tennessee		1
Texas		22
Virginia		8
Wisconsin		2

Total Stores		227	*
Total States		34

*	Excludes our Internet site, which is merchandised as a Bakers store.

Store Concepts.

As of January 28, 2012, we operated 214 Bakers stores and 13 Wild Pair stores. As of April 21, 2012, we operated 213 Bakers stores and 12 Wild Pair stores. Our Bakers stores focus on widely-accepted, mainstream fashion and provide a fun, high-energy shopping environment geared toward young women between the ages of 16 and 35. Our Wild Pair stores feature fashion-forward merchandise for faster fashion minded young women with our target customer between the ages of 17 and 29 and reflect the attitude and lifestyle of this demographic niche. The Wild Pair customer demands edgier, faster fashion that exists further towards the “leading edge” than does the typical Bakers customer, which allows us to better monitor the direction of the fashion-forward look that our Bakers customer will be seeking. To match the attitude of our Wild Pair merchandise, we have created a fast, fun, environment within our Wild Pair stores. Wild Pair stores carry a higher proportion of national branded merchandise, which generally sells at higher price points than our Bakers footwear.

The following table compares our Bakers and Wild Pair store formats:


	Bakers	Wild Pair
Target customer	Women — ages 16-35	Women — ages 17-29
Private label sales	87% — 90%	40% — 45%
National branded sales	10% — 13%	55% — 60%
Fashion content	Widely-accepted	Edgy, lifestyle-based
Approximate average store size	2,300 square feet	2,100 square feet

Store Operations.

Our store operations are organized into three divisions, east, midwest/central, and west, which are subdivided into 17 regions. Each region is managed by a regional manager, who is typically responsible for 10 to 18 stores. Each store is typically staffed with a manager, assistant manager and floor supervisor, in addition to approximately five part-time sales associates. In some markets where stores are more closely located, one of the store managers may also act as an area manager for the stores in that area, assisting the regional manager for those stores.

Our regional managers are primarily responsible for the operation and results of the stores in their region, including the hiring or promotion of store managers. We develop new store managers by promoting from within and selectively hiring from other retail organizations. Our store managers are primarily responsible for store results, hiring and training store level staff, payroll control, shortage control, store presentation and regional marketing. While managers are key in helping to determine correct product mix for their market, merchandise selections, inventory management and visual merchandising strategies for each store are largely determined at the corporate level and are communicated to the stores generally on a weekly basis.

Our commitment to customer satisfaction and service is an integral part of building customer loyalty. We seek to instill enthusiasm and dedication in our store management personnel and sales associates through incentive programs and regular communication with the stores. Sales associates receive commissions on sales with a guaranteed minimum hourly compensation. We run various sales contests to encourage our sales associates to maximize sales volume. Store managers receive base compensation plus incentive compensation based on sales, payroll and inventory control. Regional and area managers receive base compensation plus incentive compensation based on meeting operational benchmarks. Each of our managers controls the payroll hours in conjunction with a weekly budget provided by the regional manager.

We have well-established store operating policies and procedures and use an in-store training regimen for all store employees. On a regular basis, our merchandising staff provides the stores with merchandise presentation instructions, which include diagrams and photographs of fixture presentations. In addition, our internal newsletter provides product descriptions, sales histories and other milestone information to sales associates to enable them to gain familiarity with our product offerings and our business. We offer our sales associates a discount on our merchandise to encourage them to wear our merchandise and to reflect our lifestyle image both on and off the selling floor.

Our regional managers are responsible for maintaining a loss prevention program in each of our stores. In addition, we have a loss prevention department with regional loss prevention staff who perform individual store visits throughout the year. Our loss prevention efforts also include monitoring returns, voided transactions, employee sales and deposits, using software to analyze transactions recorded in our point of sale system, as well as educating our store personnel on loss prevention. We track inventory through electronic receipt acknowledgment to better monitor loss prevention factors, which allows us to identify variances and further to reduce our losses due to damage, theft or other reasons.

Sourcing and Distribution

A key factor in our ability to offer our merchandise at moderate prices and respond quickly to changes in consumer trends is our sourcing ability. We source each of our private label product lines separately based on the individual design, styling and quality specifications of those products. We do not own or operate any manufacturing facilities and rely primarily on third party foreign manufacturers in China, Brazil, Italy, Spain and other countries for the production of our private label merchandise. Our buying agents have relationships with these manufacturers and generally have been successful in minimizing the lead times for sourcing merchandise. These relationships have allowed us to work very close to our expected delivery dates. In addition, our test and react strategy supported by these strong relationships with manufacturers allows our merchandising and buying teams to test new styles and react quickly to fashion trends, while keeping fast-moving inventory in stock. For more information about risks associated with the foreign sourcing of our products, you should refer to “Risk Factors — Our merchandise is manufactured by foreign manufacturers; therefore, the availability and costs of our products may be negatively affected by risks associated with international trade” and “Risk Factors — Our reliance on manufacturers in China exposes us to supply risks.”

We believe that this sourcing of footwear products and our short lead times reduce our working capital investment and inventory risk, and enables more efficient and timely introduction of new product designs. We have not entered into any long-term manufacturing or supply contracts. We believe that a sufficient number of alternative sources exist for the manufacture of our products. The principal materials used in the manufacture of our footwear and accessory merchandise are available from numerous domestic and international sources.

Management, or our agents, perform an array of quality control inspection procedures at each stage in the production process, including examination and testing of prototypes of key products prior to manufacture, samples and materials prior to production and final products prior to shipment.

Merchandise that is manufactured in China is delivered to one of two international freight forwarders. These freight forwarders receive and apply shipping labels to our stores. When the shipment arrives at the port of Los Angeles, the individual cartons, having already been labeled with the shipping address for our stores or St. Louis warehouse, are turned over to FedEx for delivery. By having the merchandise received and labeled in China, we achieve significant cost savings as well as reduce shipment in transit time to our stores. Merchandise manufactured elsewhere in the world is delivered to our east coast distribution center located near Philadelphia, Pennsylvania where the cartons are received, labeled and shipped to the stores.

All remaining merchandise for our stores is received, inspected, processed and distributed through one of our two distribution centers, each of which is part of a third-party warehousing system, or our warehouse in St. Louis, Missouri. In accordance with our micro-merchandising strategy, our allocation teams determine how the product should be distributed among the stores based on current inventory levels, sales trends, specific product characteristics and the buyers’ input. Merchandise typically is shipped to the stores as soon as possible after receipt in our distribution centers using third party carriers, and any goods not shipped to stores are shipped to our warehouse facility in St. Louis, Missouri for replenishment purposes. We also fulfill our Internet store and catalog sales from our St. Louis facility.

Information Systems and Technology

Our information systems integrate our individual stores, merchandising, distribution and financial systems. Daily sales and cash deposit information is electronically collected from the stores’ point of sale terminals nightly. This allows management to make timely decisions in response to market conditions. These include decisions about pricing, markdowns, reorders and inventory management.

Our allocation and replenishment system, in conjunction with our point of sale system, allows us to execute our micro-merchandising strategy through efficient management and allocation of our store inventories. These systems allow us to respond quickly to fashion trends, identify and reduce our losses due to damage, theft or other reasons, and to monitor employee productivity. Our micro-merchandising strategy requires us to adapt the merchandise mix by location, with different assortments depending on store level customer demographics. We have the capability to constantly monitor inventory levels and purchases by store, enabling us to manage our merchandise mix.

We believe that effective use of our systems allow us to manage our exposure to markdowns. We believe that our systems facilitate the process of controlling inventory commitments in light of changes in consumer demand. We believe that our buyers and inventory management team are able to efficiently adjust our store inventory levels to effectively control excess inventory and markdowns.

Marketing and Advertising

Our marketing includes in-store, high-impact, visual advertising. Marketing materials are positioned to exploit our high visibility, high traffic mall locations. Banners in our windows and signage on our walls and tables may highlight a particular fashion story, a seasonal theme or a featured piece of merchandise. We utilize promotional giveaways or promotional event marketing.

Every three weeks, we provide the stores with specific merchandise display directions from the corporate office. Our in-store product presentation utilizes a variety of different fixtures to highlight the breadth of our product line. Various fashion themes are displayed throughout the store utilizing combinations of styles and colors.

We also market to customers who have provided us with their e-mail addresses via web-bursts, e-mail messages from Bakers announcing new product offerings and promotions.

Competition

We believe that our Bakers stores have no direct national competitors who specialize in full-service, moderate-priced fashion footwear for young women. Yet, the footwear and accessories retail industry is highly competitive and characterized by low barriers to entry.

Competitive factors in our industry include: brand name recognition; product styling; product quality; product presentation; product pricing; store ambiance; customer service; and convenience.

We believe that we match or surpass our competitors on the competitive factors that matter most to our target customer. We offer the convenience of being located in high-traffic, high-visibility locations within the shopping malls in which our customer prefers to shop. We have a focused strategy on our target customer that offers her the fun store atmosphere, full service and style that she desires.

Several types of competitors vie for our target customer:

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department stores (such as Bloomingdale’s, Macy’s, Dillard’s and Kohl’s);

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national branded wholesalers (such as Nine West, Steve Madden and Vans);

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national branded off-price retailers (such as DSW, Rack Room and Shoe Carnival);

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national specialty retailers (such as Finish Line, Journey’s, Naturalizer and Aldo’s);

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regional chains (such as Cathy Jean and Sheik);

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discount stores (such as Wal-Mart, Target and K-Mart); and, to a lesser extent,

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apparel retailers (such as bebe, Charlotte Russe, Rampage and Wet Seal).

Department stores generally are not located within the interior of the mall where our target customer prefers to shop with her friends. National branded wholesalers generally have a narrower line of footwear with higher average price points and target a more narrowly focused customer. Specialty retailers also cater to a different demographic than our target customer. Regional chains generally do not offer the depth of private label merchandise that we offer. National branded off-price retailers and discount stores do not provide the same level

of fashion or customer service. Apparel retailers, if they sell shoes or accessories, generally offer a narrow line of styles, which can encourage a customer to come to our store to purchase shoes or accessories to complement her new outfit. Our competitors sell a broad assortment of footwear and accessories that are similar and sometimes identical to those we sell, and at times may be able to provide comparable merchandise at lower prices. While each of these different distribution channels may be able to compete with us on fashion, value or service, we believe that none of them can successfully match or surpass us on all three of these elements.

Our Wild Pair stores compete on most of the same factors as Bakers. However, due to Wild Pair’s market position, it is subject to more intense competition from national specialty retailers and national branded wholesalers.

History of Bakers Shoe Stores

The first Bakers shoe store opened in Atlanta, Georgia, in 1924. Bakers grew to be one of the nation’s largest women’s moderately priced specialty fashion footwear retailers. At its peak in 1988, Bakers had grown to approximately 600 stores. At that time, it was one of several footwear, apparel and entertainment retail specialty chains that were owned and operated by Edison Brothers, which in 1995 had over 2,500 stores in the United States, Puerto Rico, the Virgin Islands, Mexico and Canada. Edison Brothers filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on November 3, 1995. After an unsuccessful reorganization, Edison Brothers refiled for bankruptcy on March 9, 1999, and immediately commenced a liquidation of all its assets. In June 1999, we purchased selected assets of the Bakers and Wild Pair chains, approximately 200 store locations and inventory, from Edison Brothers Stores, Inc. We retained the majority of Bakers’ employees and key senior management, merchandise buyers, store operating personnel and administrative support personnel. Subsequently, we closed or re-merchandised our prior stores into the Bakers or Wild Pair formats.

Employees

As of April 21, 2012, we employed approximately 478 full-time and 1,863 part-time employees with approximately 149 of our employees at our corporate offices and warehouse, and 2,172 employees at our store locations. The number of part-time employees fluctuates depending on our seasonal needs. None of our employees are represented by a labor union, and we believe our relationship with our employees is good.

Properties

All of our stores are located in the United States. We lease all of our store locations. Most of our leases have an initial term of approximately ten years. In addition to base rent, leases typically require us to pay property taxes, utilities, repairs, maintenance, common area maintenance and, in some instances, merchant association fees. Some of our leases also require contingent rent based on sales.

We lease approximately 38,000 square feet for our headquarters, located at 2815 Scott Avenue, St. Louis, Missouri 63103. The lease has approximately five years remaining. We also lease an approximately 138,000 square foot warehouse in St. Louis with a remaining lease term of approximately four years.

Intellectual Property and Proprietary Rights

We acquired the right and title to several trademarks in connection with the Bakers acquisition, including our trademark Bakers^TM . As discussed above, we have sold our rights to the Wild Pair^® trademark but retain a non exclusive license. In addition, we currently have several applications pending with the United States Patent and Trademark Office for additional registrations. For more information on our trademarks, please see “Risk Factors — Our ability to expand into some territorial and foreign jurisdictions under the trademarks “Bakers” and “Wild Pair” is restricted” and “Risk Factors — Our potential inability or failure to renew, register or otherwise protect our trademarks could have a negative impact on the value of our brand names.”

Seasonality

Our business is highly seasonal. We have five principal selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Our fourth quarter sales volume tends to be significantly higher than our other quarters because our product offering during the Holiday season tends to include our higher price point merchan-

dise such as boots and customer traffic tends to be substantially higher during the Holiday season. Consequently, we achieve our greatest leverage on fixed expenses and can generate our highest profit margin levels during the fourth quarter. We have two of our five clearance sales during the third quarter and, consequently, we achieve our least leverage on fixed expenses and generate our lowest profit levels during the third quarter. Our working capital requirements fluctuate during the year, increasing prior to peak shopping seasons as we increase inventory levels to meet anticipated peak demand. You should also refer to “Risk Factors — Our overall profitability is highly dependent upon our fourth quarter results,” “Risk Factors — Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

This Annual Report on Form 10-K includes, and our other periodic reports and public disclosures may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve known and unknown risks and uncertainties or other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The words “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates” and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on those statements, which speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after such dates. You should read this Form 10-K completely and with the understanding that our actual results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

These risks, uncertainties and other factors may cause our actual results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements:

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our ability to identify and respond to changing consumer fashion preferences;

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our ability to maintain adequate liquidity to operate our business as desired;

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our ability to meet our sales goals and successfully implement our cost reduction and margin enhancement plan;

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our ability to comply with the covenants and restrictions under our lending arrangements;

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our susceptibility to operating losses;

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the accuracy of our estimates regarding our capital requirements and needs for additional financing;

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the limited trading of our common stock and our ability to obtain financing;

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our ability to retain members of our senior management team;

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our expectations regarding future financial results or performance;

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the execution of our business strategy;

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the effect of a substantial portion of our stock ownership being concentrated among a relatively small number of shareholders;

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any of our other plans, objectives, expectations and intentions contained in this Annual Report on Form 10-K that are not historical facts; and

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changes in general economic and business conditions.

Risk Factors

Our failure to identify and respond to changing consumer fashion preferences in a timely manner would negatively impact our sales, profitability, liquidity and our image as a fashion resource for our customers.

The footwear industry is subject to rapidly changing consumer fashion preferences. Our sales, net income and liquidity are sensitive to these changing preferences, which can be rapid and dramatic. Accordingly, we must identify and interpret fashion trends and respond in a timely manner. We continually market new styles of footwear, but demand for and market acceptances of these new styles are uncertain. Our failure to anticipate, identify or react appropriately to changes in consumer fashion preferences may result in lower sales, higher markdowns to reduce excess inventories, lower gross profits and negatively impact our financial liquidity. Conversely, if we fail to anticipate consumer demand for our products, we may experience inventory shortages, which would result in lost sales and could negatively impact our customer goodwill, our brand image and our profitability. Moreover, our business relies on continuous changes in fashion preferences. Stagnating consumer preferences could also result in lower sales and would require us to take higher markdowns to reduce excess inventories. For example, in prior years our product offerings did not adequately reflect changes in consumer fashion trends, primarily sandals in the spring and for boots in the fall, which negatively impacted sales and profitability. See “Item 6. Selected Financial Data.”

If we cannot maintain generally positive sales trends while successfully implementing our cost reduction and margin enhancement plan, we could fail to maintain a liquidity position adequate to support our ongoing operations.

Our ability to maintain and ultimately improve our liquidity position is highly dependent on sustaining the positive sales trends that began in June 2008 and generally have continued through April 2012. Our comparable store sales for the last three fiscal years (2009-2011) increased 1.3%, 1.7% and 1.3%, respectively. Through the first 12 weeks of fiscal year 2012 comparable stores sales decreased 2.4%. Our net losses in recent years have negatively impacted our liquidity and financial position. As of January 28, 2012, we had negative working capital of $15.8 million, unused borrowing capacity under our revolving credit facility of $1.6 million, and a shareholders’ deficit of $16.6 million. Our business plan for fiscal year 2012 is based on generally flat comparable sales for the first half of fiscal year 2012 and mid-single digit increases in comparable sales for the second half of 2012. The lower than projected sales results in the fourth quarter of fiscal year 2011 and the anticipated sales for fiscal 2012 place additional pressure on our liquidity position. We expect to maintain adequate liquidity for fiscal year 2012 by, among other things, working with our landlords and vendors to arrange payment terms that are reflective of our current cash flow. However, we do not expect to achieve significant additional liquidity through further extensions of payment terms. Also, we are initiating a plan to achieve $10.0 million of margin enhancements and cost cuts. More than one-half of these cost cutting measures include reductions in costs for freight, payroll, rent, travel, marketing, administrative and other costs. We also plan to improve our gross margin by reducing inventory purchases. Our ability to achieve these cost cuts — especially increasing gross margin while meeting our sales plan at the same time we are reducing marketing expenses and inventory purchases — or to take other actions to improve our liquidity, are subject to the risk that we may not be able to achieve the anticipated amounts or timing in order to provide sufficient liquidity.

The business plan for fiscal year 2012 reflects increased focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance in fiscal year 2012 compared to fiscal year 2011. We will need to continue working with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns. However, there is no assurance that we will achieve the sales, margin improvements, expense reductions or improved cash flow contemplated in our business plan.

