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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended April 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 No.)

2815 Scott Avenue,

St. Louis, Missouri

  63103
(Address of principal executive offices)   (Zip Code)

(314) 621-0699

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.0001 per share, 9,295,916 shares issued and outstanding as of June 9, 2012.

 

 

 


Table of Contents

BAKERS FOOTWEAR GROUP, INC.

INDEX TO FORM 10-Q

 

     Page  

Part I Financial Information

     3   

Item 1. Financial Statements (Unaudited)

     3   

Condensed Balance Sheets

     3   

Condensed Statements of Comprehensive Loss

     4   

Condensed Statement of Shareholders’ Deficit

     5   

Condensed Statements of Cash Flows

     6   

Notes to Condensed Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     22   

Item 4. Controls and Procedures

     22   

Part II Other Information

     23   

Item 1. Legal Proceedings

     23   

Item 6. Exhibits

     23   

Signatures

     24   

Exhibit Index

     25   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAKERS FOOTWEAR GROUP, INC.

CONDENSED BALANCE SHEETS

 

     April 30, 2011     January 28, 2012     April 28, 2012  
     (Unaudited)           (Unaudited)  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 213,755      $ 148,308      $ 132,087   

Accounts receivable

     1,840,671        1,150,601        1,449,840   

Inventories

     27,191,213        24,398,190        24,570,829   

Prepaid expenses and other current assets

     924,525        1,124,938        1,564,161   
  

 

 

   

 

 

   

 

 

 

Total current assets

     30,170,164        26,822,037        27,716,917   

Property and equipment, net

     17,334,393        14,087,942        13,355,158   

Other assets

     1,010,982        801,074        833,612   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 48,515,539      $ 41,711,053      $ 41,905,687   
  

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ deficit

      

Current liabilities:

      

Accounts payable

   $ 14,716,321      $ 20,783,454      $ 22,313,051   

Accrued expenses

     8,823,179        8,879,369        8,838,429   

Subordinated convertible debentures

     —          —          1,000,000   

Sales tax payable

     1,122,984        989,096        988,524   

Deferred income

     1,092,757        385,599        159,991   

Revolving credit facility

     14,726,269        11,560,210        12,419,222   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     40,481,510        42,597,728        45,719,217   

Accrued noncurrent rent liabilities

     8,309,649        7,541,688        6,576,321   

Subordinated convertible debentures

     4,000,000        4,000,000        3,000,000   

Subordinated debenture

     4,138,022        4,185,483        4,202,499   

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, 9,295,916 shares outstanding at April 30, 2011, January 28, 2012, and April 28, 2012

     930        930        930   

Additional paid-in capital

     40,534,017        40,774,320        40,846,858   

Accumulated deficit

     (48,948,589     (57,389,096     (58,440,138
  

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit

     (8,413,642     (16,613,846     (17,592,350
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ deficit

   $ 48,515,539      $ 41,711,053      $ 41,905,687   
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Net sales

   $ 47,012,740      $ 44,317,499   

Cost of merchandise sold, occupancy, and buying expenses

     34,755,556        31,746,053   
  

 

 

   

 

 

 

Gross profit

     12,257,184        12,571,446   

Operating expenses:

    

Selling

     10,196,930        9,309,507   

General and administrative

     4,122,650        4,083,553   

Loss (gain) on disposal of property and equipment

     3,349        (211,608
  

 

 

   

 

 

 

Operating loss

     (2,065,745     (610,006

Other income (expense):

    

Interest expense

     (460,775     (471,458

Other, net

     9,853        30,422   
  

 

 

   

 

 

 

Loss before income taxes

     (2,516,667     (1,051,042

Benefit from income taxes

     —          —     
  

 

 

   

 

 

 

Net loss

   $ (2,516,667   $ (1,051,042
  

 

 

   

 

 

 

Net loss per common share

   $ (0.27   $ (0.11
  

 

 

   

 

 

 

Comprehensive loss

   $ (2,516,667   $ (1,051,042
  

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENT OF SHAREHOLDERS’ DEFICIT

