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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
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended January 1, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number: 000-50563
Bakers Footwear Group, Inc.
(Exact name of Registrant as Specified in Its Charter)
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Missouri |
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43-0577980 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(I.R.S. Employer
Identification Number) |
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2815 Scott Avenue,
St. Louis, Missouri
(Address of Principal Executive Offices) |
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63103
(Zip Code) |
Registrant’s telephone number, including area code:
(314) 621-0699
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.0001 per share
Indicate by check mark whether the registrant (1) has filed
all reports required 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 requirements for the past
90 days. Yes þ No o
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. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes o 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 $9.81 for the shares on the Nasdaq National
Market on July 2, 2004) was approximately $28,835,112, as
of July 2, 2004. For this purpose, all shares held by
directors, executive officers and shareholders beneficially
holding five percent or more of the Registrant’s common
stock have been treated as held by affiliates.
As of March 28, 2005 there were 5,102,481 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 2005 Annual Meeting of Shareholders to be
filed within 120 days of the end of the Registrant’s
2004 fiscal year (the “2005 Proxy Statement”) are
incorporated by reference in Part III.
TABLE OF CONTENTS
2
PART I
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
Bakers stores’ buying teams constantly modify our product
offering to reflect widely accepted fashion trends. As of
January 1, 2005, we operated 192 of our 220 stores under
the Bakers format, which targets young women between the ages of
12 and 29. 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. Based on our analysis of our competitors, we believe
that our Bakers stores are the only national, full service
retailer specializing in moderately priced footwear for this
segment. We also operate the Wild Pair chain, which consisted of
28 stores as of January 1, 2005 and offers edgier, faster
fashion-forward footwear that reflects the attitude and
lifestyles of both women and men between the ages of 17 and 24.
As a result of offering a greater proportion of national brands,
Wild Pair has somewhat higher average prices than our Bakers
stores. As of March 28, 2005, we operated 221 stores, 194
of which were Bakers stores and 27 of which were Wild Pair
stores.
On February 10, 2004, we sold 2,160,000 shares of our
common stock in our initial public offering. We sold an
additional 324,000 shares of our common stock on
March 12, 2004 in connection with the exercise of the
over-allotment option relating to our initial public offering.
Upon consummation of our initial public offering, our
subordinated convertible debentures and our previously
outstanding shares of capital stock converted into shares of our
one class of common stock and the repurchase obligations
relating to our previously outstanding shares of capital stock
were terminated. We also issued warrants to
purchase 216,000 shares of our common stock in
connection with the offering. Please see the information set
forth herein under “Item 5. Market for
Registrant’s Common Equity and Related Stockholder
Matters” which is incorporated herein by this reference.
On February 25, 2005, we announced that we would be
restating our financial statements to correct our accounting for
landlord allowances and the commencement of lease terms. On
March 21, 2005, we filed an amended Annual Report on
Form 10-K/ A for fiscal 2003 and amended Quarterly Reports
on Form 10-Q/ A for the first three quarters of
fiscal 2004 which reflected a restatement of our financial
statements to make those corrections.
On March 11, 2005, we announced that we have changed our
fiscal year to the standard retail calendar, which closes on the
Saturday closest to the end of January. We will have a four week
transition period beginning on January 2, 2005 and ending
January 29, 2005. Our new fiscal year will begin on
January 30, 2005 and will end on January 28, 2006. The
results of the transition period will be reported on
Form 10-Q along with the results of the first quarter of
fiscal year 2005, ending April 30, 2005.
In this Annual Report on Form 10-K, we refer to the fiscal
years ended December 30, 2000, January 5, 2002,
January 4, 2003, January 3, 2004 and January 1,
2005 and the fiscal year ending January 28, 2006 as
“fiscal year 2000,” “fiscal year 2001,”
“fiscal year 2002,” “fiscal year 2003,”
“fiscal year 2004” and “fiscal year 2005,”
respectively. We refer to the transition period from
January 2, 2005 through January 29, 2005 as the
“transition period.” 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.