If we do not achieve our updated business plan and our margin improvement and cost reduction plan, or if we were to incur significant unplanned cash outlays, it would become necessary for us to quickly seek additional sources of liquidity, or to find additional cost cutting measures. Any future financing would be subject to our financial results, market conditions and the consent of our lenders. We may not be able to obtain additional financing or we may only be able to obtain such financing on terms that are substantially dilutive to our current

shareholders and that may further restrict our business activities. If we cannot obtain needed financing, our operations may be materially negatively impacted and we may be forced into bankruptcy or to cease operations and you could lose your investment in the Company.

The terms of our revolving credit facility contain certain financial covenants with respect to our performance and other covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness.

Our revolving credit facility contains a financial covenant that requires us to maintain a minimum ratio of adjusted EBITDA to interest expense (both as defined in the agreement) calculated monthly on a rolling twelve month basis and includes other financial and customary covenants which, among other things require us to maintain a minimum availability, restrict our business activities and our ability to incur debt, make acquisitions, pay dividends, and repurchase our stock. A change in control of our Company, including any person or group acquiring beneficial ownership of 40% or more of our common stock or our combined voting power (as defined in the credit facility), is also prohibited. We may also maintain unused availability greater than 20% on a daily basis, instead of maintaining the ratio of our adjusted EBITDA to our interest expense of no less than 1.0:1.0. We failed to meet the covenant in June and July of 2010, which violation was waived by the bank. There is no assurance that we can obtain any further required waivers. Compliance with the ratio portion of the minimum adjusted EBITDA covenant is also a requirement under our revolving credit facility to permit the payment of principal payments on our $4 million in subordinated convertible debentures, which are now due in four equal annual installments beginning in February 2013.

There is no assurance that we will be able to comply with our covenants or the payment obligations under our subordinated convertible debentures. In light of our historical sales volatility and our recent inability to comply with the ratio requirement, there is a reasonable possibility that we may not be able to comply with our minimum adjusted EBITDA interest coverage ratio covenant or to make the scheduled principal payments on our subordinated convertible debentures. In the event that we were to violate any of the covenants in our credit facility, or if indebtedness in excess of $1.0 million, including the subordinated convertible debentures, could be accelerated, or in the event that 10% or more of our leases could be terminated (other than solely as a result of certain sales of our common stock), the lender would have the right to accelerate repayment of all amounts outstanding under the credit agreement, or to commence foreclosure proceedings on our assets. Any acceleration in the repayment of our indebtedness or related foreclosure would adversely affect our business.

For more information about our credit facility, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities.”

Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility.

Our business is seasonal, with a substantial portion of our profitability and cash flow occurring during our fourth quarter. We rely on draws from our revolving credit facility to fund seasonal working capital requirements during our year. Draws on our credit facility are limited by both an overall limit of $30 million and also by a calculated borrowing base that varies according to a formula based on inventory and accounts receivable and is generally less than the $30 million overall limit. As of January 28, 2012, we had an outstanding balance on our credit facility of $11.6 million and unused borrowing capacity, calculated in accordance with the agreement, of $1.6 million. As of April 21, 2012, we had an outstanding balance of $12.7 million and unused borrowing capacity of $1.1 million. To the extent we were to fail to generate sufficient cash from operating activities or from other financing activities, we could encounter availability constraints related to our operating activities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities.”

The report issued by our independent registered public accounting firm on our fiscal year 2011 financial statements contains language expressing substantial doubt about our ability to continue as a going concern.

The report of our independent registered public accounting firm for the fiscal year ended January 28, 2012, states that our recent losses and working capital deficiency raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset and liability amounts that might be necessary if we cease to function as a going concern. See Note 2 to our financial statements. This audit report could adversely affect our relationships with our landlords, our suppliers, our ability to raise additional capital and to execute our business plan, and could have a material adverse effect on our business, financial condition and results of operations. Moreover, if we cease to function as a going concern you may lose your investment in the Company.

The departure of members of our senior management team could adversely affect our business.

The success of our business depends upon our senior management closely supervising all aspects of our business, in particular, the operation of our stores and the design, procurement and allocation of our merchandise. Retention of senior management is especially important in our business due to the limited availability of experienced and talented retail executives. If we were to lose the services of Peter Edison, our Chairman, Chief Executive Officer and President, or other members of our senior management, our business could be adversely affected if we were unable to employ a suitable replacement in a timely manner. In addition, if Peter Edison ceases to be the Company’s Chief Executive Officer for any reason, we would be required to offer to redeem our $5 million debenture due 2020 at 101% of the outstanding principal amount. Moreover, Steven Madden Ltd. currently holds approximately 19.99% of the company’s common stock subject to a voting agreement which requires the shares to be voted in the same manner as Peter Edison. If Peter Edison ceases to be CEO, the voting agreement terminates and the two year restrictions on transferability of the shares and the debenture terminate.

A decline in general economic conditions could lead to reduced consumer demand for our footwear and accessories and could lead to reduced sales.

In addition to consumer fashion preferences, consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, gas prices, consumer confidence and consumer perception of economic conditions. The current slowdown in the United States economy and uncertain economic outlook could adversely affect consumer spending habits, which would likely result in lower net sales than expected on a quarterly or annual basis.

Our overall profitability is highly dependent upon our fourth quarter results.

Our fourth quarter sales volume tends to be significantly higher than our other quarters because our product offering during the Holiday season tends to include our higher price point merchandise such as boots and customer traffic tends to be substantially higher during the Holiday season. Consequently, we achieve our greatest leverage on fixed expenses and generate our highest profit levels during the fourth quarter. Should our product offerings not meet with customer acceptance during the fourth quarter, it would have a substantial negative impact on the overall results for the year.

Our operations are subject to quarterly fluctuations that can impact our profitability and liquidity.

In addition to customer shopping patterns, our quarterly results are affected by a variety of other factors, including:

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fashion trends;

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the effectiveness of our inventory management;

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changes in our merchandise mix;

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weather conditions;

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changes in general economic conditions; and

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actions of competitors, mall anchor stores or co-tenants.

Due to factors such as these, our quarterly results of operations have fluctuated in the past and can be expected to continue to fluctuate in the future. For more information, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality and Quarterly Fluctuations.”

We are subject to risks associated with leasing our stores, including those stores where we acquired the lease through bankruptcy auctions.

We lease our store locations under individual leases. Approximately one-half of our stores are located in properties managed by two national property management companies. A number of our leases include termination and default provisions which apply if we do not meet certain sales levels, specified dilution in or changes of ownership of our Company occur, or in other circumstances. In addition, our leases subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters. Moreover, each year a significant portion of our leases are subject to renewal or termination. If one or more of our landlords decides to terminate our leases, or to not allow us to renew, our business could be materially and adversely affected. We initially acquired many of our current leases from Edison Brothers, as debtor-in-possession, or from other bankrupt entities through auctions in which a bankruptcy court ordered the assignment of the debtor’s interest in the leases to us. As a result, we have not separately negotiated many of our leases, which are generally drafted in favor of the landlord.

Our market share may be adversely impacted at any time by a significant number of competitors.

We operate in a highly competitive environment characterized by low barriers to entry. We compete against a diverse group of competitors, including national branded wholesalers, national specialty retailers, regional chains, national branded off-price retailers, traditional department stores, discounters and apparel retailers. Many of our competitors are larger and have substantially greater resources than we do. Our market share and results of operations could be adversely impacted by this significant number of competitors or the introduction of new competitors. For more information about our competition, please see “Business — Competition.”

Our common stock is not quoted on a national exchange, and there is relatively limited trading in our common stock, which limits the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock and limits our ability to obtain financing.

We were delisted from the Nasdaq Stock Market. As a result, our common stock is not quoted on a national exchange and is currently quoted on the OTC Bulletin Board. There is no assurance that our common stock will ever be listed again on a national securities exchange. As compared to securities quoted on a national exchange, selling our common stock could be more difficult because smaller quantities of shares are likely be bought and sold, transactions could be delayed, security analysts’ coverage of us may be reduced, and our common stock may trade at a lower market price than it otherwise would. In addition, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity of our common stock. We believe market makers will continue to quote our common stock on the OTC Bulletin Board, but this is out of our direct control and we can give no assurance that our stock will remain so quoted. Also, our shareholders do not have the benefit of restrictions on dilution and other rules imposed by national exchanges, and we may engage in potentially dilutive transactions without complying with shareholder approval rules imposed by national exchanges. The trading volume of our common stock is relatively limited, which we expect to continue. These factors could have a material adverse effect on the trading price, liquidity, volatility, value and marketability of our common stock and could have a material adverse effect on our ability to obtain adequate capital or financing for the continuation of our operations.

Our failure to maintain good relationships with our manufacturers could harm our ability to procure quality inventory in a timely manner.

Our ability to obtain attractive pricing, quick response, ordering flexibility and other terms from our manufacturers depends on their perception of us and our buying agents. We do not own any production facilities or have any long term contracts with any manufacturers, and we typically order our inventory through purchase orders. Any disruption in our supply chain could quickly impact our sales. Our failure or the failure of our buying

agents to maintain good relationships with these manufacturers could increase our exposure to changing fashion cycles, which may lead to increased inventory markdown rates. It is possible that we could be unable to acquire sufficient quantities or an appropriate mix of merchandise or raw materials at acceptable prices. Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards. In this event, unless we are able to obtain replacement products in a timely manner, we may lose sales. We are also subject to risks related to the availability and use of materials and manufacturing processes for our products, including those which some may find objectionable.

We rely on a small number of buying agents and private label vendors for a substantial portion our merchandise purchases, and our failure to maintain good relationships with any of them could harm our ability to source our products.

For fiscal year 2011, five buying agents/private label vendors accounted for approximately 54% of our merchandise purchases, with one private label vendor accounting for approximately 23% of our merchandise purchases. Our buying agents and private label vendors assist in developing our private label merchandise, arrange for the purchase of necessary materials and contract with manufacturers. We execute nonexclusive agreements with some of our buying agents. These agreements prohibit our buying agents from sharing commissions with manufacturers, owning stock or holding any ownership interest in, or being owned in any way by, any of our manufacturers or suppliers. The agreements do not prohibit our buying agents from acting as agents for other purchasers, which could negatively impact our sales. If they were to disclose our plans or designs to our competitors, our sales may be materially adversely impacted. The loss of any of these key buying agents or a breach by them of our buying agent agreements could adversely affect our ability to develop or obtain merchandise.

Our merchandise is manufactured by foreign manufacturers; therefore, the availability and costs of our products may be negatively affected by risks associated with international trade.

Although all of our stores are located in the United States, virtually all of our merchandise is produced in China, Brazil, Italy, Spain and other foreign countries. Therefore, we are subject to the risks associated with international trade, which include:

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adverse fluctuations in currency exchange rates;

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changes in import tariffs, duties or quotas;

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the imposition of taxes or other charges on imports;

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the imposition of restrictive trade policies or sanctions by the United States on one or more of the countries from which we obtain footwear and accessories;

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expropriation or nationalization;

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compliance with and changes in import restrictions and regulations;

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exposure to different legal standards and the burden of complying with a variety of foreign laws and changing foreign government policies;

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international hostilities, war or terrorism and pirates;

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changes in foreign governments, regulations, political unrest, work stoppages, shipment disruption or delays; and

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changes in economic conditions in countries in which our manufacturers and suppliers are located.

Our imported products are subject to United States customs duties, which make up a material portion of the cost of the merchandise. If customs duties are substantially increased, it would harm our profitability. The United States and the countries in which our products are produced may impose new quotas, duties, tariffs, or other restrictions, or adversely adjust prevailing quota, duty, or tariff levels, any of which could have a harmful effect on our profitability.

Furthermore, when declaring the duties owed on and the classifications of our imported products, we make various good faith assumptions. We regularly employ a third party to review our customs declarations, and we will notify the appropriate authorities if any erroneous declarations are revealed. However, the customs authorities retain the right to audit our declarations, which could result in additional tariffs, duties and/or penalties if the authorities believe that they have discovered any errors.

A decline in the value of the United States dollar relative to other currencies, especially the Chinese yuan could negatively impact our gross margins.

The value of the United States dollar recently has declined relative to the Chinese yuan. Although our inventory purchase transactions are denominated in United States dollars which eliminates exchange rate risks on established contracts, the decline in the value of the United States dollar has resulted in increases in the costs of our Chinese sourced products. In the event of a further decline in the United States dollar or economy, it may not be possible for us to increase or maintain an increase in our average selling prices sufficient to fully or partially reflect these cost increases. To the extent that we are unable to offset such cost increases there would be a negative impact on our gross margins.

Our reliance on manufacturers in China exposes us to supply risks.

Manufacturing facilities in China produce a significant portion of our products. Generally, a substantial majority of our private label footwear units are manufactured in China and virtually all of our private label accessories are manufactured in China each year. The Chinese economy is subject to periodic energy and labor shortages, as well as transportation and shipping bottlenecks. In prior years, there have been delays at ports on the West Coast of the United States. These matters, changes in the Chinese government or economy, or the current tariff or duty structures or adoption by the United States of trade policies or sanctions adverse to China, could harm our ability to obtain inventory in a timely and cost effective manner.

Our ability to expand into some territorial and foreign jurisdictions under the trademark “Bakers” is restricted.

When we acquired selected assets of the Bakers chain from Edison Brothers Stores, Inc. in a bankruptcy auction in June 1999, we were assigned title to and the right to use the trademark “Bakers,” and other trademarks to the extent owned by Edison Brothers at that time. Our rights to use the trademarks are subject to a Concurrent Use Agreement which recognizes the geographical division of the trademarks between us and a Puerto Rican company. At approximately the same time as we acquired our rights and title, Edison Brothers also assigned to the Puerto Rican company title to and the right to use the trademarks, subject to the Concurrent Use Agreement. Under the Concurrent Use Agreement, we and the Puerto Rican company agree that the Puerto Rican company has the exclusive right to use the trademarks in the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Central and South America, Cuba, the Dominican Republic, the Bahamas, the Lesser Antilles and Jamaica and that we have the exclusive right to use the trademarks in the United States and throughout the world, except for the territories and jurisdictions in which the Puerto Rican company was assigned the rights. Consequently, we do not have the right to use the trademark “Bakers” in those territories and foreign jurisdictions in which the Puerto Rican company owns the trademark rights, which may limit our growth.

Our potential inability or failure to renew, register or otherwise protect our trademarks could have a negative impact on the value of our brand names.

Because the trademarks assigned to us by Edison Brothers are subject to the Concurrent Use Agreement, the U.S. trademark applications and registrations are jointly owned by us and a Puerto Rican company, which could impair our ability to renew and enforce the assigned applications and registrations. Simultaneously with the Puerto Rican company, we have filed separate concurrent use applications for the “Bakers” trademark, and we have requested that existing applications for the trademark “Bakers” also be divided territorially. While we are in agreement with the Puerto Rican company that confusion is not likely to result from concurrent use of the trademarks in our respective territories, the United States Patent and Trademark Office may not agree with our position. If we are not able to register or renew our trademark registrations, our ability to prevent others from using

trademarks and to capitalize on the value of our brand names may be impaired. Further, our rights in the trademarks could be subject to security interests granted by the Puerto Rican company. Our potential inability or failure to renew, register or otherwise protect our trademarks and other intellectual property rights could negatively impact the value of our brand names.

On December 28, 2011, we sold to Steven Madden, Ltd. (“Madden”) our rights to the Wild Pair trademark and related marks in the United States and certain other territories. Although we will retain a non-exclusive, royalty free license that will allow us to continue to offer Wild Pair merchandise in our stores as long as we comply with the agreement, the sale may limit our ability to further monetize the value of the mark as the license is generally not transferrable. Moreover, the Agreement also contains customary and other terms and conditions, including requirements for us to comply with covenants regarding the maintenance, registration and use of the marks, including maintaining quality control and obtaining the consent of Madden in some cases. Madden has also agreed not sell certain marked merchandise to certain of our competitors. The agreement is perpetual, but may be terminated by Madden we are in material breach of the agreement, in which event our license would be terminated.

We would be adversely affected if our distribution operations were disrupted.

The efficient operation of our stores is dependent on our ability to distribute merchandise manufactured overseas to locations throughout the United States in a timely manner. We depend on third parties to ship, receive and distribute substantially all of our merchandise. A third party operating in China manages the shipping of merchandise from China either to a third party operating our Los Angeles, California distribution center or for delivery directly to our stores through Los Angeles. The third party in Los Angeles, California accepts delivery of a significant portion of our merchandise from Asia, and another third party near Philadelphia, Pennsylvania accepts delivery of our merchandise from elsewhere. These parties located in the United States have provided these services to us pursuant to written agreements since 1999 and 2000. One of these agreements is terminable upon 30 days notice. We also continue to operate under the terms of an expired agreement with the remaining third party. Merchandise not shipped to our stores is shipped to our company operated warehouse. We also rely on our computer network to coordinate the distribution of our products. If we need to replace one of our third party service providers, if our warehouse or computer network is shut down for any reason or does not operate efficiently, our operations could be disrupted for a substantial period of time while we identify and integrate a replacement into our system. Any such disruption could materially negatively impact our ability to maintain sufficient inventory in our stores and consequently our profitability.

The market price of our common stock may be materially adversely affected by market volatility.

The market price of our common stock is expected to be highly volatile, both because of actual and perceived changes in our financial results and prospects and because of general volatility in the stock market. The factors that could cause fluctuations in our stock price may include, among other factors discussed in this section, the following:

•

actual or anticipated variations in comparable store sales or operating results;

•

changes in financial estimates by research analysts;

•

actual or anticipated changes in the United States economy or the retailing environment;

•

changes in the market valuations of other footwear or retail companies; and

•

announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures, financing transactions, securities offerings or other strategic initiatives.

We are controlled by a small group of shareholders whose interests may differ from other shareholders.

A substantial portion of our stock ownership is concentrated among a relatively small number of mutual funds and hedge funds, and Steven Madden, Ltd., a competitor, whose interests may differ from our other shareholders or could impact our company including any potential change of control. Accordingly, these shareholders will continue to have significant influence in determining the outcome of all matters submitted to shareholders

for approval, including the election of directors and significant corporate transactions. The interests of these shareholders may differ from the interests of other shareholders, and their concentration of ownership may have the effect of delaying or preventing a change in control that may be favored by other shareholders. As long as these people are among our principal shareholders, they will have the power to significantly influence the election of our entire board of directors.