(Unaudited)

 

     Common Stock                      
     Shares
Issued and
Outstanding
     Amount      Additional
Paid-In
Capital
     Accumulated
Deficit
    Total  

Balance at January 28, 2012

     9,295,916       $ 930       $ 40,774,320       $ (57,389,096   $ (16,613,846

Stock-based compensation expense

     —           —           72,538         —          72,538   

Net loss

     —           —           —           (1,051,042     (1,051,042
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at April 28, 2012

     9,295,916       $ 930       $ 40,846,858       $ (58,440,138   $ (17,592,350
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Operating activities

    

Net loss

   $ (2,516,667   $ (1,051,042

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     1,281,678        1,077,442   

Accretion of debt discount

     14,695        17,016   

Stock-based compensation expense

     90,129        72,538   

Loss (gain) on disposal of property and equipment

     3,349        (211,608

Changes in operating assets and liabilities:

    

Accounts receivable

     (355,855     (299,232

Inventories

     (1,279,705     (172,639

Prepaid expenses and other current assets

     46,358        (439,223

Other assets

     76,076        (41,670

Accounts payable

     (1,293,526     1,529,597   

Accrued expenses and deferred income

     276,867        (267,120

Accrued rent liabilities

     (338,623     (965,367
  

 

 

   

 

 

 

Net cash used in operating activities

     (3,995,224     (751,308

Investing activities

    

Purchase of property and equipment

     (214,254     (383,168
  

 

 

   

 

 

 

Net cash used in investing activities

     (214,254     (383,168

Financing activities

    

Net advances under revolving credit facility

     4,276,970        859,012   

Proceeds from disposition of property and equipment

     —          259,243   
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,276,970        1,118,255   

Net increase (decrease) in cash and cash equivalents

     67,492        (16,221

Cash and cash equivalents at beginning of period

     146,263        148,308   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 213,755      $ 132,087   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for interest

   $ 330,578      $ 328,995   
  

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

BAKERS FOOTWEAR GROUP, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Unaudited

1. Basis of Presentation

The accompanying unaudited condensed financial statements contain all adjustments that management believes are necessary to present fairly Bakers Footwear Group, Inc.’s (the Company’s) financial position, results of operations and cash flows for the periods presented. Such adjustments consist of normal recurring accruals. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The Company’s operations are subject to seasonal fluctuations and, consequently, operating results for interim periods are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012. The Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission (“SEC”) and has made disclosures of all material subsequent events in the notes to the unaudited interim financial statements.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Codification (ASC) 2011-05, Presentation of Comprehensive Income, which requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The Company adopted ASC 2011-05 during the quarter ended April 28, 2012 and did not affect our results of operations or financial condition.

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 recent losses have had a significant negative impact on the Company’s financial position and liquidity. As of April 28, 2012, the Company had negative working capital of $18.0 million, unused borrowing capacity under its revolving credit facility of $1.3 million, and shareholders’ deficit of $17.6 million.

The Company’s updated business plan for the remainder fiscal year 2012 is based on mid-single digit decreases in comparable store sales for the second quarter of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. Fiscal year 2012 comparable store sales through June 9, 2012, have decreased 4.4%. The lower than planned sales have placed increased pressure on the Company’s liquidity position. The Company also initiated a plan to achieve $10.0 million of margin enhancements and cost cuts. Based on the updated 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. The Company is working with its lenders to refinance its credit line to increase availability, including an increase to the interest rate, but no assurance can be given as to when it will occur, if at all. 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 3. 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. As of June 9, 2012, the balance on the revolving line of credit was $8.1 million and unused borrowing capacity in excess of the covenant minimum was $1.4 million.

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.