3
Entry into Agreement for Private Placement
On March 31, 2005, we entered into a definitive securities
purchase agreement with six institutional “accredited
investors” for the private placement, pursuant to
Regulation D under the Securities Act of 1933, of
1,000,000 shares of our common stock, par value
$0.0001 per share, and warrants to purchase
250,000 shares of our common stock at an exercise price of
$10.18 per share (the “Private Placement”). Under the
purchase agreement, we would receive aggregate gross proceeds of
$8.75 million. Net proceeds to us are expected to
approximate between $7.25 million and $7.5 million. We
intend to use the net proceeds to open new stores, remodel
existing stores, repay indebtedness under our revolving line of
credit and for other working capital purposes. The Private
Placement is subject to customary closing conditions in the
purchase agreement and will terminate if not closed on or prior
to April 15, 2005. At the closing of the Private Placement
we will also be issuing warrants to purchase 125,000 shares
of our common stock to the placement agent in the offering at an
exercise price of $10.18 per share. The placement agent
would also be entitled to receive placement fees of
approximately $700,000 plus reimbursement of certain expenses.
In connection with the Private Placement, we have agreed to
provide certain registration rights under the Securities Act of
1933 to the investors and the placement agent relating to the
shares of common stock purchased and shares of common stock
issuable pursuant to the warrants. As part of our registration
obligations, we will be subject to liquidated damages penalties
equal to 1.0% of the aggregate purchase price for each
30 day period or pro rata for any portion thereof in excess
of our allotted time if the required registration statement is
not filed within 30 days of closing, if it is not effective
within 90 days after the closing of the Private Placement
(120 days if the registration statement is reviewed by the
SEC), or if after effectiveness sales cannot be made pursuant to
the registration statement for any reason, subject to our right
to suspend use of the registration statement for certain periods
of time in certain circumstances. We will be filing a Current
Report on Form 8-K within the prescribed time responsive to
the requirements of that form which will provide additional
detail relating to the Private Placement.
If the Private Placement were not to close, we would expect to
open 25-30 new stores in fiscal 2005, substantially all in our
new format. We expect the net proceeds of the Private Placement
to allow us to open an additional 10 stores in the fall of 2005
and to target the opening of 35-40 new stores in fiscal 2006,
substantially all in the new format.
All of the forward-looking statements herein are subject to the
risk and uncertainty that the Private Placement will not occur
and as to its final terms, if any, and the impact of such
transactions on our operating results and financial position.
Company History
We were founded in 1926 as Weiss-Kraemer, Inc., which was 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 spent
12 years in various senior management positions at Edison
Brothers Stores, Inc. In June 1999, we teamed with Bakers’
existing management to purchase selected assets of the Bakers
and Wild Pair chains, including approximately 200 store
locations and merchandise inventory from Edison Brothers, which
had filed for bankruptcy protection in March 1999. We also
retained the majority of Bakers’ employees, including key
senior management, merchandise buyers, store operating personnel
and administrative support personnel. At the time of the
acquisition, we had approximately 60 Weiss and Neuman locations,
which we have subsequently closed or re-merchandised into the
Bakers or Wild Pair formats. In February 2001, we changed our
name to Bakers Footwear Group, Inc.
We operate as one business segment for accounting purposes. See
“Item 6. Selected Financial Data.” and
“Item 8. Financial Statements and Supplementary
Data.” 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.
4
Competitive Advantages
We believe our long operating history and management expertise
provide us several key competitive advantages that have
historically allowed us to operate our stores to generate strong
cash flow and operating margins.