Peter Edison’s employment agreement entitles him to a onetime payment equal to three times his current base salary (as defined in the agreement) upon the occurrence of certain events, including following a change of control of the Company if there is generally a material reduction in the nature of his duties or his base salary, or he is not allowed to participate in certain bonus plans. For this purpose, a change of control generally includes the acquisition by a person or group of more of our common stock than that held by Peter Edison. More than one of our shareholders has filed a Schedule 13D or G reporting beneficial ownership in an amount in excess of that beneficially owned by Peter Edison and our current management.

Our charter documents and Missouri law may inhibit a takeover, which may cause a decline in the value of our stock.

Provisions of our restated articles of incorporation, our restated bylaws and Missouri law could make it more difficult for a third party to acquire us, even if closing the transaction would be beneficial to our shareholders. For example, our restated articles of incorporation provide, in part, that directors may be removed from office by our shareholders only for cause and by the affirmative vote of not less than two-thirds of our outstanding shares and that vacancies may be filled only by a majority of remaining directors. Under our restated bylaws, shareholders must follow detailed notice and other requirements to nominate a candidate for director or to make shareholder proposals. In addition, among other requirements, our restated bylaws require at least a two-thirds vote of shareholders to call a special meeting. Moreover, Missouri law and our bylaws provide that any action by written consent must be unanimous. Furthermore, our bylaws may be amended only by our board of directors. Certain amendments to our articles of incorporation require the vote of two-thirds of our outstanding shares in certain circumstances, including the provisions of our articles of incorporation relating to business combinations, directors, bylaws, limitations on director liabilities and amendments to our articles of incorporation. We are also generally subject to the business combination provisions under Missouri law, which allow our board of directors to retain discretion over the approval of certain business combinations. In our bylaws, we have elected to not be subject to the control shares acquisition provision under Missouri law, which would deny an acquiror voting rights with respect to any shares of voting stock which increase its equity ownership to more than specified thresholds. These and other provisions of Missouri law and our articles of incorporation and bylaws, our board’s authority to issue preferred stock and the lack of cumulative voting in our articles of incorporation may have the effect of making it more difficult for shareholders to change the composition of our board or otherwise to bring a matter before shareholders without our board’s consent. Such items may reduce our vulnerability to an unsolicited takeover proposal and may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price of our common stock.

Executive Officers of the Registrant

The information set forth herein under the caption “Item 10. Directors, Executive Officers and Corporate Governance — Executive Officers of the Registrant” is incorporated herein by reference.

Item 1A.

Risk Factors.

Information set forth in Item 1 of this report under “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and under “Item 1. Business — Risk Factors” is incorporated herein by this reference.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

Information relating to properties set forth in Item 1 of this report under “Item 1. Business — Stores” is incorporated herein by this reference. Information relating to properties set forth in Item 1 of this report under “Item 1. Business — Properties” is incorporated herein by this reference. All of our stores are located in the United States.

Item 3.

Legal Proceedings.

From time to time, the Company is involved in ordinary routine litigation common to companies engaged in the Company’s line of business. Currently, the Company is not involved in any material pending legal proceedings.

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Holders

The common stock of Bakers Footwear Group, Inc. has been quoted on the OTC Bulletin Board, which is not a national securities exchange, under the symbol “BKRS.OB” since June 18, 2010. Prior to that the common stock was quoted on the Nasdaq Capital Market under the symbol “BKRS” since September 2009 and on the Nasdaq Global Market from February 5, 2004 to September 2009. Prior to this time, there was no public market for the Company’s common stock. The closing sales price of Bakers Footwear Group, Inc.’s common stock on the OTC Bulletin Board was $0.73 per share on April 24, 2012. As of April 24, 2012, we estimate that there were approximately 37 holders of record and approximately 1,100 beneficial owners of the Company’s common stock. Please see “Item 1. Business — Risk Factors — Our common stock is not quoted on a national exchange, and there is relatively limited trading in our common stock, which limits the ability of our shareholders or potential shareholders to purchase or sell shares of our common stock and limits our ability to obtain financing.”

The following table summarizes the range of high and low sales prices on Nasdaq and the high and low prices on the OTC Bulletin Board for the Company’s common stock during fiscal years 2010 and 2011, as applicable. The quotations on the OTC Bulletin Board may reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

The following table summarizes the range of high and low sales prices for the Company’s common stock during fiscal years 2010 and 2011.


	High		Low
2010
First quarter (ended May 1, 2010)	$	3.55	$	0.95
Second quarter (ended July 31, 2010)		2.80		0.55
Third quarter (ended October 30, 2010)		1.10		0.55
Fourth quarter (ended January 29, 2011)		1.49		0.80
2011
First quarter (ended April 30, 2011)	$	1.20	$	0.71
Second quarter (ended July 30, 2011)		1.25		0.85
Third quarter (ended October 29, 2011)		1.10		0.55
Fourth quarter (ended January 28, 2012)		0.80		0.46

Dividends

We have declared no dividends subsequent to our initial public offering in 2004. We currently intend to retain our earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Any future payments of dividends will be at the discretion of our board of directors and will depend upon factors as the board of directors deems relevant. Our revolving credit facility generally prohibits the payment of dividends, except for common stock dividends. We give no assurance that we will pay or not pay dividends in the foreseeable future.

Recent Sales of Unregistered Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans

The information with respect to “Equity Compensation Plan Information” in Item 12 hereof is incorporated herein by reference.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During fiscal year 2011, the Company did not repurchase any Company securities.

Item 6.

Selected Financial Data.

The following table summarizes certain selected financial data for each of the five fiscal years in the period ended January 28, 2012 and have been derived from our audited financial statements. Our audited financial statements for the three fiscal years ended January 28, 2012 are included elsewhere in this Annual Report on Form 10-K. The information contained in these tables should be read in conjunction with our financial statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.


	Fiscal Year Ended(1)
	February 2, 2008 (2)(3)(4)(5)			January 31, 2009 (4)(5)(6)(7)			January 30, 2010 (4)(5)(7)			January 29, 2011 (4)(5)(7)(8)			January 28, 2012 (4)(5)(7)(8)(9)
Net sales	$	186,279,987		$	183,661,789		$	185,368,696		$	185,625,844		$	185,095,288
Gross profit		47,461,122			50,551,662			53,368,600			49,571,907			46,346,110
Loss before income taxes		(16,965,898	)		(14,910,754	)		(9,082,096	)		(9,479,199	)		(10,957,174	)
Provision for (benefit from) income taxes(5)		691,367			84,847			—			(187,462	)		—

Net loss	$	(17,657,265	)	$	(14,995,601	)	$	(9,082,096	)	$	(9,291,737	)	$	(10,957,174	)

Net loss per common share	$	(2.70	)	$	(2.13	)	$	(1.24	)	$	(1.14	)	$	(1.18	)

Total assets	$	67,558,951		$	58,508,192		$	48,618,467		$	48,005,687		$	41,711,053

Long-term debt and capital lease obligations, less current portion	$	4,000,000		$	—		$	—		$	8,123,327		$	8,185,483

(1)

Because of the changes in the number of stores for each period, our operating results for each period and future periods may not be comparable in some significant respects. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a reconciliation and discussion of certain store openings and closings by period. We currently have no plans to pay dividends. See the information under the caption “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividends,” which is incorporated herein by reference.

(2)	During fiscal year 2007, we completed a private placement of $4,000,000 in aggregate principal amount of subordinated convertible debentures. We received net proceeds of $3,578,752.

(3)

During fiscal year 2007, we entered into an agreement to terminate a long-term below market operating lease, in exchange for an immediate $5,050,000 cash payment and the right to continue occupying the space through January 8, 2009. We recognized a net gain of $4,700,000 from this transaction in fiscal year 2007.

(4)	During fiscal years 2007, 2008, 2009, 2010 and 2011, we recognized $3,131,169, $2,609,589, $2,762,273, $1,415,979 and $1,882,725, respectively, in noncash charges related to the impairment of long-lived assets of underperforming stores.

(5)

During fiscal year 2007, our pretax losses exceeded our operating loss carryback potential. Therefore, we concluded that the realizability of net deferred tax assets was no longer more likely than not, and established a valuation allowance against its net deferred tax assets. As of February 2, 2008, the valuation allowance was $7,186,389, resulting in a net provision for income tax expense of $691,367 for fiscal year 2007. As of January 31, 2009, January 30, 2010, January 29, 2011 and January 28, 2012, the valuation allowance had increased to $12,896,006, $16,363,420, $19,742,497 and $23,921,637, respectively.

(6)	During fiscal year 2008, we obtained net proceeds of $6.7 million from the entry into a $7.5 million subordinated secured term loan and the issuance of 350,000 shares of common stock.

(7)

In fiscal years 2008 and 2009, the entire balance of the subordinated secured term loan and the subordinated convertible debentures was classified as a current liability because of our potential inability to comply with certain financial covenants contained in the subordinated secured term loan. With the repayment of the subordinated secured term loan at the end of fiscal year 2010, the classification of the subordinated convertible debentures has been returned to non-current liabilities.

(8)	In fiscal year 2010, we obtained net proceeds of $4.5 million from the entry into a $5 million subordinated debenture and the issuance of 1,844,860 shares of common stock.

(9)	During fiscal year 2011, we recorded a $3.8 million gain from sale of the Wild Pair trademark.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and “Item 1. Business — Risk Factors” and elsewhere in this annual report. The following section is qualified in its entirety by this more detailed information and our Financial Statements and the related Notes thereto, included elsewhere in this Annual Report on Form 10-K.

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 January 28, 2012, we operated 227 stores, including the 13 store Wild Pair chain that targets women between the ages of 17 and 29 who desire edgier, fashion forward footwear. As of April 21, 2012 we operated 225 stores, including 12 Wild Pair stores.

During fiscal 2011, net sales decreased 0.3% compared to the prior year, reflecting strong demand for dress shoes in the spring, offset by weakness in demand for dress boots in the fall. Comparable store sales in fiscal 2011 increased 1.3%. Gross profit percentage decreased to 25.0% of sales compared to 26.7% in the prior year, reflecting the impact of weak fourth quarter sales and increased promotional activity. We recognized noncash impairment expense of $1.9 million compared to $1.4 million last year.

We incurred net losses of $11.0 million and $9.3 million in fiscal years 2011 and 2010. We achieved increases in comparable store sales of 1.3% and 1.7% in fiscal years 2011 and 2010, respectively. Fiscal year 2011 marked our fourth consecutive year of comparable store sales increases. Our losses since 2005 have had a significant negative impact on our financial position and liquidity. As of January 28, 2012, we had negative working capital of $15.8 million, unused borrowing capacity under our revolving credit facility of $1.6 million, and shareholders’ deficit of $16.6 million.

Our business plan for fiscal year 2012 is based on generally flat comparable store sales for the first half of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. Through April 21, 2012, comparable store sales have decreased 2.4%. Also, as part of the business plan, we initiated a plan to achieve $10.0 million of margin enhancements and cost cuts. Based on the business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2012. The business plan reflects increased focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance in fiscal year 2012 compared to fiscal year 2011. We will need to continue working with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns. We do not expect to achieve significant additional liquidity through further extensions of payment terms There is no assurance that we will achieve the sales, margin improvements, expense reductions or improved cash flow contemplated in our business plan.

Sale of Wild Pair Trademark

In late December 2011, we sold to Steven Madden, Ltd. (“Madden”) for net proceeds of approximately $3.8 million our rights to the Wild Pair trademark and related marks in the United States and certain other territories, but retained a non-exclusive, royalty free license that will allow us to continue to offer Wild Pair merchandise in our stores as long as we comply with the agreement We used the proceeds for working capital purposes, including payments to certain mutually agreed vendors. We do not anticipate any similar transactions that would help our liquidity situation.

Debt Covenants.

We amended our $4 million subordinated convertible debentures in June 2011 and again in April 2012 to defer principal payments and increase the interest rate. Originally, the debentures were payable in full in June 2012 and bore interest at 9.5%. The June 2011 amendment rescheduled the principal payments to four equal annual installments beginning in June 2012 and increased the interest rate to 12%. The April 2012 amendment further deferred the principal payments to four equal annual installments beginning in February 2013 and increased the interest rate to 13%. In both cases, our senior lender consented to the amendment but, among other things, conditioned our ability to make those future principal payments on a requirement that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12 month periods ending prior to the payments. For more information on the April 2012 amendment, please see “Item 9B. Other Information” which is incorporated herein by reference. In addition, please see “— Liquidity and Capital Resources — Debt Covenants” for additional information.

In addition to the condition to make the payments on our subordinated convertible debentures, our credit facility contains, among other things, a minimum availability or adjusted EBITDA interest coverage ratio covenant which requires that either we maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0. Since the third quarter of fiscal year 2010, we have met the bank covenant based on maintaining unused availability greater than 20% on a daily basis and we anticipate doing so for 2012. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of April 21, 2012, the balance on our revolving line of credit was $12.7 million, and our unused borrowing capacity in excess of the covenant minimum was $1.1 million.

Based on our business plans for fiscal year 2012 including the anticipated impact of the margin improvement and cost reduction program, we believe that we will be able to comply with the minimum availability or adjusted EBITDA coverage ratio covenant in our revolving credit facility and comply with the adjusted EBITDA requirement related to the scheduled principal payment on the convertible debentures in February 2013. Given the inherent volatility in our sales performance, there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility and our recent inability to comply with the ratio requirement, we believe that there is a reasonable possibility that we may not be able to comply with the financial covenants. Failure to comply with our financial covenants or the payment terms of the subordinated convertible debentures may result in a default under the terms of the revolving credit facility and our subordinated convertible debentures and could result in the acceleration of all of our debt obligations. As a result, we would be required to seek one or more additional amendments or waivers from our lenders. We believe that we would be able to obtain any required amendments or waivers, but can give no assurance that we would be able to do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against us. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to seek alternative financing.

We continue to face considerable liquidity constraints. Although we believe our business plan is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we were to incur significant unplanned cash outlays, it would become necessary for us to obtain additional sources of liquidity or make further cost cuts to fund our operations. In recognition of existing liquidity constraints, we continue to look for additional sources of capital at acceptable terms. However, there is no assurance that we would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow us to operate our business.

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. For more information, please see Note 1 in the Notes to the Financial Statements.

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

Merchandise inventories

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

Store closing and impairment charges

Long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. We regularly analyze the operating results of our stores and assess the viability of under-performing stores to determine whether they should be closed or whether their associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends, fixed assets of stores indicated to be impaired are written down to fair value based on management’s estimates of future store sales and expenses, which are considered Level 3 inputs. During the years ended January 30, 2010, January 29, 2011 and January 28, 2012, we recorded $2,762,273, $1,415,979, and $1,882,725, respectively, in noncash charges to earnings related to the impairment of long-lived assets.

Stock-based compensation expense

We compensate certain employees with various forms of share-based payment awards and recognize compensation expense for stock-based compensation based on the grant date fair value. Stock-based compensation expense is then recognized ratably over the service period related to each grant. We determine the fair value of stock-based compensation using the Black-Scholes option pricing model, which requires us to make assumptions regarding future dividends, expected volatility of our stock, and the expected lives of the options. We also make assumptions regarding the number of options and the number of shares of restricted stock and performance shares that will ultimately vest. The assumptions and calculations are complex and require a high degree of judgment. Assumptions regarding the vesting of grants are accounting estimates that must be updated as necessary with any resulting change recognized as an increase or decrease in compensation expense at the time the estimate is changed. Excess tax benefits related to stock option exercises are reflected as financing cash inflows and operating cash outflows.

During fiscal years 2009 and 2011, we granted 84,000 and 67,000 shares of restricted stock, respectively, under our 2005 Incentive Compensation Plan. During fiscal years 2009, 2010, and 2011 we granted 72,000, 227,000 and 75,000 stock options, respectively, under our 2003 Stock Option Plan.

As of January 28, 2012, the total unrecognized compensation cost related to non vested stock-based compensation is $484,130, and the weighted-average period over which this compensation is expected to be recognized is 1.4 years.

Deferred income taxes

We calculate income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations.

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

Based on our analyses during fiscal year 2010 and fiscal year 2011, we concluded that the realizability of net deferred tax assets was unlikely, and maintained a full valuation allowance against our net deferred tax assets. We have scheduled the reversals of our deferred tax assets and deferred tax liabilities and have concluded that based on the anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

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

We regularly analyze filing positions in all of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. Our federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. We did not record any unrecognized tax benefits as of January 28, 2012. As of January 29, 2011, we recorded a tax benefit of $187,462 as a result of a carryback of losses against previous federal tax payments. Our policy, if we had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

Fiscal Year

Our fiscal year is based upon a 52 — 53 week retail calendar, ending on the Saturday nearest January 31. The fiscal years ended January 28, 2012 (fiscal year 2011), January 29, 2011 (fiscal year 2010) and January 30, 2010 (fiscal year 2009) are 52 week periods. For comparison purposes, we classify our stores as comparable or non-comparable. A new store’s sales are not included in comparable store sales until the thirteenth month of operation. Sales from remodeled stores are excluded from comparable store sales during the period of remodeling. We include our Internet and catalog sales (“Multi-Channel Sales”) as one store in calculating our comparable store sales. Comparable store sales for fiscal year 2011 compare the fifty-two week period ended January 28, 2012 to the fifty-two week period ended January 29, 2011. Comparable store sales for fiscal year 2010 compare the fifty-two week period ended January 29, 2011 to the fifty-two week period ended January 30, 2010.