 

7


Table of Contents

Based on the Company’s business plan for the remainder of 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 and recent sales trends, there is no assurance 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, including refinancing of its credit facility, 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 the Company’s most recent 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. Revolving Credit Facility

The Company has a revolving credit agreement with a commercial bank (Bank). This agreement calls for a maximum line of credit of $30,000,000 subject to the calculated borrowing base as defined in the agreement, which is based primarily on the 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%. An unused line fee of 0.75% per annum is payable monthly based on the difference between the maximum line of credit and the average loan balance. The Company had approximately $1,624,000, $1,556,000 and $1,316,000 (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 as of April 30, 2011, January 28, 2012 and April 28, 2012, respectively. 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.

 

8


Table of Contents

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. The Company is in negotiations to refinance its credit facility, but can give no assurance as to when it will occur, if at all.

4. 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 prorated 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.

5. Subordinated Convertible Debentures

The Company completed a private placement of $4,000,000 in aggregate principal amount of subordinated convertible debentures on June 26, 2007 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.

 

9


Table of Contents

The Company uses FASB guidance in 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 April 30, 2011, January 28, 2012 and April 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.

6. 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 April 28, 2012, the Company has increased the valuation allowance to $24,172,746. 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.

As of April 28, 2012, the Company has approximately $37.6 million of net operating loss carryforwards that expire in 2022 available to offset future taxable income.

Significant components of the provision for (benefit from) income tax expense are as follows:

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Current:

    

Federal

   $ (739,092   $ (570,078

State and local

     (157,652     (113,298
  

 

 

   

 

 

 

Total current

     (896,744     (683,376
  

 

 

   

 

 

 

Deferred:

    

Federal

     (52,676     241,833   

State and local

     (9,577     43,970   
  

 

 

   

 

 

 

Total deferred

     (62,253     285,803   
  

 

 

   

 

 

 

Valuation allowance

     958,997        397,573   
  

 

 

   

 

 

 

Total income tax expense

   $ —        $ —     
  

 

 

   

 

 

 

The differences between income tax expense calculated at the statutory U.S. federal income tax rate of 35% and the amount reported in the statements of operations are as follows:

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Federal income tax at statutory rate

   $ (880,833   $ (367,865

Impact of graduated Federal rates

     25,167        10,511   

State and local taxes, net of federal income taxes

     (111,303     (46,490

Change in valuation allowance

     958,996        397,573   

Permanent differences

     7,973        6,271   
  

 

 

   

 

 

 

Total provision for (benefit from) income taxes

   $ —        $ —     
  

 

 

   

 

 

 

 

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Table of Contents

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

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

 

     April 30, 2011     January 28, 2012     April 28, 2012  

Deferred tax assets:

      

Net operating loss carryforward

   $ 11,671,854      $ 13,890,728      $ 14,574,105   

Vacation accrual

     410,153        411,576        416,256   

Inventory

     1,325,812        1,157,708        1,175,938   

Stock-based compensation

     1,293,662        1,387,381        1,415,670   

Accrued rent

     3,240,763        2,941,258        2,564,765   

Property and equipment

     2,925,026        4,229,939        4,193,262   
  

 

 

   

 

 

   

 

 

 

Total deferred tax assets

     20,867,270        24,018,590        24,339,996   
  

 

 

   

 

 

   

 

 

 

Deferred tax liabilities:

      

Prepaid expenses

     165,776        (96,953     (167,250
  

 

 

   

 

 

   

 

 

 

Valuation allowance

     (20,701,494     (23,921,637     (24,172,746
  

 

 

   

 

 

   

 

 

 

Net deferred tax assets

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

The Company’s federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of April 28, 2012, the Company has not recorded 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.

7. Stock-Based Compensation

During the thirteen weeks ended April 28, 2012, the Company issued 19,500 nonqualified stock options with a weighted average exercise price of $0.84. During the thirteen weeks ended April 30, 2011, the Company issued 75,000 nonqualified stock options with a weighted average exercise price of $0.80. These options are exercisable in equal annual installments of 20% on or after each of the first five years from the date of grant and expire ten years from the date of grant. The Company uses the Black-Scholes option pricing model to determine the fair value of stock-based compensation. During the thirteen weeks ended April 30, 2011, the Company also issued 67,000 shares of restricted common stock. Shares of restricted stock cliff vest on the five year anniversary of the grant date.

The number of stock options granted, their grant-date weighted-average fair value, and the significant assumptions used to determine fair-value during the thirteen weeks ended April 30, 2011 and April 28, 2012 are as follows:

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Options granted

     75,000        19,500   

Weighted-average fair value of options granted

   $ 0.63      $ 0.68   

Assumptions

    

Dividends

     0     0

Risk-free interest rate

     2.2     1.1

Expected volatility

     99     104

Expected option life

     6 years        6 years   

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. 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 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.

 

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Table of Contents

On May 14, 2012, subsequent to the end of the first quarter, the Company issued 945,000 restricted stock units.

8. Earnings Per Share

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

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

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Numerator:

    

Net loss

   $ (2,516,667   $ (1,051,042
  

 

 

   

 

 

 

Numerator for loss per share

     (2,516,667     (1,051,042
  

 

 

   

 

 

 

Interest expense related to convertible debentures

     —          —     

Numerator for diluted loss per share

   $ (2,516,667   $ (1,051,042
  

 

 

   

 

 

 

Denominator:

    

Denominator for basic earnings per share — weighted average shares

     9,262,048        9,295,916   

Effect of dilutive securities Stock options

     —          —     

Convertible debentures

     —          —     

Denominator for diluted earnings (loss) per share — adjusted weighted average shares and assumed conversions

     9,262,048        9,295,916   
  

 

 

   

 

 

 

The diluted earnings per share calculation for the thirteen weeks ended April 28, 2012 excludes 28,113 incremental shares related to outstanding stock options and 518,299 incremental shares underlying convertible debentures because they are antidilutive. The diluted earnings per share calculation for the thirteen weeks ended April 30, 2011 excludes 30,285 incremental shares related to outstanding stock options and 518,299 incremental shares underlying convertible debentures because they are antidilutive.

9. Commitments and Contingencies

The Company has certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business. Management believes the probable resolution of such contingencies will not materially affect the financial position or results of operations of the Company. The Company, in the ordinary course of store construction and remodeling, is subject to 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.

10. Fair Value of Financial Instruments

The Company has adopted the provisions of ASC 825 Financial Instruments related to interim disclosures about fair value of financial instruments. This guidance requires disclosures regarding fair value of financial instruments in interim financial statements, as well as in annual financial statements.

 

     April 30, 2011  
     Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 213,755       $ 213,755   

Revolving credit facility

     14,726,269         14,726,269   

Subordinated debenture

     4,138,022         4,055,343   

Subordinated convertible debentures

     4,000,000         3,290,279   

 

     January 28, 2012  
     Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 148,308       $ 148,308   

Revolving credit facility

     11,560,210         11,560,210   

Subordinated debenture

     4,185,483         4,106,971   

Subordinated convertible debentures

     4,000,000         3,827,461   

 

12


Table of Contents
     April 28, 2012  
     Carrying
Amount
     Fair Value  

Cash and cash equivalents

   $ 132,087       $ 132,087   

Revolving credit facility

     12,419,222         12,419,222   

Subordinated debenture

     4,202,499         4,125,578   

Subordinated convertible debentures

     4,000,000         3,974,437   

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 ratings.

 

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Table of Contents

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

The following discussion should be read in conjunction with the Company’s unaudited condensed financial statements and notes thereto provided herein and the Company’s audited financial statements and notes thereto in our annual report on Form 10-K for the fiscal year ended January 28, 2012. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The factors that might cause such a difference also include, but are not limited to, those discussed in our annual report on Form 10-K under “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and under “Item 1. Business — Risk Factors” and those discussed elsewhere in our Annual Report on Form 10-K and related notes thereto and elsewhere in this quarterly report.

Overview

We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We feature private label and national brand dress, casual and sport shoes, boots, sandals and accessories. As of April 28, 2012, we operated a total of 225 stores, including 12 stores in the Wild Pair format.