Results of Operations

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


	Fiscal Year Ended
	January 30, 2010			January 29, 2011			January 28, 2012
Net sales		100.0	%		100.0	%		100.0	%
Cost of merchandise sold, occupancy and buying expense		71.2			73.3			75.0

Gross profit		28.8			26.7			25.0
Selling expense		22.0			21.8			22.2
General and administrative expense		8.6			8.2			8.9
(Gain) Loss on disposal of property and equipment		0.2			—			(2.1	)
Impairment of long-lived assets		1.5			0.8			1.0

Operating loss		(3.5	)		(4.1	)		(5.0	)
Other income, net		0.1			0.1			0.1
Interest expense		(1.5	)		(1.1	)		(1.0	)
Benefit from income taxes		—			(0.1	)		—

Net loss		(4.9	)%		(5.0	)%		(5.9	)%

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


	Fiscal Year Ended
	January 30, 2010			January 29, 2011			January 28, 2012
Number of stores at beginning of period		239			238			232
Stores opened or acquired during period		4			4			3
Stores closed during period		(5	)		(10	)		(8	)

Number of stores at end of period		238			232			227

Fiscal Year Ended January 28, 2012 Compared to Fiscal Year Ended January 29, 2011

Net sales. Net sales were $185.1 million in fiscal year 2011, down from $185.6 million for fiscal year 2010, a decrease of $0.5 million or 0.3%. Comparable store sales in fiscal year 2011 increased 1.3% compared to a 1.7% increase in fiscal year 2010. Sales reflected strong spring sales of dress shoes offset by lower demand for opened up footwear in the summer and for dress boots in the fall. Average unit selling prices increased 7.7% reflecting higher price points compared to fiscal year 2010. Unit sales decreased 6.8%. Our multi-channel sales increased 31.2% to $15.4 million in fiscal year 2011.

Gross profit. Gross profit decreased to $46.3 million in fiscal year 2011 from $49.6 million in fiscal year 2010, a decrease of $3.3 million or 6.5%. As a percentage of sales, gross profit decreased to 25.0% in fiscal year 2011 from 26.7% in fiscal year 2010. Principal components of the decrease in gross margin dollars in fiscal year 2011 are a $2.7 million decrease from reduced gross margin percentage and a $0.9 million decrease from net store closures, partially offset by a $0.4 million increase in margins from our comparable store sales increase. Total markdown costs increased to $30.7 million in fiscal year 2011 compared to $28.4 million in fiscal year 2010.

Selling expense. Selling expense increased to $41.0 million in fiscal year 2011 from $40.4 million in fiscal year 2010, an increase of $0.6 million or 1.7%. The increase was primarily the result of a $1.1 million increase in marketing expenses, partially offset by a $0.4 million decrease in lower store depreciation expense and $0.1 million decrease in store repair and maintenance costs.

General and administrative expense. General and administrative expense increased to $16.5 million in fiscal year 2011 from $15.3 million in fiscal year 2010, an increase of $1.2 million or 8.0%. As a percentage of sales, general and administrative expense increased to 8.9% from 8.2% in fiscal year 2010. The increase was primarily the result of $0.4 million increase in payroll costs, $0.4 million in higher group health insurance costs, $0.3 million in legal expenses, $0.2 million increase in travel and meal expenses and $0.1 million increase in insurance coverage costs, partially offset by a $0.2 million decrease in depreciation.

Gain/loss on disposal of property and equipment. We recognized a $3.8 million gain on disposal of property and equipment in fiscal year 2011 primarily from the sale of the Wild Pair trademark. In fiscal year 2010, we recognized a $0.1 million loss.

Impairment of long-lived assets. During fiscal year 2011 we recognized $1.9 million in noncash charges related to the impairment of fixed assets and other assets at specific underperforming stores. Impairment expense in fiscal year 2010 was $1.4 million.

Interest expense. Interest expense decreased to $1.9 million in fiscal year 2011 from $2.1 million in fiscal year 2010, as a result of the subordinated secured term loan being paid off in fiscal year 2010.

Income tax expense. We did not recognize an income tax expense in fiscal year 2011. We recognized an income tax benefit of $0.2 million for fiscal year 2010 as a result of a carryback of losses against previous federal tax payments.

Net loss. We had a net loss of $11.0 million in fiscal year 2011 compared to net loss of $9.3 million in fiscal year 2010.

Fiscal Year Ended January 29, 2011 Compared to Fiscal Year Ended January 30, 2010

Net sales. Net sales were $185.6 million in fiscal year 2010, up from $185.4 million for fiscal year 2009, an increase of $0.2 million or 0.1%. Comparable store sales in fiscal year 2010 increased 1.7% compared to a 1.3% increase in fiscal year 2009. Sales reflected strong demand for dress shoes and casual boots during the fall months, partially offset by weakness in demand for our sandal line in the spring and summer. Average unit selling prices increased 1.1% reflecting slightly higher price points compared to fiscal year 2009. Unit sales decreased 0.6%. Our multi-channel sales increased 9.5% to $11.7 million in fiscal year 2010.

Gross profit. Gross profit decreased to $49.6 million in fiscal year 2010 from $53.4 million in fiscal year 2009, a decrease of $3.8 million or 7.1%. As a percentage of sales, gross profit decreased to 26.7% in fiscal year 2010 from 28.8% in fiscal year 2009, due to increased promotional activity and costs related to the roll out of the H by Halston line. Principal components of the decrease in gross margin dollars in fiscal year 2010 are a $3.7 million decrease from reduced gross margin percentage and a $0.5 million decrease from net store closures, partially offset by a $0.4 million increase in margins from our comparable store sales increase. Total markdown costs increased to $28.4 million in fiscal year 2010 compared to $26.0 million in fiscal year 2009.

Selling expense. Selling expense decreased to $40.4 million in fiscal year 2010 from $40.8 million in fiscal year 2009, a decrease of $0.4 million or 1.1%. The decrease was primarily the result of a $0.6 million decrease in store depreciation expense and a $0.2 million decrease in store payroll expenses, partially offset by a $0.4 million increase in advertising costs.

General and administrative expense. General and administrative expense decreased to $15.3 million in fiscal year 2010 from $15.9 million in fiscal year 2009, a decrease of $0.6 million or 4.2%. As a percentage of sales, general and administrative expense decreased to 8.2% from 8.6% in fiscal year 2009. The decrease was primarily the result of $0.3 million of lower group health insurance costs, and $0.3 million decrease of professional fees.

Gain/loss on disposal of property and equipment. Loss on disposal of property and equipment was $0.1 million in fiscal year 2010 compared to $0.3 million in fiscal year 2009.

Impairment of long-lived assets. During fiscal year 2010 we recognized $1.4 million in noncash charges related to the impairment of fixed assets and other assets at specific underperforming stores. Impairment expense in fiscal year 2009 was $2.8 million.

Interest expense. Interest expense decreased to $2.1 million in fiscal year 2010 from $2.7 million in fiscal year 2009, primarily as a result of the lower balance on the subordinated secured term loan which was paid off in fiscal year 2010.

Income tax expense. We recognized an income tax benefit of $0.2 million for fiscal year 2010 as a result of a carryback of losses against previous federal tax payments. We did not recognize an income tax expense in fiscal year 2009.

Net loss. We had a net loss of $9.3 million in fiscal year 2010 compared to net loss of $9.1 million in fiscal year 2009.

Seasonality and Quarterly Fluctuations

The following table sets forth our summary operating results for the quarterly periods indicated.


	Fiscal Year Ended January 31, 2010(1)
	Thirteen Weeks Ended May 2, 2009			Thirteen Weeks Ended August 1, 2009			Thirteen Weeks Ended October 31, 2009			Thirteen Weeks Ended January 30, 2010
Net sales	$	44,976,621		$	43,720,271		$	39,042,191		$	57,629,613
Gross profit		12,696,440			12,922,107			6,766,363			20,983,690
Operating expenses		14,600,044			14,076,667			16,293,982			14,853,036
Operating income (loss)		(1,903,604	)		(1,154,560	)		(9,527,619	)		6,130,654


	Fiscal Year Ended January 29, 2011(1)
	Thirteen Weeks Ended May 1, 2010			Thirteen Weeks Ended July 31, 2010			Thirteen Weeks Ended October 30, 2010			Thirteen Weeks Ended January 29, 2011
Net sales	$	43,524,036		$	43,293,127		$	40,575,879		$	58,232,802
Gross profit		10,736,296			11,932,912			6,350,181			20,552,518
Operating expenses		13,646,509			13,536,391			14,825,328			15,095,604
Operating income (loss)		(2,910,213	)		(1,603,479	)		(8,475,147	)		5,456,914


	Fiscal Year Ended January 28, 2012(1)(2)
	Thirteen Weeks Ended April 30, 2011			Thirteen Weeks Ended July 30, 2011			Thirteen Weeks Ended October 29, 2011			Thirteen Weeks Ended January 28, 2012
Net sales	$	47,012,740		$	44,303,614		$	40,201,918		$	53,577,016
Gross profit		12,257,184			12,970,222			4,937,045			16,181,659
Operating expenses		14,322,929			14,119,731			14,827,429			12,315,399
Operating income (loss)		(2,065,745	)		(1,149,509	)		(9,890,384	)		3,866,260

(1)	During the third quarters of fiscal year 2009, 2010 and 2011 we recognized $2,762,273, $1,415,979, and $932,879, respectively, in noncash charges related to the impairment of long-lived assets of underperforming stores.

(2)	During the fourth quarter of fiscal year 2011, we recorded a $3,839,232 gain on disposal of property and equipment primarily from the sale of our Wild Pair trademark, offset by $949,846 in noncash charges related to the impairment of long-lived assets of underperforming stores.

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. Quarterly comparisons may also be affected by the timing of sales promotions and costs associated with remodeling stores, opening new stores or acquiring stores. Sales and operating results in our third quarter are typically much weaker than in our other quarters.

Liquidity and Capital Resources

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

We incurred net losses of $11.0 million and $9.3 million in fiscal years 2011 and 2010. We achieved increases in comparable store sales of 1.3% and 1.7% in fiscal years 2011 and 2010, respectively. Our losses since 2005 have had a significant negative impact on our financial position and liquidity. As of January 28, 2012, we had negative working capital of $15.8 million, unused borrowing capacity under our revolving credit facility of $1.6 million, and shareholders’ deficit of $16.6 million.

Our business plan for fiscal year 2012 is based on generally flat comparable store sales for the first half of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. Also, as part of our business plan, we initiated a plan to achieve $10.0 million of margin enhancements and cost cuts. Based on the business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2012. The business plan reflects increased focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance in fiscal year 2012 compared to fiscal year 2011. We will need to continue working with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns. We do not expect to achieve significant additional liquidity through further extensions of payment terms. There is no assurance that we will achieve the sales, margin improvements, expense reductions or improved cash flow contemplated in our business plan.

Debt Covenants

Senior Credit Facility. We have a $30 million senior secured revolving credit facility with Bank of America, N.A., which matures on May 28, 2013. The agreement contains, among other things, a minimum availability or adjusted EBITDA interest coverage ratio covenant which requires that either we maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily, and if not met the adjusted EBITDA covenant is tested monthly on a rolling twelve month basis. Since the third quarter of fiscal year 2010, we have met the bank covenant based on maintaining unused availability greater than 20% on a daily basis. Our business plan for 2012 also anticipates meeting the bank covenant on this basis. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of April 21, 2012, the balance on our revolving line of credit was $12.7 million, and our unused borrowing capacity in excess of the covenant minimum was $1.1 million.

Subordinated Convertible Debentures. We also owe $4 million in principal amount on our subordinated convertible debentures. In June 2011 and April 2012, we amended the debentures to defer payment of principal. Please see “Item 9B. Other Information” which is incorporated herein by reference. Principal payments are now due in four equal annual installments of $1 million beginning on February 15, 2013. The interest rate on the debentures was also increased from 9.5% to 12% and then to 13% per annum. The amendments were consented to by our senior lender pursuant to an amendment to our senior credit facility. However, the bank amendment only allows us to make the required principal payments if certain conditions are met. These conditions include a requirement that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12 month periods ending prior to each principal payment date.

Failure to comply with our financial covenants or the payment terms of the subordinated convertible debentures may result in a default under the terms of the revolving credit facility and our subordinated convertible debentures and could result in the acceleration of all of our debt obligations. As a result, we would be required to seek one or more additional amendments or waivers from our lenders. We believe that we would be able to obtain any required amendments or waivers, but can give no assurance that we would be able to do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against us. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to seek alternative financing. Please see “Item 1. Business — Risk Factors — The terms of our revolving credit facility contain certain financial covenants with respect to our performance and other covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness.”

For additional information on our loan arrangements, please see “Item 1. Business — Risk Factors — Our operations could be constrained by our ability to obtain funds under the terms of our revolving credit facility” and “Item 1. Business — Risk Factors — The terms of our revolving credit facility contain certain financial covenants with respect to our performance and other covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness.” herein.

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


	January 29, 2011			January 28, 2012
Cash	$	146,263		$	148,308
Inventories		25,911,508			24,398,190
Total current assets		28,513,463			26,822,037
Property and equipment, net		18,405,166			14,087,942
Total assets		48,005,687			41,711,053
Accounts Payable		16,009,847			20,783,454
Revolving credit facility		10,449,299			11,560,210
Subordinated convertible debentures		4,000,000			4,000,000
Subordinated debenture		4,123,327			4,185,483
Total current liabilities		37,211,199			42,597,728
Total shareholders’ deficit		(5,987,111	)		(16,613,846	)
Net working capital deficit		(8,707,737	)		(15,775,691	)
Unused borrowing capacity(1)		3,060,582			1,556,150

(1)	As calculated under the terms of our revolving credit facility.

Operating activities

As a result of the seasonality of our operations, we generate a significant proportion of our cash from operating activities during our fourth quarter. For fiscal year 2011, through the end of our third quarter, cash used in operating activities was $5.2 million compared to cash used in operating activities of $2.3 million for the entire fiscal year. For fiscal year 2010, through the end of our third quarter, cash used in operating activities was $8.6 million compared to cash used in operating activities of $0.5 million for the entire fiscal year.

Cash used in operating activities was $2.3 million in fiscal year 2011 compared to $0.5 million in fiscal year 2010. The net loss in fiscal year 2011 of $11.0 million included significant non-cash items such as depreciation expense of $5.1 million, impairment expense of $1.9 million, stock-based compensation expense of $0.3 million and accretion of debt discount of $0.1 million, offset by a $3.8 million gain on the disposal of a trademark. There was a $3.2 million increase of accounts payable, accrued expenses and accrued rent liabilities, partially offset by a $1.5 million decrease in inventory from the balances at the end of fiscal year 2010. We continue to work with our vendors and landlords to maintain terms that are reflective of our seasonal cash flow patterns.

Our inventories at January 28, 2012 decreased to $24.4 million from $25.9 million at January 29, 2011. We believe that at January 28, 2012, inventory levels and valuations are appropriate given current and anticipated sales trends, however, 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.

For fiscal year 2010, cash used in operating activities was $0.5 million compared to cash provided by operating activities of $3.9 million in fiscal year 2009. The net loss in fiscal year 2010 of $9.3 million included significant non-cash items such as depreciation expense of $5.7 million, impairment expense of $1.4 million, and stock-based compensation expense of $0.4 million and accretion of debt discount of $0.2 million. There was a $5.7 million increase in inventory and a $6.3 million increase of accounts payable, accrued expenses and accrued rent liabilities from the balances at the end of fiscal year 2009, reflecting incremental in transit inventory and related payables at the end of fiscal year 2010.

We are committed under noncancelable operating leases for all store and office spaces. These leases expire at various dates through 2020 and generally provide for minimum rent plus payments for real estate taxes and operating expenses, subject to escalations. Some of our leases also require us to pay contingent rent based on sales. As of January 28, 2012, our lease payment obligations under these leases totaled approximately $23.8 million for fiscal year 2012, and an aggregate of approximately $95.4 million through 2020.

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.

Investing activities

In fiscal year 2011, cash provided by investing activities was $1.2 million compared to cash used in investing activities of $1.0 million in fiscal year 2010 and $0.4 million in fiscal year 2009. The principal source of cash from investing activities in fiscal year 2011 was the net proceeds of approximately $4.0 from the sale of the Wild Pair trademark, partially offset by capital expenditures of $2.8 million. During fiscal years 2010 and 2009, cash used in investing activities consisted primarily of capital expenditures for furniture, fixtures and leasehold improvements for both new and remodeled stores.

We currently anticipate that our capital expenditures in fiscal year 2012, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $2 million depending on cash flow. We anticipate being able to fund this level of store expansion from internally generated cash flow.

Our future capital expenditures will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. We continuously evaluate our future capital expenditure plans and adjust planned expenditures, as necessary, based on business conditions. As of April 21, 2012, we have not opened any new stores in fiscal year 2012.

Financing activities

In fiscal year 2011, net cash provided by financing activities was $1.1 million compared $1.5 million in fiscal year 2010 and net cash used in financing activities of $3.5 million in fiscal year 2009. The source of cash provided by financing activities in fiscal year 2011 was the $1.1 million net borrowings on our revolving line of credit. The principal source of cash from financing activities in fiscal year 2010 was the $4.5 million aggregate net proceeds from the issuance of common stock and the subordinated debenture, partially offset by $3.0 million of principal payments on the subordinated secured term loan. The principal uses of cash in financing activities in fiscal year 2009 was the repayment of $2.5 million on the subordinated secured term loan and net repayments on our revolving line of credit of approximately $1.0 million.

Revolving Credit Facility

We have a $30 million senior secured revolving credit facility with Bank of America, N.A. due May 28, 2013. The facility contains a minimum availability or adjusted EBITDA interest coverage ratio covenant that requires either the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily, and if not met the adjusted EBITDA covenant is tested monthly on a rolling twelve month basis. Since the third quarter of fiscal year 2010, we met the bank covenant based on maintaining unused availability greater than 20% on a daily basis.

In connection with amendments to our subordinated convertible debentures, in June 2011 and April 2012, we amended our revolving credit facility to allow us to make the required principal payments on the subordinated convertible debentures beginning February 2013, provided that certain conditions are met, including that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12 month period ending prior to the principal payment dates, all as calculated pursuant to the senior credit facility.

Amounts borrowed under the facility bear interest at a rate equal to the base rate (as defined in the agreement) plus a margin amount between 3.0% and 3.5%. The base rate equals the greater of the bank’s prime rate, the federal funds rate plus 0.50% or the Libor rate plus 1.0% (all as defined in the agreement).

The revolving credit facility also allows us to apply an interest rate based on Libor (as defined in the agreement) plus a margin amount to a designated portion of the outstanding balance as set forth in the agreement. The Libor margin (as defined in the agreement) ranges from 3.5% to 4.0%. Following the occurrence of any event of default, the bank may increase the rate by an additional two percentage points.

The unused line fee is 0.75% per annum. The unused line fee is payable monthly based on the difference between the revolving credit ceiling and the average loan balance under the agreement. The aggregate amount that we may borrow under the agreement at any time is further limited by a formula, which is based substantially on our inventory level but cannot be greater than the revolving credit ceiling of $30 million.

Amounts borrowed under the credit facility are secured by substantially all of our assets. If contingencies related to early termination of the revolving credit facility were to occur, or if we request and receive an accommodation from the lender in connection with the facility, we may be required to pay additional fees. We may be required to pay an early termination fee of up to $150,000 in the event we terminate the facility before May 2012.

The credit facility includes financial, reporting and other covenants relating to, among other things, use of funds under the facility in accordance with our business plan, prohibiting a change of control, including any person or group acquiring beneficial ownership of 40% or more of our common stock or combined voting power (as defined in the credit facility), maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase of our stock, and restricting certain acquisitions. In the event that we violate any of these covenants, including the minimum availability or adjusted EBITDA interest coverage financial covenant or the obligation to extend the maturity of our subordinated convertible debentures (both as described above), or if other indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or more of our leases could be terminated (other than solely as a result of certain sales of our common stock), the bank would have the right to accelerate repayment of all amounts outstanding under the agreement, or to commence foreclosure proceedings on our assets. We were in compliance with these covenants as of January 28, 2012 and expect to remain in compliance throughout fiscal year 2012 based on the expected execution of our business plan.

We had balances under our revolving credit facility of $11.6 million and $10.4 million as of January 28, 2012 and January 29, 2011, respectively. We had approximately $1.6 million and $3.1 million in unused borrowing capacity calculated under the provisions of our revolving credit facility as of January 28, 2012 and January 29, 2011, respectively. During the fiscal years 2011 and 2010, the highest outstanding balances on our revolving credit facility were $19.4 million and $20.1 million, respectively. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures. As of April 21, 2012, we had outstanding balances on our revolving credit facility of $12.7 million and unused borrowing capacity of $1.1 million.

Subordinated Convertible Debentures

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

In June 2011 and April 2012, we amended the debentures to defer payment of principal and to increase the interest rate. Under the amendments, principal will be repaid in four equal annual installments of $1 million beginning on February 15, 2013. The interest rate on the debentures was also increased from 9.5% to 12% and then to 13% per annum. The amendments were consented to by our senior lender pursuant to an amendment to our senior credit facility. The bank amendment allows us to make the $1 million required principal payments, provided that certain conditions are met. These conditions include a requirement that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12-month period ending prior to the principal payment dates, all as calculated pursuant to the senior credit facility. Please see “Item 9B. — Other Information.”

The subordinated convertible debentures are convertible into shares of common stock at any time. The initial conversion price was $9.00 per share. The conversion price, and thus the number of shares into which the debentures are convertible, is subject to anti-dilution and other adjustments. If we distribute any assets (other than ordinary cash dividends), then generally each holder is entitled to receive a like amount of such distributed property. In the event of a merger, consolidation, sale of substantially all of our assets, or reclassification or compulsory share exchange, then upon any subsequent conversion each holder will have the right to either the

same property as it would have otherwise been entitled or cash in an amount equal to 100% principal amount of the debenture, plus interest and any other amounts owed. The subordinated convertible debentures also contain a weighted average conversion price adjustment generally for future issuances, at prices less than the then current conversion price, of common stock or securities convertible into, or options to purchase, shares of common stock, excluding generally currently outstanding options, warrants or performance shares and any future issuances or deemed issuances pursuant to any properly authorized equity compensation plans. The subordinated convertible debentures contain limitations on the number of shares issuable pursuant to the subordinated convertible 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 subordinated convertible debentures issued to advisory directors, corporate directors or the entity that was affiliated with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock in the transaction or such that following conversion, the total number of shares beneficially owned by each holder does not exceed 19.999% of our common stock. These limitations may be removed with shareholder approval.

As a result of prior issuances of shares, the weighted average conversion price of the subordinated convertible debentures has decreased from $8.31 to $6.76 with respect to $1 million in aggregate principal amount of debentures and to $8.10, the minimum conversion price, with respect to $3 million in aggregate principal amount of debentures held by directors and director affiliates. The debentures are now convertible into a total of 518,299 shares of the Company’s common stock.

The subordinated convertible 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 subordinated convertible 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 subordinated convertible 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 subordinated convertible debentures.

Subordinated Debenture

On August 26, 2010, we entered into a Debenture and Stock Purchase Agreement with Steven Madden, Ltd. In connection with the agreement, we sold to Steven Madden, Ltd. a debenture in the principal amount of $5,000,000 (the “subordinated debenture”). Under the subordinated debenture, interest payments are required to be paid quarterly at an interest rate of 11% per annum. The principal amount is required to be repaid in four annual installments commencing on August 31, 2017, through the final maturity on August 31, 2020. As additional consideration, Steven Madden, Ltd. also received 1,844,860 shares of the our common stock which are subject to a voting agreement in favor of Peter Edison, representing a 19.99% interest in the Company on a post-closing basis. In connection with the transaction, we received aggregate net proceeds of $4.5 million after transaction and other costs.

The transaction documents contain standstill provisions which generally prohibit Steven Madden, Ltd. from owning more than 19.999% of our outstanding shares of common stock or from engaging in certain transactions in our common stock for ten years, subject to certain conditions. Until the earlier of August 26, 2012 or the termination or departure of Peter A. Edison as our Chief Executive Officer, Steven Madden, Ltd. is generally prohibited from transferring the shares issued or the subordinated debenture.

The subordinated debenture is subordinate to our other indebtedness, and is generally unsecured. We are required to offer to redeem the subordinated debenture at 101% of the outstanding principal amount in certain circumstances, including a change of control of the Company (as defined in the subordinated debenture) including the termination or departure of Peter A. Edison as our Chief Executive Officer for any reason.

The subordinated debenture generally provides for customary events of default, including default in the payment of principal or interest or other required payments in favor of Steven Madden, Ltd., breach of representations, and specified events of bankruptcy or specified judgments against us. Upon the occurrence of an event of default under the subordinated debenture, Steven Madden, Ltd. would be entitled to acceleration of the debt (at between 102% and 100% of principal depending on when a default occurred) plus all accrued and unpaid interest, with the interest rate increasing to 13.0% per annum. We may prepay the debenture at any time, subject to prepayment penalties of between 1% and 2% of the principal amount over the first two years. We also granted certain demand and piggy-back registration rights in respect of the shares covering a period of ten years.

Contractual Obligations

The following table summarizes our contractual obligations as of January 28, 2012:


	Payments Due in Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-term debt obligations(1)	$	14,315,054	$	1,066,111	$	3,792,249	$	3,265,027	$	6,191,667
Operating lease obligations(2)		95,412,863		23,833,175		38,897,461		23,650,914		9,031,313
Purchase obligations(3)		25,241,534		22,241,534		3,000,000		—		—

Total	$	134,969,451	$	47,140,820	$	45,689,710	$	26,915,941	$	15,222,980

(1)	Includes principal and interest payments on our subordinated convertible debentures and our subordinated debenture.

(2)	Includes minimum payment obligations relating to our store leases.

(3)	Includes merchandise on order, minimum royalty payments related to the H by Halston license, and payment obligations relating to store construction and miscellaneous service contracts.

Off-Balance Sheet Arrangements

At January 28, 2012 and January 29, 2011, 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.

Recent Accounting Pronouncements

None.

Impact of Inflation

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

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not Required.

Item 8.

Financial Statements and Supplementary Data.

Our financial statements together with the report of the independent registered public accounting firm are set forth beginning on page F-1 and are incorporated herein by this reference.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.

Controls and Procedures.

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in accumulating and communicating such information to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework and the criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that internal control over financial reporting was effective as of January 28, 2012.

Our internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fourth fiscal quarter ended January 28, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the Company’s fourth quarter of fiscal year 2011.

Item 9B.

Other Information.

The following information would have otherwise have been filed under the captions below pursuant to a Current Report on Form 8-K.

Item 1.01. Entry into a Material Definitive Agreement.

Amendment to Subordinated Convertible Debentures and Subordinated Convertible Debenture Purchase Agreement.

On April 26, 2012, Bakers Footwear Group, Inc. (the “Company”) entered into an amendment to its $4 million in aggregate principal amount of Subordinated Convertible Debentures (the “Debentures”) issued by the Company to investors on June 26, 2007, and an amendment to the related Subordinated Convertible Debenture Purchase Agreement dated June 13, 2007, by and among the Company and the investors named therein (collectively, the “Debenture Amendments”).

The Debenture Amendments defer payment of principal under the Debentures in order to remain in compliance with both the Debentures and the Company’s senior credit facility. Prior to the Debenture Amendments, principal was due in $1 million annual installments beginning in June 2012. Under the Debenture Amendments, the four principal payments must be made on each February 15, beginning on February 15, 2013. The interest rate on the Debentures was also increased from 12% to 13% per annum. The Debentures continue to be nonamortizing, with interest payable semi-annually on each June 30 and December 31. The Debenture Amendments had no impact on the conversion terms. The Debenture Amendments are attached hereto as Exhibit 4.8.

In connection with the Debenture Amendments, the Company’s senior lender, Bank of America, N.A. (the “Bank”), consented to the Debenture Amendments, subject to the terms of a consent agreement entered into on April 26, 2012, among the Bank, the Company and each of the Debenture holders (the “Bank Agreement”). The Bank Agreement consents to the Debenture Amendments in connection with the Company’s Second Amended and Restated Loan and Security Agreement, as amended (the “Senior Secured Loan Agreement”), with the Bank and amended the subordination agreement in favor of the Bank entered into on June 30, 2011 among the Company, the Debenture holders, and the Bank (the “Bank Subordination Agreement”) to allow the payments to occur.

Pursuant to the Bank Agreement, the Company is allowed to make the required principal payments of $1 million each only if certain conditions are met, including that the Company maintains at least a 1.0 to 1.0 ratio of adjusted EBITDA to its interest expense for the 12 month period ending prior to each February 15 payment, all as calculated pursuant to the Senior Secured Loan Agreement. Previously, the payment of the June 2012 principal payment was also conditioned on the Company complying with that requirement. In addition, also as previously disclosed, the Company’s Senior Secured Loan Agreement continues to require that the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of its adjusted EBITDA to its interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis. The Bank Agreement is filed herewith as Exhibit 10.23.12.

Originally, the full principal amount of the Debentures was due in June 2012. As previously reported, In June 2011, the Company amended the Debentures to defer payment of principal so that it will be repaid in four equal annual installments of $1 million beginning on June 30, 2012 and increased the interest rate from 9.5% to 12% per annum.

For additional information regarding the Senior Secured Loan Agreement, the Debentures, the Debenture Amendments, the Bank Agreement or the risks of the Company’s liquidity situation and its ability to comply with its financial covenants, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Item 1A. Risk Factors” which are incorporated herein by reference. The descriptions of the documents contained herein are qualified in their entirety by the full text of such documents, which are filed as exhibits to this Annual Report on Form 10-K.

As previously disclosed in a Current Report of Form 8-K filed on June 19, 2007, investors in the Debentures included corporate director Scott C. Schnuck, former director Andrew Baur, an entity affiliated with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison and are set forth in the attached Exhibit 4.8. Bernard Edison is also the father of Peter Edison, the Company’s Chairman and Chief Executive Officer. Julian Edison is a cousin of Peter Edison. Each of Messrs. Schnuck, B. Edison and J. Edison receive fees and other compensation from the Company from time to time in their capacities with the Company. The audit committee and Board of Directors of the Company reviewed and approved the transaction.

Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

The information set forth under Item 1.01 is incorporated herein by reference.

Item 3.02. Unregistered Sales of Equity Securities.

The information set forth under Item 1.01 is incorporated herein by reference.

For the Debenture Amendments, the Company relied on the exemption from registration relating to offerings that do not involve any public offering pursuant to Section 4(2) under the Securities Act of 1933 and Section 3(a)(9) under the Securities Act of 1933 for an exchange with existing security holders where no commission or other remuneration is paid or given for soliciting such exchange. The offering of the securities was conducted without general solicitation or advertising. The Debentures continue to bear, and certificates evidencing the shares of common stock issuable upon conversion of the Debentures will bear, restrictive legends permitting the transfer thereof only in compliance with applicable securities laws. The Company believes that the Investors are holding the Debentures for investment purposes and not with a view to or for distribution in these transactions and that each was an “accredited investor” under Rule 501(e) under Regulation D under the Securities Act of 1933.

Item 3.03. Material Modification of Rights of Security Holders.

The information set forth under Item 1.01 is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits. See Exhibit Index.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

Information set forth in the Company’s 2012 Proxy Statement under the caption “Information Regarding Board of Directors and Committees” is hereby incorporated by reference. No other sections of the 2012 Proxy Statement are incorporated herein by this reference. The following information with respect to the executive officers of the Company as of April 1, 2012 is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K.

Executive Officers of the Registrant

Certain information concerning the executive officers of Bakers is set forth below:


Name	Age	Position
Peter A. Edison	56	Chairman of the Board, Chief Executive Officer and President
Mark D. Ianni	51	Executive Vice President and Chief Merchandising Officer
Stanley K. Tusman	65	Executive Vice President and Chief Planning Officer
Joseph R. VanderPluym	60	Executive Vice President and Chief Operations Officer
Charles R. Daniel, III	53	Executive Vice President and Chief Financial Officer, Controller, Treasurer and Secretary

Peter A. Edison has over 30 years of experience in the fashion and apparel industry. Between 1986 and 1997, Mr. Edison served as director and as an officer in various divisions of Edison Brothers Stores, Inc., including serving as the Director of Corporate Development for Edison Brothers, President of Edison Big & Tall, and as President of Chandlers/Sacha of London. He also served as Director of Marketing and Merchandise Controller, and in other capacities, for Edison Shoe Division. Mr. Edison received his M.B.A. in 1981 from Harvard Business School, and served as chairman of the board of directors of Dave & Busters, Inc. until February 2006. He has served as our Chairman of the Board and Chief Executive Officer since October 1997 and as our President since September 15, 2007.

Mark D. Ianni has over 30 combined years with Edison Brothers and Bakers as an experienced first-cost buyer, having held various positions, including Merchandiser, Associate Buyer, Senior Dress Shoe Buyer, Tailored Shoe Buyer and Executive Vice President — Divisional Merchandise Manager of Dress Shoes from June 1999 to July 2002. Mr. Ianni has served as our Executive Vice President since July 2002 and our Chief Merchandising Officer since September 15, 2007.

Stanley K. Tusman has over 30 years of financial analysis and business experience. Mr. Tusman served as the Vice President — Director of Planning & Allocation for the 500-store Edison Footwear Group, the Vice President of Retail Systems Integration for the 500-store Genesco Retail, Director of Merchandising, Planning and Logistics for the 180-store Journey’s and the Executive Director of Financial Planning for the 400-store Claire’s Boutiques chains. Mr. Tusman has served as our Executive Vice President since June 1999 and our Chief Planning Officer since September 15, 2007.

Joseph R. VanderPluym has over 30 years of store operations experience with a track record of building and motivating high energy, high service field organizations. Mr. VanderPluym spent 20 years at the 700-store Merry Go Round chain, where he served as Executive Vice President of Stores for Merry Go Round and Boogie’s Diner Stores. He served as Vice President of Stores for Edison Footwear Group for two years and as Vice President of Stores for Lucky Brand Apparel Stores for approximately six months prior to joining Bakers. Mr. VanderPluym has served as either our Vice President — Stores or our Executive Vice President since June 1999 and as Chief Operations Officer since September 15, 2007.

Charles R. Daniel, III has over 30 years of accounting experience. Mr. Daniel has served as our Controller since February 2004. Prior to that time, Mr. Daniel worked for the accounting firm of Stone Carlie & Company. Mr. Daniel served as our Secretary, Treasurer and Vice President — Finance since February 4, 2008 and has served as Executive Vice President and Chief Financial Officer since March 12, 2009.

Each of the executive officers, except for Mr. Daniel, has entered into an employment agreement with the Company. Information with respect to the executive officers set forth in the Company’s 2012 Proxy Statement under the caption “Executive Compensation — Employment Agreements and Termination of Employment” is incorporated herein by this reference.

Section 16(a) Beneficial Ownership Reporting Compliance

Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in the Company’s 2012 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by this reference. No other sections of the 2012 Proxy Statement are incorporated by this reference.

Code of Ethics

The Company has adopted a Code of Business Conduct (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as directors, officers and employees of the Company. The Code of Ethics has been filed as Exhibit 14.1 to this Annual Report on Form 10-K. The information set forth under the caption “Information Regarding Board of Directors and Committees — Code of Business Conduct” in the Company’s 2012 Proxy Statement is incorporated herein by this reference. No other sections of the 2012 Proxy Statement are incorporated by this reference.

Item 11.

Executive Compensation.

The information set forth in the Company’s 2012 Proxy Statement under the captions “Information Regarding Board of Directors and Committees — Compensation of Directors,” “Information Regarding Board of Directors and Committees — Compensation Committee Interlocks and Insider Participation” and “Executive Compensation” are hereby incorporated by reference. No other sections of the 2012 Proxy Statement are incorporated herein by this reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information set forth in the Company’s 2012 Proxy Statement under the caption “Stock Ownership of Management and Certain Beneficial Owners” is hereby incorporated by reference. The information set forth under the caption “Equity Compensation Plan Information” in the Company’s 2012 Proxy Statement is hereby incorporated herein by reference. No other sections of the 2012 Proxy Statement are incorporated herein by this reference.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The information set forth under the caption “Certain Relationships and Related Person Transactions” and “Information Regarding Board of Directors and Committees — Corporate Governance and Director Independence” in the Company’s 2012 Proxy Statement is hereby incorporated by reference. No other sections of the 2012 Proxy Statement are incorporated herein by this reference.

Item 14.

Principal Accountant Fees and Services.

The section of the 2012 Proxy Statement entitled “Principal Accountant Fees and Services” is hereby incorporated by reference.

No other sections of the 2012 Proxy Statement are incorporated herein by this reference.

PART IV

Item 15.

Exhibits and Financial Statement Schedules.