During the first quarter of fiscal year 2012, our net sales decreased 5.7% compared to the first quarter of fiscal year 2011, reflecting lower demand in our dress shoe category. Comparable store sales in the first quarter of 2012 decreased 2.7%, compared to an increase of 9.3% in the first quarter of 2011. Gross profit percentage increased to 28.4% of sales in the first quarter of 2011 from 26.1% in the first quarter of 2011, reflecting lower occupancy costs due to the reduction in store count and reduced occupancy costs as discussed below. Our net loss for the first quarter decreased to $1.1 million from $2.5 million in the first quarter of 2011.

Recent losses have had a significant negative impact on our financial position and liquidity. As of April 28, 2012, we had negative working capital of $18.0 million, unused borrowing capacity under our revolving credit facility of $1.3 million, and a shareholders’ deficit of $17.6 million.

As discussed in more detail in the “Liquidity and Capital Resources” section below, our updated business plan for the remainder of fiscal year 2012 reflects mid-single digit decreases in comparable store sales for the second quarter of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. Fiscal year 2012 comparable store sales through June 9, 2012, have decreased 4.4%. The lower than planned sales have placed increased pressure on our liquidity position. We also have initiated a plan to achieve $10.0 million of margin enhancements and cost cuts. Based on the updated 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

As previously reported, 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, 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

 

14


Table of Contents

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 June 9, 2012, the balance on our revolving line of credit was $8.1 million, and our unused borrowing capacity in excess of the covenant minimum was $1.4 million.

Based on our business plan for the remainder of 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 and our recent inability to comply with the ratio requirement there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility, recent sales trends, and the current state of the economy, we believe that there is a reasonable possibility that we may not be able to comply with the financial covenants. Failure to comply 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, including refinancing our credit facility, 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.

Senior Credit Facility

We are negotiating with our lenders to refinance our senior revolving credit facility. We anticipate that such a refinancing would increase our unused borrowing capacity for most of our fiscal year, extend the term of the facility and increase our borrowing costs by approximately 4% per annum, plus the costs of entering into the facility. Initially, any increased availability from a new facility is not likely to materially increase our borrowing capacity beyond relieving some of the recent pressure on our liquidity position as a result of recent sales results and the increased costs of entering into the new facility. We can give no assurance as to when this may occur, if at all.

Critical Accounting Policies

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

We believe that our application of accounting policies, and the estimates that are inherently required by these policies, are reasonable. We believe that our significant accounting policies including those regarding merchandise inventories, store closing and impairment charges, stock-based compensation expense and deferred income taxes may involve a higher degree of judgment and complexity. These policies were discussed in our most recent Annual Report on Form 10-K for the fiscal year ended January 28, 2012 and there has been no changes in these policies during the first quarter of 2012.

 

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Table of Contents

Results of Operations

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

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Net sales

     100.0     100.0

Cost of merchandise sold, occupancy and buying expense

     73.9        71.6   
  

 

 

   

 

 

 

Gross profit

     26.1        28.4   

Selling expense

     21.7        21.0   

General and administrative expense

     8.8        9.2   

Loss (gain) on disposal of property and equipment

     —          (0.4
  

 

 

   

 

 

 

Operating loss

     (4.4     (1.4

Other income, net

     —          0.1   

Interest expense

     (1.0     (1.1
  

 

 

   

 

 

 

Loss before income taxes

     (5.4     (2.4

Benefit from income taxes

     —          —     
  

 

 

   

 

 

 

Net loss

     (5.4 )%      (2.4 )% 
  

 

 

   

 

 

 

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

 

     Thirteen
Weeks Ended
April 30, 2011
    Thirteen
Weeks Ended
April 28, 2012
 

Number of stores at beginning of period

     232        227   

Stores opened during period

     0        —     

Stores closed during period

     (1     (2
  

 

 

   

 

 

 

Number of stores at end of period

     231        225   
  

 

 

   

 

 

 

Thirteen Weeks Ended April 28, 2012 Compared to Thirteen Weeks Ended April 30, 2011