(a) Documents filed as part of this Report:

1. Financial Statements: The financial statements commence on page F-1. The Index to Financial Statements on page F-1 is incorporated herein by reference.

2. Financial Statement Schedules: All information schedules have been omitted as the required information is inapplicable, not required, or other information is included in the financial statement notes.

3. Exhibits: The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference. The following exhibits are management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K: Exhibits 10.1 through 10.16 and Exhibits 10.18 through 10.22. The exhibits were filed with the SEC but were not included in the printed version of the Annual Report to Shareholders.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.


BAKERS FOOTWEAR GROUP, INC.

By		/s/ PETER A. EDISON
		Peter A. Edison
		Chairman of the Board, Chief Executive Officer
		and President (Principal Executive Officer)

April 27, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ PETER A. EDISON (Peter A. Edison)	Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer)	April 27, 2012

/s/ CHARLES R. DANIEL, III (Charles R. Daniel, III)	Executive Vice President and Chief Financial Officer, Controller, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)	April 27, 2012

* (Timothy F. Finley)	Director	April 27, 2012

* (Harry E. Rich)	Director	April 27, 2012

* (Scott C. Schnuck)	Director	April 27, 2012

*	Peter A. Edison, by signing his name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney duly executed by such individuals which have been filed as an Exhibit to this Report.

/s/ PETER A. EDISON

Peter A. Edison

Attorney-in-Fact

EXHIBIT INDEX


Exhibit No.		Description
3.1		Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
3.2		Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
4.1		Form of common stock certificate (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 filed on April 24, 2009 (File No. 000-50563)).
4.2		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 Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).
4.3		9.5% Subordinated Convertible Debentures issued by the Company to Investors on June 26, 2007 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).
4.4		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 Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).
4.5		Amended and Restated Subordination Agreement by and among the Company, the Investors named therein and Bank of America, N.A. (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 5, 2011 (File No. 000-50563)).
4.6		First Amendment to Subordinated Convertible Debentures and Subordinated Convertible Debenture Purchase Agreement dated April 20, 2010 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
4.7		Second Amendment to Subordinated Convertible Debentures and Subordinated Convertible Debenture Purchase Agreement dated June 30, 2011 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 5, 2011 (File No. 000-50563)).
4.8		Third Amendment to Subordinated Convertible Debentures and Subordinated Convertible Debenture Purchase Agreement entered into on April 26, 2012.
4.9		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 Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).
4.10		Debenture and Stock Purchase Agreement dated August 26, 2010 by and among the Company and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
4.11		Debenture issued by the Company to Steven Madden, Ltd. on August 26, 2010 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
4.12		Voting Agreement dated August 26, 2010 by and among the Company, Peter A. Edison, and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
4.13		Registration Rights Agreement dated August 26, 2010 by and among the Company and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
4.14		Subordination Agreement dated August 26, 2010 by and among the Company, Bank of America, N.A., and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).


Exhibit No.		Description
4.15		Subordination Agreement dated August 26, 2010 by and among the Company, the holders of $4 million aggregate principal amount of the Company’s 9.5% Subordinated Convertible Debentures due June 30, 2012, and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
10.1		Bakers Footwear Group, Inc. 2003 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 21, 2007 (File No. 000-50563)).
10.1.1		Form of Nonqualified Option Award Agreement under Bakers Footwear Group, Inc. 2003 Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 21, 2007 (File No. 000-50563)).
10.2		Bakers Footwear Group, Inc. Cash Bonus Plan (incorporated by reference to Exhibit 10.2 of Amendment No. 3 to the Company’s Registration Statement on Form S-1 filed on January 8, 2004 (File No. 333-86332)).
10.3		Letter to Peter Edison outlining 2010 bonus levels (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
10.4		Letter to Joe VanderPluym outlining 2010 bonus levels (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
10.5		Letter to Mark Ianni outlining 2010 bonus levels (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
10.6		Letter to Stan Tusman outlining 2010 bonus levels (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
10.7		Letter to Charlie Daniel outlining 2010 bonus levels (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
10.8		Letter to Peter Edison outlining 2011 bonus levels (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed on April 29, 2011 (File No. 000-50563)).
10.9		Letter to Joe VanderPluym outlining 2011 bonus levels (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed on April 29, 2011 (File No. 000-50563)).
10.10		Letter to Mark Ianni outlining 2011 bonus levels (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed on April 29, 2011 (File No. 000-50563)).
10.11		Letter to Stan Tusman outlining 2011 bonus levels (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed on April 29, 2011 (File No. 000-50563)).
10.12		Letter to Charlie Daniel outlining 2011 bonus levels (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed on April 29, 2011 (File No. 000-50563)).
10.13		Bakers Footwear Group, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Appendix A to the Company’s 2005 Proxy Statement filed on April 27, 2005 (File No. 000-50563)).
10.13.1		Form of Notice of Award of Performance Shares under Bakers Footwear Group, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 22, 2006 (File No. 000-50563)).
10.13.2		Form of Restricted Stock Award Agreement under Bakers Footwear Group, Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 9, 2007 (File No. 000-50563)).


Exhibit No.		Description
10.14		Bakers Footwear Group, Inc. 2012 Incentive Compensation Plan (incorporated by reference to (File No. 000-50563). (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 20, 2012 (File No. 000-50563)).
10.14.1		Form of Restricted Stock Unit Award Agreement under Bakers Footwear Group, Inc. 2012 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 20 , 2012 (File No. 000-50563)).
10.15		Summary of base salaries for specified executive officers (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008 filed on May 2, 2008 (File No. 000-50563)).
10.16		Summary of April 20, 2010 stock option grants to executive officers of the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 23, 2010 (File No. 000-50563)).
10.17		Assignment of Rights dated June 23, 1999 between the Company and Edison Brothers Stores, Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 filed on April 16, 2002 (File No. 333-86332)).
10.18		Employment Agreement dated January 12, 2004 by and between the Company and Peter Edison (incorporated by reference to Exhibit 10.15 of Amendment No. 4 to the Company’s Registration Statement on Form S-1 filed on January 20, 2004 (File No. 333-86332)).
10.19		Employment Agreement dated September 16, 2002 by and between the Company and Stanley K. Tusman (incorporated by reference to Exhibit 10.20 of Amendment No. 4 to the Company’s Registration Statement on Form S-1 filed on January 20, 2004 (File No. 333-86332)).
10.20		Employment Agreement dated September 5, 2006 by and between the Company and Joe VanderPluym (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)).
10.21		Employment Agreement dated August 31, 2006 by and between the Company and Mark Ianni (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)).
10.22		Summary of Compensation of Non-management Directors as of March 15, 2007 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended May 5, 2007 filed on June 19, 2007 (File No. 000-50563)).
10.23		Second Amended and Restated Loan and Security Agreement dated as of August 31, 2006 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)).
10.23.1		Amended and Restated Revolving Credit Note dated as of August 31, 2006 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)).
10.23.2		Waiver and Consent Agreement dated as of April 18, 2007 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.14.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007 filed on April 24, 2007 (File No. 000-50563)).
10.23.3		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 Company’s Current Report on Form 8-K filed on May 18, 2007 (File No. 000-50563)).
10.23.4		Extension Agreement dated June 26, 2007 between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)).


Exhibit No.		Description
10.23.5		Second Amendment to Second Amended and Restated Loan and Security Agreement dated February 1, 2008 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)).
10.23.6		Third Amendment to Second Amended and Restated Loan and Security Agreement dated April 9, 2009 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 15, 2009 (File No. 000-50563)).
10.23.7		Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated September 8, 2009 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended August 1, 2009 filed on September 10, 2009 (File No. 000-50563)).
10.23.8		Fifth Amendment to Second Amended and Restated Loan and Security Agreement dated May 28, 2010 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on May 28, 2010 (File No. 000-50563)).
10.23.9		Waiver of Bank of America, N.A., dated August 26, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
10.23.10		Consent of Bank of America, N.A., dated August 26, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)).
10.23.11		Sixth Amendment to Second Amended and Restated Loan and Security Agreement dated June 30, 2011 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 5, 2011 (File No. 000-50563)).
10.23.12		Consent of Bank of America, N.A. entered into on April 26, 2012.
10.24		Concurrent Use Agreement dated June 23, 1999 between the Company and Novus, Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 filed on April 16, 2002 (File No. 333-86332)).
10.25		Trademark Sales and License Agreement between the Company and Steven Madden, Ltd., dated as of December 28, 2011.
11.1		Statement regarding computation of per share earnings (incorporated by reference from Note 15 of the Financial Statements).
14.1		Code of Business Conduct (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
23.1		Consent of Independent Registered Public Accounting Firm.
24.1		Power of Attorney.
31.1		Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).
31.2		Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer).
32.1		Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer and the Chief Financial Officer).


Exhibit No.		Description
101		Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets at January 29, 2011 and January 28, 2012; (ii) Statements of Operations for the years ended January 30, 2010, January 29, 2011, and January 28, 2012; (iii) Statement of Shareholders’ Equity (Deficit); (iv) Statements of Cash Flows for the years ended January 30, 2010, January 29, 2011, and January 28, 2012; and (v) Notes to Financial Statements for the year ended January 28, 2012. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act or the Exchange Act, or otherwise subject to liability under those sections, except as shall be expressly set forth by specific reference in such filing.

INDEX TO FINANCIAL STATEMENTS

Contents


Report of Independent Registered Public Accounting Firm			F-1
Balance Sheets			F-2
Statements of Operations			F-3
Statements of Shareholders’ Equity (Deficit)			F-4
Statements of Cash Flows			F-5
Notes to Financial Statements			F-6

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Bakers Footwear Group, Inc.

We have audited the accompanying balance sheets of Bakers Footwear Group, Inc. (the Company) as of January 28, 2012 and January 29, 2011, and the related statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended January 28, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bakers Footwear Group, Inc. at January 28, 2012 and January 29, 2011, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has incurred substantial losses from operations in recent years and has a significant working capital deficiency. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ ERNST & YOUNG LLP

St. Louis, Missouri

April 27, 2012

F-1

BAKERS FOOTWEAR GROUP, INC.

BALANCE SHEETS


	January 29, 2011			January 28, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	146,263		$	148,308
Accounts receivable		1,484,809			1,150,601
Inventories		25,911,508			24,398,190
Prepaid expenses and other current assets		970,883			1,124,938

Total current assets		28,513,463			26,822,037
Property and equipment, net		18,405,166			14,087,942
Other assets		1,087,058			801,074

Total assets	$	48,005,687		$	41,711,053

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	16,009,847		$	20,783,454
Accrued expenses		8,519,585			8,879,369
Sales tax payable		1,122,024			989,096
Deferred income		1,120,444			385,599
Revolving credit facility		10,449,299			11,560,210

Total current liabilities		37,221,199			42,597,728
Accrued noncurrent rent liabilities		8,648,272			7,541,688
Subordinated convertible debentures		4,000,000			4,000,000
Subordinated debenture		4,123,327			4,185,483
Shareholders’ deficit:
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, 9,228,916 and 9,295,916 shares outstanding at January 29, 2011 and January 28, 2012, respectively		923			930
Additional paid-in capital		40,443,888			40,774,320
Accumulated deficit		(46,431,922	)		(57,389,096	)

Total shareholders’ deficit		(5,987,111	)		(16,613,846	)

Total liabilities and shareholders’ deficit	$	48,005,687		$	41,711,053

See accompanying notes.

F-2

BAKERS FOOTWEAR GROUP, INC.

STATEMENTS OF OPERATIONS


	Year Ended January 30, 2010			Year Ended January 29, 2011			Year Ended January 28, 2012
Net sales	$	185,368,696		$	185,625,844		$	185,095,288
Cost of merchandise sold, occupancy, and buying expenses		132,000,096			136,053,937			138,749,178

Gross profit		53,368,600			49,571,907			46,346,110
Operating expenses:
Selling		40,826,820			40,364,873			41,036,844
General and administrative		15,928,472			15,252,338			16,474,519
Loss (gain) on disposal of property, equipment and intangible assets		306,164			70,642			(3,808,600	)
Impairment of long-lived assets		2,762,273			1,415,979			1,882,725

Operating loss		(6,455,129	)		(7,531,925	)		(9,239,378	)
Other income (expense):
Interest expense		(2,723,566	)		(2,074,628	)		(1,889,277	)
Other income, net		96,599			127,354			171,481

Loss before income taxes		(9,082,096	)		(9,479,199	)		(10,957,174	)
Benefit from income taxes		—			(187,462	)		—

Net loss	$	(9,082,096	)	$	(9,291,737	)	$	(10,957,174	)

Net loss per common share:	$	(1.24	)	$	(1.14	)	$	(1.18	)

See accompanying notes.

F-3

BAKERS FOOTWEAR GROUP, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)


	Common Stock
	Shares Issued and Outstanding		Amount		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at January 31, 2009		7,055,856	$	705	$	38,506,784	$	(28,058,089	)	$	10,449,400
Stock-based compensation expense		—		—		585,341		—			585,341
Issuance of common stock		250,000		25		187,475		—			187,500
Issuance of restricted stock		77,000		8		—		—			8
Net loss		—		—		—		(9,082,096	)		(9,082,096	)

Balance at January 30, 2010		7,382,856		738		39,279,600		(37,140,185	)		2,140,153
Stock-based compensation expense		—		—		364,088		—			364,088
Issuance of common stock		1,844,860		184		799,816		—			800,000
Shares issued in connection with exercise of stock options		1,200		1		384		—			385
Net loss		—		—		—		(9,291,737	)		(9,291,737	)

Balance at January 29, 2011		9,228,916		923		40,443,888		(46,431,922	)		(5,987,111	)
Stock-based compensation expense		—		—		330,432		—			330,432
Issuance of restricted stock		67,000		7		—		—			7
Net loss		—		—		—		(10,957,174	)		(10,957,174	)

Balance at January 28, 2012		9,295,916	$	930	$	40,774,320	$	(57,389,096	)	$	(16,613,846	)

See accompanying notes.

F-4

BAKERS FOOTWEAR GROUP, INC.

STATEMENTS OF CASH FLOWS


	Year Ended January 30, 2010			Year Ended January 29, 2011			Year Ended January 28, 2012
Operating activities
Net loss	$	(9,082,096	)	$	(9,291,737	)	$	(10,957,174	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,535,588			5,712,996			5,104,424
Accretion of debt discount		488,663			217,382			62,156
Stock-based compensation expense		585,341			364,088			330,432
Interest expense recognized for issuing common stock related to amending the subordinated secured term loan		187,500			—			—
Impairment of long-lived assets		2,762,273			1,415,979			1,882,725
Loss (Gain) on disposal of property, equipment and intangible assets		306,164			70,642			(3,808,600	)
Changes in operating assets and liabilities:
Accounts receivable		(13,971	)		65,918			334,208
Inventories		743,145			(5,678,301	)		1,513,318
Prepaid expenses and other current assets		(238,969	)		263,904			(154,055	)
Other assets		243,150			98,021			269,821
Accounts payable		2,581,651			5,871,212			4,773,607
Accrued expenses and deferred income		(587,711	)		922,929			(507,989	)
Accrued noncurrent rent liabilities		(591,073	)		(535,484	)		(1,106,584	)

Net cash provided by (used in) operating activities		3,919,655			(502,451	)		(2,263,711	)
Investing activities
Purchase of property and equipment		(428,054	)		(997,787	)		(2,808,743	)
Proceeds from disposition of property, equipment and intangible assets		416			3,282			3,963,588

Net cash (used in) provided by investing activities		(427,638	)		(994,505	)		1,154,845
Financing activities
Net borrowings (payments) on line of credit		(951,175	)		(82,388	)		1,110,911
Net proceeds from exercise of stock options		—			385			—
Proceeds from issuance of subordinated debenture and common stock		—			4,549,704			—
Principal payments of subordinated secured term loan		(2,520,833	)		(2,979,167	)		—

Net cash provided by (used in) financing activities		(3,472,008	)		1,488,534			1,110,911

Net increase (decrease) in cash and cash equivalents		20,009			(8,422	)		2,045
Cash and cash equivalents at beginning of period		134,676			154,685			146,263

Cash and cash equivalents at end of period	$	154,685		$	146,263		$	148,308

Supplemental disclosures of cash flow information
Cash paid for interest	$	2,032,627		$	1,736,049		$	1,762,654

See accompanying notes.

F-5

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

January 28, 2012

1.	Summary of Significant Accounting Policies

Operations

Bakers Footwear Group, Inc., (the Company) was incorporated in 1926 and is engaged in the sale of shoes and accessories through over 225 retail stores throughout the United States under the Bakers and Wild Pair names. The Company is a national full-service retailer specializing in moderately priced fashion footwear. The Company’s products include private-label and national brand dress, casual, and sport shoes, boots, sandals and accessories such as handbags and costume jewelry.

Fiscal Year

The Company’s fiscal year is based upon a 52 — 53 week retail calendar, ending on the Saturday nearest January 31. The fiscal years ended January 28, 2012 (fiscal year 2011), January 29, 2011 (fiscal year 2010) and January 30, 2010 (fiscal year 2009) are 52 week periods.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments with a maturity of three months or less at the time of purchase to be cash equivalents. During periods when the Company has outstanding balances on its revolving credit agreement, substantially all cash is held in depository accounts where disbursements are restricted to payments on the revolving credit agreement and the Company’s disbursing accounts are funded through draws on the revolving credit agreement. During periods when the Company does not have outstanding balances on its revolving credit agreement, it invests cash in a money market fund as well as in its depository accounts.

Accounts Receivable

Accounts receivable consist substantially of customer merchandise purchases paid for with third-party credit cards. Such purchases generally are approved by the card issuers at the point of sale and cash is remitted to the Company from the card issuers within three to five days of the transaction. The Company does not provide an allowance for doubtful accounts because the Company has not experienced any credit losses in collecting these amounts from card issuers.

Inventories

Merchandise inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. Consideration received from vendors relating to inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying expenses after an agreement with the vendor is executed and when the related inventory is sold. The Company physically counts all merchandise inventory on hand annually, during the month of January, and adjusts the recorded balance to reflect the results of the physical counts. The Company records estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of merchandise sold, occupancy, and buying expenses. Markdowns are recorded or accrued to reflect expected adjustments to retail prices in accordance with the retail inventory method. In determining the lower of cost or market for inventories, management considers current and recently recorded sales prices, the length of time product is held in inventory, and quantities of various product

F-6

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

styles contained in inventory, among other factors. The ultimate amount realized from the sale of inventories could differ materially from management’s estimates. If market conditions are less favorable than those projected by management, additional inventory markdowns may be required.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives ranging from three to ten years. Leasehold improvements are amortized over the lesser of the related lease term or the useful life of the assets. Costs of repairs and maintenance are charged to expense as incurred.

Impairment of Long-Lived Assets

The Company reviews long-lived assets to be “held and used” for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. The Company regularly analyzes the operating results of its stores and assesses 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 based on management’s estimates of future store sales and expenses, which are considered Level 3 inputs. During the years ended January 30, 2010, January 29, 2011 and January 28, 2012, the Company recorded $2,762,273, $1,415,979, and $1,882,725, respectively, in noncash charges to earnings related to the impairment of furniture, fixtures, and equipment, leasehold improvements, and other long-lived assets.

Revenue Recognition

Retail sales are recognized at the point of sale to the customer, are recorded net of estimated returns, and exclude sales tax. Sales through the Company’s Web site or call center are recognized as revenue at the time the product is shipped and title passes to the customer on an FOB shipping point basis.

Cost of Merchandise Sold

Cost of merchandise sold includes the cost of merchandise, buying costs, and occupancy costs.

Operating Leases

The Company leases its store premises, warehouse, and headquarters facility under operating leases. The Company recognizes rent expense for each lease on the straight line basis, aggregating all future minimum rent payments including any predetermined fixed escalations of the minimum rentals, exclusive of any executory costs, and allocating such amounts ratably over the period from the date the Company takes possession of the leased premises until the end of the noncancelable term of the lease. Likewise, negotiated landlord construction allowances are recognized ratably as a reduction of rent expense over the same period that rent expense is recognized. Accrued noncurrent rent liabilities consist of the aggregate difference between rent expense recorded on the straight line basis and amounts paid or received under the leases.

Store leases generally require contingent rentals based on retail sales volume in excess of pre-defined amounts in addition to the minimum monthly rental charge. The Company records expense for contingent rentals during the period in which the retail sales volume exceeds the respective targets or when management determines that it is probable that such targets will be exceeded.

F-7

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation

The Company recognizes expense for stock-based compensation based on the grant date fair value ratably over the service period related to each grant. The Company determines the fair value of stock-based compensation using the Black-Scholes option pricing model, which requires the Company to make assumptions regarding future dividends, expected volatility of its stock, and the expected lives of the options. The Company also makes assumptions regarding the number of options and the number of shares of restricted stock and performance shares that will ultimately vest. The assumptions and calculations are complex and require a high degree of judgment. Assumptions regarding the vesting of grants are accounting estimates that must be updated as necessary with any resulting change recognized as an increase or decrease in compensation expense at the time the estimate is changed. Excess tax benefits related to stock option exercises are reflected as financing cash inflows and operating cash outflows.

Advertising and Marketing Expense

The Company expenses costs of advertising and marketing, including the cost of newspaper, magazine, and web-based advertising, promotional materials, in-store displays, and point-of-sale marketing as advertising expense, when incurred. The Company expenses the costs of producing catalogs at the point when the catalogs are initially mailed. Consideration received from vendors in connection with the promotion of their products is netted against advertising expense. Marketing and advertising expense, net of promotional consideration received, totaled $664,475, $982,219, and $2,055,423 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively. The Company did not receive any promotional consideration from vendors for the years ended January 30, 2010, January 29, 2011 and January 28, 2012, respectively.

Earnings per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share is 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, warrants, and convertible debentures.

At the beginning of 2009, the Company was required to begin using the two-class method to calculate basic and diluted earnings (loss) per common share attributable to Bakers Footwear Group, Inc. shareholders as unvested restricted stock awards are considered participating units because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Because the Company’s restricted share awards do not contractually participate in its losses, the Company has not used the two-class method to calculate basic and diluted EPS.

Income Taxes

The Company calculates income taxes using 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 the Company’s operations.

The Company recognizes 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’s federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of January 28, 2012 and

F-8

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

January 29, 2011, the Company did not record any unrecognized tax benefits. The Company’s 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.

Deferred Income

The Company has a frequent buying program where customers can purchase a frequent buying card generally entitling them to a 10% discount on all purchases for a 12-month period. The Company recognizes the revenue from the sale of the card ratably over the 12-month life of the card and records the related discounts at the point of sale when the card is used. Effective November 2011, the Company discontinued the sale of frequent buying cards but will continue to honor cards previously sold until their scheduled expiration dates and will continue to amortize the related deferred revenue through November 2012.

The Company recognized income of $2,901,078, $2,711,698, and $2,047,928 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively, related to the amortization of deferred income for the frequent buying card program, as a component of net sales. Total discounts given to customers under the frequent buying program were $4,250,360, $3,890,782, and $2,839,665 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively.

Business Segment

The Company has one business segment that offers the same principal product and service in various locations throughout the United States.

Shipping and Handling Costs

The Company incurs shipping and handling costs to ship merchandise to its customers, primarily related to sales orders received through the Company’s Web site and call center. Shipping and handling costs are recorded as a component of cost of merchandise sold, occupancy, and buying expenses. Amounts paid to the Company by customers are recorded in net sales. Amounts paid to the Company for shipping and handling costs were $590,506, $470,712, and $340,512 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively.

Fair Value Measurements

FASB guidance on fair value measurements and disclosures specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

F-9

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

2.	Liquidity

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

The Company’s losses in fiscal years after 2005 have had a significant negative impact on the Company’s financial position and liquidity. As of January 28, 2012, the Company had negative working capital of $15.8 million, unused borrowing capacity under its revolving credit facility of $1.6 million, and a shareholders’ deficit of $16.6 million.

The Company’s business plan for fiscal year 2012 is based on generally flat comparable store sales for the first half of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. The Company also initiated a plan to achieve $10.0 million of margin enhancements and cost cuts. Based on the business plan, the Company expects to maintain adequate liquidity for the remainder of fiscal year 2012. The business plan reflects increased focus on inventory management and on timely promotional activity. The Company believes that this focus on inventory should improve overall gross margin performance in fiscal year 2012 compared to fiscal year 2011. The Company will need to continue working with its landlords and vendors to arrange payment terms that are reflective of its seasonal cash flow patterns. The Company does not expect to achieve significant additional liquidity through further extensions of payment terms. There is no assurance that the Company will achieve the sales, margin improvements, expense reductions or improved cash flow contemplated in its business plan.

The Company has a $30 million revolving credit facility as described in Note 4. The facility contains a minimum availability or adjusted EBITDA interest coverage ratio covenant that requires that either the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain a ratio of adjusted EBITDA to interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis. During the third and fourth quarters of fiscal year 2010 and fiscal year 2011, the Company met the bank covenant based on maintaining unused availability greater than 20% on a daily basis. The Company continues to closely monitor its availability and continues to be constrained by its limited unused borrowing capacity.

In June 2011 and April 2012, the Company amended its $4 million in aggregate principal amount of subordinated convertible debentures. The amendments defer payment of principal under the debentures. Originally, all $4 million in principal amount was payable on June 30, 2012. Under the amendments, principal will now be repaid in four equal annual installments of $1 million beginning on February 15, 2013. The interest rate on the debentures was also increased from 9.5% to 13% per annum. The amendments were consented to by the Company’s senior lender pursuant to an amendment to the Company’s senior credit facility. The bank amendment allows the Company to make the $1 million required principal payments, provided that certain conditions are met, including that the Company maintains at least a 1.0 to 1.0 ratio of adjusted EBITDA to its interest expense for the 12 month periods ending prior to each principal payment date, all as calculated pursuant to the senior credit facility.

Based on the Company’s business plans for fiscal year 2012, including the anticipated impact of the margin improvement and cost reduction program, the Company believes that it will be able to comply with the minimum availability or adjusted EBITDA coverage ratio covenant in the revolving credit facility and comply with the adjusted EBITDA requirement related to the scheduled principal payment on the convertible debentures in February 2013. However, given the inherent volatility in the Company’s sales performance, there is no assurance

F-10

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

that the Company will be able to do so. In addition, in light of the Company’s historical sales volatility and the Company’s recent inability to comply with the ratio requirement, the Company believes that there is a reasonable possibility that the Company may not be able to comply with its financial covenants.

Failure to comply would be a default under the terms of the Company’s revolving credit facility and could result in the acceleration of all of the Company’s debt obligations. If the Company is unable to comply with its financial covenants, it will be required to seek one or more amendments or waivers from its lenders. The Company believes that it would be able to obtain any required amendments or waivers, but can give no assurance that it would be able to do so on favorable terms, if at all. If the Company is unable to obtain any required amendments or waivers, the Company’s lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against the Company. If such acceleration occurred, the Company currently has insufficient cash to pay the amounts owed and would be forced to seek alternative financing.

The Company continues to face considerable liquidity constraints. Although the Company believes the business plan, including the cost reduction and margin improvement plan, is achievable, should the Company fail to achieve the sales or gross margin levels anticipated, or if the Company were to incur significant unplanned cash outlays, it would quickly become necessary for the Company to obtain additional sources of liquidity or make further cost cuts to fund its operations. In recognition of existing liquidity constraints, the Company continues to look for additional sources of capital at acceptable terms. However, there is no assurance that the Company would be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow the Company to operate its business.

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

3.	Sale of Trademark

On December 28, 2011, the Company entered into and consummated a Trademark Sales and License Agreement (the “Agreement”) with Steven Madden, Ltd. (“Madden”) in which the Company agreed to sell to Madden the Company’s rights to the Wild Pair trademark and related marks in the United States and certain other territories. The Company will retain a non-exclusive, royalty free license that will allow the Company to continue to offer Wild Pair merchandise in its stores. The Agreement also contains customary and other terms and conditions, including requirements for the Company to comply with covenants regarding maintenance, registration and use of the marks, including maintaining quality control and obtaining the consent of Madden in some cases. Madden has also agreed not to sell certain marked merchandise to certain competitors of the Company. The Agreement is perpetual, but may be terminated by Madden if the Company is in material breach of the Agreement, in which event the Company’s license would be terminated. The Company received gross proceeds of $4 million and recognized a net gain of $3.8 in fiscal year 2011 which is disclosed as a component of (gain) loss on disposal of property, equipment and intangible assets in the accompanying Statement of Operations.

4.	Revolving Credit Agreement

The Company has a revolving credit agreement with a commercial bank (Bank). This agreement calls for a maximum line of credit of $30,000,000 subject to the calculated borrowing base as defined in the agreement, which is based primarily on the Company’s inventory level. The agreement is secured by substantially all assets of the Company. The credit facility is senior to the subordinated convertible debentures and the subordinated debenture. Interest is payable monthly at the bank’s base rate plus 3.5%. The weighted average interest rate approximated 4.8%, 5.1%, and 4.4% for the years ended January 30, 2010, January 29, 2011 and January 28,

F-11

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

2012, respectively. An unused line fee of 0.75% per annum is payable monthly based on the difference between the maximum line of credit and the average loan balance. At January 28, 2012, the Company has approximately $1.6 million (under the terms of the new minimum availability covenant discussed below) of unused borrowing capacity under the revolving credit agreement based upon the Company’s borrowing base calculation. The agreement has certain restrictive financial and other covenants relating to, among other things, use of funds under the facility in accordance with the Company’s business plan, prohibiting a change of control, including any person or group acquiring beneficial ownership of 40% or more of the Company’s common stock or combined voting power (as defined in the credit facility), maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase of the Company’s stock, and restricting certain acquisitions. The revolving credit agreement also provides that the Company can elect to fix the interest rate on a designated portion of the outstanding balance as set forth in the agreement based on the LIBOR (London Interbank Offered Rate) plus 4.0%.

The agreement contains a minimum availability or adjusted EBITDA interest coverage ratio covenant that requires that either the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain a ratio of adjusted EBITDA to interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis.

In connection with amendments to the Company’s subordinated convertible debentures, the Company amended its revolving credit facility to allow the Company to make the required $1 million principal payments on the subordinated convertible debentures beginning February 15, 2013, provided that certain conditions are met, including that the Company maintains at least a 1.0 to 1.0 ratio of adjusted EBITDA to its interest expense for the 12 month periods ending prior to the principal payment dates, all as calculated pursuant to the senior credit facility.

5.	Subordinated Debenture

On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with Steven Madden, Ltd. In connection with the agreement, the Company sold a subordinated debenture in the principal amount of $5,000,000. Under the subordinated debenture, interest payments are required to be paid quarterly at an interest rate of 11% per annum. The principal amount is required to be paid in four annual installments commencing August 31, 2017, through the final maturity date on August 31, 2020. The subordinated debenture is generally unsecured and subordinate to the Company’s other indebtedness. As additional consideration, Steven Madden, Ltd. also received 1,844,860 shares of the Company’s common stock, representing a 19.99% interest in the Company on a post-closing basis. In connection with the transaction, the Company received aggregate net proceeds of approximately $4.5 million after transaction and other costs.

The Company allocated the net proceeds received in connection with the subordinated debenture and the related issuance of common stock based on the relative fair values of the debt and equity components of the transaction. The fair value of the 1,844,860 shares of common stock issued was estimated based on the actual market value of the Company’s common stock at the time of the transaction net of a blockage discount based on the size of the issuance relative to average trading volume in the Company’s common stock and a discount to reflect that unregistered shares were issued and could not be sold on the open market. The fair value of the $5.0 million principal amount of debt was estimated based on publicly available data regarding the valuation of debt of companies with comparable credit ratings. The relative fair values of the debt and equity components were then pro rated into the net proceeds received by the Company to determine the amounts to be allocated to debt and to equity. Other expenses incurred by the Company relative to this transaction were allocated either to debt issuance costs or as a reduction of additional paid-in capital based on either specific identification of the particular expenses or on a pro rata basis. The Company accretes the initial value of the debt to the nominal value of the debt over the term of the loan using the effective interest method and recognizes such accretion as a component of interest expense. Likewise, the Company amortizes the related debt issuance costs using the effective interest method and recognizes this amortization as a component of interest expense.

F-12

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

6.	Property and Equipment

Property and equipment consist of the following:


	Estimated Useful Lives		January 29, 2011		January 28, 2012
Furniture, fixtures, and equipment		3 to 8 years	$	28,758,171	$	28,071,499
Leasehold improvements		up to 10 years		40,817,876		40,461,214
Computer equipment and software		3 years		4,121,172		4,145,950
Construction in progress				426,839		1,610,502

				74,124,058		74,289,165
Less accumulated depreciation and amortization				55,718,892		60,201,223

			$	18,405,166	$	14,087,942

Depreciation and amortization of property and equipment was, $6,535,588, $5,712,996, and $5,104,424 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively.

7.	Accrued Expenses

Accrued expenses consist of the following:


	January 29, 2011		January 28, 2012
Employee compensation and benefits	$	1,934,943	$	1,949,700
Accrued rent		304,136		277,286
Other		6,280,506		6,652,383

	$	8,519,585	$	8,879,369

8.	Operating Leases

The Company leases property and equipment under noncancelable operating leases expiring at various dates through 2020. Certain leases have scheduled future rent increases, escalation clauses, or renewal options. Rent expense, including occupancy costs, was $40,519,956, $39,779,699, and $39,101,980 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively. Certain leases provide for contingent rent based on sales. Contingent rent, a component of rent expense, was $204,361, $173,010, and $224,418 for the years ended January 30, 2010, January 29, 2011, and January 28, 2012, respectively.

Future minimum lease payments, excluding executory costs, at January 28, 2012 are as follows:


Fiscal year:
2012	$	23,833,175
2013		20,585,230
2014		18,312,231
2015		14,296,677
2016		9,354,237
Thereafter		9,031,313

	$	95,412,863

F-13

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

9.	Subordinated Convertible Debentures

The Company completed a private placement of $4,000,000 in aggregate principal amount of subordinated convertible debentures on June 26, 2007 and received net proceeds of approximately $3.6 million. Originally, the debentures bore interest at a rate of 9.5% per annum, payable semi-annually and the principal balance of $4,000,000 was payable in full on June 30, 2012. On June 30, 2011, the Company amended the debentures by changing the principal repayment terms to four equal annual installments of $1 million beginning on June 30, 2012. On April 25, 2012, the Company further amended the debentures to defer the payment of principal to four equal annual installments of $1,000,000 beginning February 15, 2013. The interest rate on the debentures was also increased from 9.5% to 12% and then to 13% per annum. As discussed above, under the terms of the Company’s revolving credit facility, the Company is allowed to make the $1 million principal payments, provided that certain conditions are met, including that the Company maintains at least a 1.0 to 1.0 ratio of adjusted EBITDA to its interest expense for the 12 month periods ending prior to the principal payment dates, all as calculated pursuant to the senior credit facility.

The initial conversion price was $9.00 per share. The conversion price is subject to anti-dilution and other adjustments, including a weighted average conversion price adjustment for certain future issuances or deemed issuances of common stock at a lower price, subject to limitations as required under rules of the Nasdaq Stock Market. The Company can redeem the unpaid principal balance of the debentures if the closing price of the Company’s common stock is at least $16.00 per share, subject to the adjustments and conditions in the debentures.

The debentures contain a weighted average conversion price adjustment that is triggered by issuances or deemed issuances of the Company’s common stock. As a result of the issuance of shares of common stock, effective August 26, 2010, the conversion price of the debentures decreased to $6.76 with respect to $1 million in aggregate principal amount of debentures and to $8.10, the minimum conversion price, with respect to $3 million in aggregate principal amount of debentures held by directors and director affiliates.

The Company uses Financial Accounting Standards Board (FASB) guidance in Accounting Standards Certification (ASC) 815, Derivatives and Hedging, related to determining whether an instrument (or embedded feature) is indexed to an entity’s own stock and established a two-step process for making such determination. The Company accounts separately for the fair value of the conversion feature of the convertible debentures. As of January 29, 2011 and January 28, 2012, the Company determined that the fair value of the conversion feature was de minimis. Significant future increases in the value of the Company’s common stock would result in an increase in the fair value of the conversion feature which would result in expense recognition in future periods.