Net sales. Net sales decreased to $44.3 million for the thirteen weeks ended April 28, 2012 (first quarter 2012) from $47.0 million for the thirteen weeks ended April 30, 2011 (first quarter 2011), a decrease of $2.7 million or 5.7%. The lower sales reflect comparatively lower demand for our dress shoe category. Our comparable store sales for the first quarter of 2012, including multi-channel sales, decreased by 2.7% compared to a 9.3% increase in comparable store sales in the first quarter of 2011. Our unit sales decreased 7.3% and our average unit selling prices increased 2.6% compared to the first quarter of 2011. Our multi-channel sales increased 40.1% to $2.8 million.

Gross profit. Gross profit increased to $12.6 million in the first quarter of 2012 from $12.3 million in the first quarter of 2011, an increase of $0.3 million or 2.6% primarily resulting from a $1.0 million reduction in occupancy costs that are classified as a component of cost of sales. The reduction in occupancy included the reversal of approximately $0.7 million in accrued straight-line rent expense resulting from the sale of a store lease. As a percentage of sales, gross profit increased to 28.4% in the first quarter of 2012 from 26.1% in the first quarter of 2011 primarily resulting from lower occupancy costs due to a reduction in store count. The increase in gross margin dollars includes the following: an increase of $1.0 million from improved gross margin percentage partially offset by a $0.6 million comparable sales decrease and a decrease of $0.1 million from net store closures. Total markdowns costs were $6.0 million in the first quarter of 2012 compared to $7.3 million in the first quarter of 2011.

Selling expense. Selling expense decreased to $9.3 million in the first quarter of 2012 from $10.2 million in the first quarter of 2011, a decrease of $0.9 million or 8.7%, and decreased as a percentage of sales to 21.0% from 21.7%. The decrease was the result of $0.4 million decrease in payroll expenses, $0.3 million decrease in marketing expenses and $0.2 million in lower store depreciation expense. The reduction in payroll expenses and store depreciation expense was primarily the result of a reduction in the number of stores in the first quarter of 2012 from the first quarter of 2011.

General and administrative expense. General and administrative expense remained flat at $4.1 million in the first quarter of 2012 compared to the first quarter of 2011. As a percentage of sales, general and administrative expenses increased to 9.2% from 8.8%.

 

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Table of Contents

Gain/loss on disposal of property and equipment. We recognized a $0.2 million gain on disposal of property and equipment in the first quarter of 2012 from a sale of a store lease.

Interest expense. Interest expense remained flat at $0.5 million year over year.

Net loss. Our net loss decreased to 1.1 million, or 2.4% of net sales, in the first quarter of 2012 compared to a net loss of $2.5 million, 5.4% of net sales, in the first quarter of 2011.

Seasonality and Quarterly Fluctuations

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

Liquidity and Capital Resources

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

Our recent losses have had a significant negative impact on our financial position and liquidity. As of April 28, 2012, we had negative working capital of $18.0 million, unused borrowing capacity under our revolving credit facility of $1.3 million, and negative shareholders’ equity of $17.6 million.

Our updated business plan for fiscal year 2012 reflects mid-single digit decreases in comparable store sales for the second quarter of fiscal year 2012 and mid-single digit increases in comparable store sales for the second half of 2012. Fiscal year 2012 comparable store sales through June 9, 2012, have decreased 4.4%. The lower than planned sales have placed increased pressure on our liquidity position. 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 is scheduled to mature 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 June 9, 2012, the balance on our revolving line of credit was $8.1 million, and our unused borrowing capacity in excess of the covenant minimum was $1.4 million. As discussed in “—Overview—Senior Credit Facility,” we are in the process of attempting to refinance our senior credit facility but can give no assurance as to when it will occur, if at all, or at what terms.

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. 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.

 

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Table of Contents

Based on our business plan 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, our recent inability to comply with the ratio requirement and recent sales results there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility and the current state of the economy, we believe that there is a reasonable possibility that we may not be able to comply with the financial covenants.