10.

Long-term Debt Maturities

The aggregate scheduled principal payments on the Company’s subordinated debenture (Note 5) and the Company’s subordinated convertible debentures as of January 28, 2012 are as follows:


Fiscal year:
2012	$	—
2013		1,000,000
2014		1,000,000
2015		1,000,000
2016		1,000,000
Thereafter		4,185,483

	$	8,185,483

F-14

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

11.

Employee Benefit Plan

The Company has a 401(k) savings plan which allows full-time employees age 21 or over with at least one year of service to make tax-deferred contributions of 1% of compensation up to a maximum amount allowed under Internal Revenue Service guidelines. The plan provides for Company matching of employee contributions on a discretionary basis. The Company made no matching contributions for the years ended January 30, 2010, January 29, 2011, or January 28, 2012.

12.

Commitments and Contingencies

On January 25, 2010, the Company entered into a licensing agreement with the owner of the Halston trademark. Under the terms of this agreement, the Company has the exclusive right to manufacture and market footwear and handbags primarily under the trade name “H by Halston” for an initial, renewable term of five years. The Company pays royalties to the owner of the trademark based on the greater of a percentage of sales or a minimum annual royalty of $1,500,000, payable quarterly. The initial quarterly minimum royalty payment was made at the commencement of the agreement, subsequent royalty payments are payable quarterly in arrears. At January 28, 2012, the remaining contractual minimum royalty payments under the licensing agreement was $4,500,000.

The Company has certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business. Management believes the probable resolution of such contingencies will not materially affect the financial position or results of operations of the Company. The Company, in the ordinary course of store construction and remodeling, is subject to mechanic’s liens on the unpaid balances of the individual construction contracts. The Company obtains lien waivers from all contractors and subcontractors prior to or concurrent with making final payments on such projects.

13.

Income Taxes

In accordance with ASC 740, Income Taxes, the Company regularly assesses available positive and negative evidence to determine whether it is more likely than not that its deferred tax asset balances will be recovered from (a) reversals of deferred tax liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax planning strategies and (d) future taxable income. There are significant restrictions on the consideration of future taxable income in determining the realizability of deferred tax assets in situations where a company has experienced a cumulative loss in recent years. When sufficient negative evidence exists that indicates that full realization of deferred tax assets is no longer more likely than not, a valuation allowance is established as necessary against the deferred tax assets, increasing the Company’s income tax expense in the period that such conclusion is reached. Subsequently, the valuation allowance is adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the future, sufficient positive evidence, such as a sustained return to profitability, arises that would indicate that realization of deferred tax assets is once again more likely than not, any existing valuation allowance would be reversed as appropriate, decreasing the Company’s income tax expense in the period that such conclusion is reached.

Management believes it is more likely than not that it will not be able to realize benefits of net deferred tax assets and therefore has established a valuation allowance against its net deferred tax assets. As of January 28, 2012, the Company has increased the valuation allowance to $23,921,637. The Company has scheduled the reversals of its deferred tax assets and deferred tax liabilities and has concluded that based on the anticipated reversals a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

During fiscal year 2010, the Company received a federal income tax refund of $0.2 million from the carryback of net operating losses which was reflected as income tax benefit in the statement of operations. As of January 28, 2012, the Company has approximately $36.2 million of net operating loss carryforwards that expire in 2022 available to offset future taxable income.

F-15

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Significant components of the provision for income taxes are as follows:


	Year Ended January 30, 2010			Year Ended January 29, 2011			Year Ended January 28, 2012
Current:
Federal	$	(1,250,116	)	$	(1,595,111	)	$	(2,550,482	)
State and local		(311,435	)		(565,290	)		(565,137	)

Total current		(1,561,551	)		(2,160,401	)		(3,115,619	)

Deferred:
Federal		(1,612,653	)		(1,392,386	)		(899,902	)
State and local		(293,210	)		(253,161	)		(163,619	)

Total deferred		(1,905,863	)		(1,645,547	)		(1,063,521	)

Valuation allowance		3,467,414			3,618,486			4,179,140

Total provision (benefit) for income taxes	$	—		$	(187,462	)	$	—

The differences between the provision for income taxes at the statutory U.S. federal income tax rate of 35% and those reported in the statements of operations are as follows:


	Year Ended January 30, 2010			Year Ended January 29, 2011			Year Ended January 28, 2012
Federal income tax at statutory rate	$	(3,178,734	)	$	(3,317,720	)	$	(3,835,011	)
Impact of federal alternative minimum tax		—			—			—
Impact of NOL carryback refunds		—			(187,462	)		—
Impact of graduated Federal rates		90,821			94,792			109,572
State and local income taxes, net of Federal income taxes		(401,655	)		(419,218	)		(484,589	)
Change in valuation allowance		3,467,414			3,618,486			4,179,140
Permanent differences		22,154			23,660			30,888

Total provision (benefit) for income taxes	$	—		$	(187,462	)	$	—

Deferred income taxes arise from temporary differences in the recognition of income and expense for income tax purposes and were computed using the liability method reflecting 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.

F-16

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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


	January 29, 2011			January 28, 2012
Deferred tax assets:
Net operating loss carryforward	$	10,775,110		$	13,890,728
Vacation accrual		405,473			411,576
Inventory		1,191,540			1,157,708
Stock-based compensation		1,258,512			1,387,381
Accrued rent		3,372,826			2,941,258
Property and equipment		2,842,665			4,229,939

Total deferred tax assets		19,846,126			24,018,590

Deferred tax liabilities:
Prepaid expenses		(103,629	)		(96,953	)

Valuation allowance		(19,742,497	)		(23,921,637	)

Net deferred tax assets	$	—		$	—

14.

Stock-Based Compensation

The Company has established the Bakers Footwear Group, Inc. 2003 Stock Option Plan (the 2003 Plan) and the Bakers Footwear Group, Inc. 2005 Incentive Compensation Plan (the 2005 Plan).

2003 Stock Option Plan

Under the 2003 Plan, as amended in connection with a June 1, 2006 shareholder vote, qualified or nonqualified stock options to purchase up to 1,368,992 shares of the Company’s common stock are authorized for grant to employees or non-employee directors at an option price determined by the Compensation Committee of the Board of Directors, which administers the 2003 Plan. The 2003 Plan also covers options that were issued under the predecessor stock option plan. All of the option holders under the predecessor plan agreed to amend their option award agreements to have their options governed by the 2003 Plan on generally the same terms and conditions. Generally, options have terms not exceeding 10 years from the date of grant and vest ratably over three to five years on each annual anniversary of the option grant date. The Company has issued new shares of stock upon exercise of stock options through fiscal year 2010 and anticipates that it will continue to issue new shares of stock upon exercise of stock options in future periods.

In June 2009, the executive officers, members of the Company’s Board of Directors, and certain other corporate officers surrendered, for no current or future consideration, 224,073 stock options with exercise prices ranging from $7.75 to $20.06. In accordance with ASC 718, the Company recognized $171,966 of non-cash stock-based compensation expense as a result of these surrenders.

F-17

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

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 years ended January 30, 2010, January 29, 2011 and January 28, 2012, are as follows:


	Year Ended January 30, 2010	Year Ended January 29, 2011	Year Ended January 28, 2012
Options granted	72,000	227,000	75,000
Weighted-average fair value of options granted	$0.18	$1.96	$0.63
Assumptions:
Dividends	0%	0%	0%
Risk-free interest rate	2.2%	2.8%	2.2%
Expected volatility	54%	97%	99%
Expected option life	6 years	6 years	6 years

Stock option activity through January 28, 2012 is as follows:


	Vested					Non Vested					Total
	Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price
Balance at January 31, 2009		320,122		$	9.76		641,451		$	5.78		961,573		$	7.11
Granted		—			—		72,000			0.33		72,000			0.33
Vested		211,063			7.41		(211,063	)		7.41		—			—
Exercised		—			—		—			—		—			—
Forfeited		(258,156	)		10.49		(70,662	)		10.52		(328,818	)		10.50

Balance at January 30, 2010		273,029			7.26		431,726			3.31		704,755			4.84

Granted		—			—		227,000			2.50		227,000			2.50
Vested		125,909			4.55		(125,909	)		4.55		—			—
Exercised		(1,200	)		0.32		—			—		(1,200	)		0.32
Forfeited		(8,000	)		9.08		(5,100	)		4.72		(13,100	)		7.38

Balance at January 29, 2011		389,738		$	6.37		527,717		$	2.65		917,455		$	4.23

Granted		—			—		75,000			0.80		75,000			0.80
Vested		154,910			3.31		(154,910	)		3.31		—			—
Exercised		—			—		—			—		—			—
Forfeited		(29,658	)		9.53		(400	)		1.95		(30,058	)		9.43

Balance at January 28, 2012		514,990		$	5.26		447,407		$	2.11		962,397		$	3.80

Total stock based compensation expense was $585,341, $364,088 and $330,432 for the years ended January 30, 2010, January 29, 2011 and January 28, 2012, respectively. The total intrinsic value of the options exercised during the year ended January 29, 2011, measured as the difference between the fair value of the Company’s stock on the date of exercise and the exercise price of the options exercised, was $2,367. No options were exercised during the years ended January 30, 2010 or January 28, 2012. The Company recognizes income tax deductions equal to the intrinsic value of stock options exercised. For the year ended January 29, 2011, such deductions resulted in an income tax benefit of $828, which, as a result of the Company’s net operating loss carryforward position, will not be recognized for financial reporting purposes until realized on a future income tax return. Cash payments received from option holders upon exercise of options during the year ended January 29, 2011 were $385.

F-18

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about vested stock options as of January 28, 2012:


Range of Exercise Prices	Number of Options		Weighted-Average Contractual Life (Years)		Weighted-Average Exercise Price		Aggregate Intrinsic Value
$0.01 — $0.80		31,919		6.4	$	0.29	$	19,616
$1.43 — $4.52		318,384		6.3		2.75		—
$7.75		57,320		2.0		7.75		—
$9.30 — $13.80		84,004		4.2		10.88		—
$20.06		23,364		4.1		20.06		—

Total ($0.01 — $20.06)		514,990		5.4		5.27	$	19,616

The following table summarizes information about vested stock options and stock options expected to vest as of January 28, 2012:


Range of Exercise Prices	Number of Options		Weighted-Average Contractual Life (Years)		Weighted-Average Exercise Price		Aggregate Intrinsic Value
$0.01 — $0.80		137,219		7.9	$	0.55	$	47,750
$1.43 — $4.52		603,600		6.8		2.60		—
$7.75		73,820		2.0		7.75		—
$9.30 — $13.80		108,983		4.2		10.81		—
$20.06		28,233		4.1		20.06		—

Total ($0.01 — $20.06)		951,855		6.9		4.16	$	47,750

2005 Incentive Compensation Plan

Under the 2005 Plan, up to 250,000 performance shares, restricted shares and other stock-based awards are available to be granted to employees or non-employee directors under terms determined by the Compensation Committee of the Board of Directors, which administers the 2005 Plan.

Restricted Shares

During fiscal years 2007, 2009, and 2011, the Company granted 69,000, 84,000, and 67,000 restricted shares of common stock with a grant date fair value of $4.52, $0.32, and $0.80 per share, respectively. Compensation expense related to restricted shares is recognized ratably over the 60 month vesting periods based on the grant date fair value of the restricted shares expected to vest at the end of the vesting period. As of January 28, 2012, the Company estimated that 200,600 restricted shares would vest at the end of the vesting periods. The number of restricted shares expected to vest is an accounting estimate and any future changes to the estimate will be reflected in stock based compensation expense in the period the change in estimate is made. As of January 29, 2011 and January 28, 2012, the aggregate intrinsic value of restricted shares expected to vest was $123,300 and, $124,372, respectively.

2012 Incentive Compensation Plan

On April 20, 2012, the Company’s Board of Directors adopted the Bakers Footwear Group, Inc. 2012 Incentive Compensation Plan and a related form of Restricted Stock Unit Award Agreement, which provide for awards of restricted stock units covering up to 1,010,000 shares of the Company’s common stock. Awards

F-19

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

related to all of these shares are expected to be issued in the second quarter of fiscal year 2012. The awards will be paid out in common stock only if the vesting conditions are met. These conditions require, among other things, a minimum of two years of continuous service from the date of grant and satisfaction of additional vesting triggers based on the closing price of the Company’s common stock ranging from $2 to $3 per share. The awards expire after five years if the vesting conditions are not met.

15.

Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Year Ended January 30, 2010			Year Ended January 29, 2011			Year Ended January 28, 2012
Numerator:
Net loss	$	(9,082,096	)	$	(9,291,737	)	$	(10,957,174	)
Numerator for basic earnings (loss) per share		(9,082,096	)		(9,291,737	)		(10,957,174	)
Interest expense related to convertible debentures		—			—			—
Numerator for diluted earnings (loss) per share	$	(9,082,096	)	$	(9,291,737	)	$	(10,957,174	)

Denominator:
Denominator for basic earnings (loss) per share — weighted average shares		7,328,087			8,174,465			9,287,449
Effect of dilutive securities:
Stock options		—			—			—
Stock purchase warrants		—			—			—
Convertible debentures		—			—			—
Denominator for diluted earnings (loss) per share — adjusted weighted average shares and assumed conversions		7,328,087			8,174,465			9,287,449

The diluted earnings per share calculation for the year ended January 28, 2012 excludes incremental shares of 29,773 related to outstanding stock options and incremental shares of 518,299 related to shares underlying convertible debentures because they are antidilutive. The diluted earnings per share calculation for the year ended January 29, 2011 excludes incremental shares of 33,529 related to outstanding stock options and incremental shares of 497,286 related to shares underlying convertible debentures because they are antidilutive. The 384,000 outstanding stock purchase warrants were excluded from the diluted earnings per share calculation for the year ended January 30, 2010 because they had exercise prices that were greater than the average closing price of the Company’s common stock for the period.

During the first quarter of 2009, the Company adopted updated provisions of ASC 260 Earnings per Share relating to determining whether instruments granted in share-based payment transactions are participating securities which addresses whether instruments granted in share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents before vesting should be considered participating securities and need to be included in the earnings allocation in computing EPS under the “two-class method”. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Because the Company’s restricted share awards do not contractually participate in its losses, the Company has not used the two-class method to calculate basis and diluted EPS.

F-20

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

16.

Fair Value Measurement

The carrying values and fair values of the Company’s financial instruments are as follows:


	January 29, 2011				January 28, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	146,263	$	146,263	$	148,308	$	148,308
Revolving credit facility		10,449,299		10,449,299		11,560,210		11,560,210
Subordinated debenture		4,123,327		4,039,445		4,185,483		4,106,971
Subordinated convertible debentures		4,000,000		3,052,837		4,000,000		3,827,461

The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The carrying amount of the revolving credit facility approximates fair value because the facility has a floating interest rate. The fair values of the subordinated debenture and the subordinated convertible debentures have been estimated based on Level 3 inputs in the fair value hierarchy as there is no relevant publicly available data regarding the valuation of debt of similar size and maturities of companies with comparable credit ratings.

17.

Related Party Transactions

Among the investors in the subordinated convertible debentures described in Note 9 are Scott Schnuck, who is a director of the Company, Bernard Edison and Julian Edison, who are advisory directors to the Company, Andrew Baur, who prior to his death in 2011 was a director of the company, and an entity affiliated with Mr. Baur. Each of Messrs. Baur, Schnuck, B. Edison and J. Edison received fees and other compensation from time to time in their capacities with the Company. Mr. B. Edison beneficially owned in excess of 5% of the Company’s common stock during part of fiscal year 2011.

Steven Madden, Ltd., owns 1,844,860 shares of the Company’s common stock and is the investor in the subordinated debenture described in Note 5. Steven Madden, Ltd., through its subsidiaries, sells footwear to the Company and also serves as one of the Company’s buying agents. In fiscal years 2010 and 2011, the Company purchased $10.5 million and $17.0 million, respectively, in footwear and paid $0.7 million and $1.3 million, respectively, in buying agent fees to Steven Madden, Ltd. or its subsidiaries. As described in Note 3, the Company sold its Wild Pair trademark to Steven Madden, Ltd. for $4.0 million in fiscal year 2011.

18.

Quarterly Financial Data — Unaudited

Summarized quarterly financial information for fiscal years 2010 and 2011 is as follows:


	Thirteen Weeks Ended May 1, 2010			Thirteen Weeks Ended July 31, 2010			Thirteen Weeks Ended October 30, 2010			Thirteen Weeks Ended January 29, 2011
Fiscal year 2010:
Net sales	$	43,524,036		$	43,293,127		$	40,575,879		$	58,232,802
Gross profit		10,736,296			11,932,912			6,350,181			20,552,518
Net income (loss)(1)		(3,450,817	)		(2,075,142	)		(8,934,981	)		5,169,203
Basic earnings (loss) per share		(0.47	)		(0.28	)		(1.03	)		0.56
Diluted earnings (loss) per share		(0.47	)		(0.28	)		(1.03	)		0.54

F-21

BAKERS FOOTWEAR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)


	Thirteen Weeks Ended April 30, 2011			Thirteen Weeks Ended July 30, 2011			Thirteen Weeks Ended October 29, 2011			Thirteen Weeks Ended January 28, 2012
Fiscal year 2011:
Net sales	$	47,012,740		$	44,303,614		$	40,201,918		$	53,577,016
Gross profit		12,257,184			12,970,222			4,937,045			16,181,659
Net income (loss)(1)(2)		(2,516,667	)		(1,581,460	)		(10,233,721	)		3,374,674
Basic earnings (loss) per share		(0.27	)		(0.17	)		(1.10	)		0.36
Diluted earnings (loss) per share		(0.27	)		(0.17	)		(1.10	)		0.36

(1)	During fiscal years 2010 and 2011, the Company recognized $1,415,979, and $1,882,725 respectively in noncash charges related to the impairment of long-lived assets of underperforming stores.

(2)	During the fourth quarter of fiscal year 2011, we recorded a $3.8 million gain on disposal of property and equipment from sale of Wild Pair trademark.

F-22

BAKERS FOOTWEAR GROUP INC - FORM 10-K - April 27, 2012

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