Failure to comply 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, including refinancing our credit facility, 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.

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

The following table summarizes certain key liquidity measurements:

 

     April 30, 2011     January 28, 2012     April 28, 2012  

Cash

   $ 213,755      $ 148,308      $ 132,087   

Inventories

     27,191,213        24,398,190        24,570,829   

Total current assets

     30,170,164        26,822,037        27,716,917   

Property and equipment, net

     17,334,393        14,087,942        13,355,158   

Total assets

     48,515,539        41,711,053        41,905,687   

Accounts payable

     14,716,321        20,783,454        22,313,051   

Revolving credit facility

     14,726,269        11,560,210        12,419,222   

Subordinated convertible debentures

     4,000,000        4,000,000        4,000,000   

Subordinated debenture

     4,138,022        4,185,483        4,202,499   

Total current liabilities

     40,481,510        42,597,728        45,719,217   

Total shareholders’ deficit

     (8,413,642     (16,613,846     (17,592,350

Net working capital

     (10,311,346     (15,775,691     (18,002,300

Unused borrowing capacity*

     1,624,060        1,556,150        1,315,900   

 

* as calculated under the terms of our revolving credit facility

 

18


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Operating activities

Cash used in operating activities was $0.8 million in the first quarter of 2012 compared to $4.0 million in the first quarter of 2011. The net loss in the first quarter of 2012 of $1.1 million included non-cash items such as depreciation expense of $1.1 million, gain on disposal of property and equipment of $0.2 million, and $0.1 million of stock-based compensation expense and accretion of debt discount. The most significant use of cash in operating activities in the first quarter of 2012 relates to a $1.2 million increase in accrued expenses and accrued rent liabilities from the beginning of the year, $0.9 increase in prepaid expenses and other current assets, accounts receivable and inventory offset by a $1.5 million increase in accounts payable. The most significant uses of cash in operating activities in the first quarter of 2011, relate to a net loss of $2.5 million, a $1.3 million increase in inventory from the beginning of the year, $1.3 decrease in accounts payable and a $0.4 million increase in accounts receivable.

Inventories at April 28, 2012 were $0.2 million higher than at January 28, 2012, and $2.6 million, or 9.6%, lower than at April 30, 2011, consistent with our cost reduction strategy. Although we believe that at April 28, 2012, inventory levels and valuations are appropriate given current and anticipated sales trends, there is always the possibility that fashion trends could change suddenly. We monitor our inventory levels closely and will take appropriate actions, including taking additional markdowns, as necessary, to maintain the freshness of our inventory.

Investing activities

Cash used in investing activities was $0.4 million in the first quarter of 2012 compared to $0.2 million for the first quarter of 2011. During each quarter, cash used in investing activities substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements for both new and remodeled stores.

We currently anticipate that our capital expenditures in fiscal year 2012, primarily related to new stores, store remodeling, 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.

Financing activities

Cash provided by financing activities was $1.1 million in the first quarter of 2012 compared to $4.3 million for the first quarter of 2011. The source of cash in the first quarter of 2012 was the net draws of $0.9 million on our revolving line of credit and $0.3 million proceeds from sale of property and equipment. In the first quarter of fiscal year 2011, the principal source of cash was the net draws of $4.3 million on our revolving line of credit.

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.

 

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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 (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 $12.4 million, $11.6 million and $14.7 million as of April 28, 2012, January 28, 2012 and April 30, 2011, respectively. We had approximately $1.3 million, $1.6 million and $1.6 million in unused borrowing capacity calculated under the provisions of our revolving credit facility as of April 28, 2012, January 28, 2012, and April 30, 2011, respectively. During the first quarters of fiscal years 2012 and 2011, the highest outstanding balances on our revolving credit facility were $12.8 million and $15.9 million, respectively. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.

Subordinated Convertible Debentures

On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated convertible debentures in a private placement. 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.

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

 

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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.

 

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Off-Balance Sheet Arrangements

At April 28, 2012, January 28, 2012, and April 30, 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.

Contractual Obligations

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

 

     Payments due by Period  

Contractual Obligations

   Total      Less than
1 Year
     1 - 3 Years      3 - 5 Years      More than
5 Years
 

Long-term debt obligations(1)

   $ 13,403,456       $ 843,055       $ 3,654,749       $ 3,127,527       $ 5,778,125   

Operating lease obligations (2)

     89,893,373         23,238,282         37,376,573         20,874,897         8,403,621   

Purchase obligations (3)

     29,551,702         23,926,702         3,000,000         2,625,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 132,848,531       $ 48,008,039       $ 44,031,322       $ 26,627,424       $ 14,181,746   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes principal and interest payments on our subordinated convertible debentures and our subordinated debenture.
(2) Includes minimum payment obligations related 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.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance which requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. We adopted this guidance effective January 29, 2012. This guidance does not affect our results of operations or financial condition.

Impact of Inflation

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. The 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.

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 first fiscal quarter ended April 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 first quarter of fiscal year 2012.

 

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved from time to time in various lawsuits and claims arising in the ordinary course of business. Although the outcomes of these lawsuits and claims are uncertain, we do not believe any of them will have a material adverse effect on our business, financial condition or results of operations.

ITEM 6. EXHIBITS

See Exhibit Index herein.

 

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SIGNATURES

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

Date: June 12, 2012

 

BAKERS FOOTWEAR GROUP, INC.
(Registrant)
By:  

/s/ Peter A. Edison

Peter A. Edison

  Chairman of the Board, Chief Executive Officer And President (Principal Executive Officer)
  Bakers Footwear Group, Inc.
  (On behalf of the Registrant)
By:  

/s/ Charles R. Daniel, III

Charles R. Daniel, III

  Executive Vice President and Chief Financial Officer, Controller, Treasurer, and Secretary
  (Principal Financial Officer and Principal Accounting Officer)

 

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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    Third Amendment to Subordinated Convertible Debentures and Subordinated Convertible Debenture Purchase Agreement entered into on April 26, 2012 (incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K filed on April 27, 2012 (File No. 000-50563)).
  10.1    Bakers Footwear Group, Inc. 2012 Incentive Compensation Plan (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)).
  10.2    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)).
  10.3    Consent of Bank of America, N.A. entered into on April 26, 2012 (incorporated by reference to Exhibit 10.23.12 to the Company’s Annual Report on Form 10-K filed on April 27, 2012 (File No. 000-50563)).
  10.4    Summary of May 14, 2012 Restricted Stock Unit Awards to Executive Officers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 14, 2012 (File No. 000-50563)).
  10.5    Letter to Peter Edison outlining 2012 bonus levels (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 14, 2012 (File No. 000-50563)).
  10.6    Letter to Joe VanderPluym outlining 2012 bonus levels (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 14, 2012 (File No. 000-50563)).
  10.7    Letter to Mark Ianni outlining 2012 bonus levels (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 14, 2012 (File No. 000-50563)).
  10.8    Letter to Stan Tusman outlining 2012 bonus levels (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on May 14, 2012 (File No. 000-50563)).
  10.9    Letter to Charles R. Daniel, III outlining 2012 bonus levels (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on May 14, 2012 (File No. 000-50563)).
  11.1    Statement regarding computation of per share earnings (incorporated by reference from Note 8 to the unaudited interim financial statements included herein).
  31.1    Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).
  31.2    Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer).

 

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  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).
101    Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheets at April 30, 2011, January 28, 2012, and April 28, 2012; (ii) Condensed Statements of Comprehensive Loss for the thirteen weeks ended April 30, 2011 and April 28, 2012; (iii) Condensed Statement of Shareholders’ Deficit; (iv) Condensed Statements of Cash Flows for the thirteen weeks ended April 30, 2011 and April 28, 2012; and (v) Notes to Condensed Financial Statements for the thirteen weeks ended April 28, 2012. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q 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.

 

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