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Our Reputation as a Leading Fashion Footwear Retailer for
Young Women. |
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We strive to be the store of choice for young women between the
ages of 12 and 29 who seek quality, fashionable footwear at an
affordable price. Based on our analysis of our competitors, we
believe we are the only national, full service retailer
specializing in serving this segment. We provide a high energy,
fun shopping experience and attentive, personal service
primarily in highly visible fashion mall locations. |
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The average retail prices of our private label footwear
generally range from $39 to $65. 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. |
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Our micro-merchandising strategy enables us to adapt our store
inventories with the trends and demographics of individual
locations. As a result, we are able to stock the styles our
customers desire, increasing sales and customer loyalty. |
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Our marketing initiatives foster additional customer loyalty,
while expanding our presence in serving our target market. This
can be exemplified by our successful introduction of our Bakers
Frequent Buyer Card, which our customers purchase to obtain a
discount on all future purchases until the expiration of the
card. |
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A Disciplined Management Approach. |
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We believe our senior management team combines a unique blend of
experience with our company and other national specialty
retailers. Our six-member senior management team averages
approximately 25 years of individual experience in footwear
and accessories retailing. |
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Our organizational structure is designed to respond to the
changes that are inherent in our business. Our senior
management, merchandisers and buyers work closely with our
flexible network of manufacturing sources and efficient
third-party distribution system to give our customers the styles
they demand in a timely manner. |
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During the recent challenges in the retail environment, our
senior management team utilized our management structure to
effectively control overhead and our administrative operations.
We also reacted quickly to changes in consumer demand and
strategically reduced inventory purchases to reduce the need for
markdowns and clearance merchandise. |
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We intend to continually focus on improving profitability by: |
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Leveraging our investment in corporate infrastructure. We have
invested in technology, including integrated inventory
management and logistics systems, point of sale systems and
equipment, and planning and allocation systems. Because these
information systems and personnel costs are primarily fixed, as
net sales increase, our profitability should increase at a
greater rate. |
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Improving our inventory turns through the use of our new
planning, allocation and assortment planning systems, and
through the increase in our mix of branded products, which
should lead to fewer markdowns. |
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Constantly reviewing our store locations and proactively closing
underperforming stores and remodeling older stores, while
building new stores with attractive unit economics. |
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A key factor in our ability to offer our merchandise at moderate
prices and respond quickly to changes in consumer trends is our
sourcing proficiency. We 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 long-term relationships with these manufacturers and
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 and reduce our markdowns.
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.
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Advanced Inventory Management Systems. |
In fiscal year 2003, we completed the final step in the
implementation and integration of our planning, purchasing,
allocation, assortment planning and point of sale systems. These
systems allow us to better execute our micro-merchandising
strategy through more efficient management and allocation of our
store inventories to reduce further our response times in
reaction to fashion trends. Our micro-merchandising strategy
requires us to adapt the merchandise mix by location, with
different assortments depending on store level customer
demographics. We now 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 has allowed us to
reduce markdowns, resulting in higher gross margins. We believe
that our systems facilitate the process of reducing 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.
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Flexible Store Location Strategy. |
Our multiple concepts and variety of formats within these
concepts allow us to operate profitably in a wide range of
shopping malls. New and remodeled Bakers stores located in A and
B malls have been designed in a new format. As of
January 1, 2005 we have 73 stores featuring this new format
which have shown stronger sales and profits than non-remodeled
stores. We continue to operate lower cost formats in C malls
which can generate the same return on investment as the new
format stores. Additionally, our Wild Pair concept, operating at
a similar return on investment, can succeed in smaller spaces
than those typically required by Bakers stores. Wild Pair’s
higher sales per square foot often allow it to operate in some
higher-end malls as well. This flexibility to operate in a wide
variety of malls enhances Bakers’ potential to grow and
supports strong landlord relationships with the national real
estate developers.
Strategy
Our goal is to position Bakers as the fashion footwear
merchandise authority for young women. We intend to effect this
strategy through:
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Opening New Stores in Key Locations. |
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We plan to open new stores in a controlled and disciplined
manner. Our strong relationships with landlords allow us to
secure desirable locations in fashion malls. In selecting a
specific site, 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 the
specific location. |
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Once we have identified a key location and secured a lease, we
build our store in our distinctive new upscale contemporary
format. We expect these new stores to average approximately
$790,000 a year in store volume and to contribute approximately
$110,000 of cash flow per year in their second year of
operations. We have identified 200 additional locations for new
format stores and plan to open approximately 25 to 30 new stores
in fiscal year 2005. Assuming the successful consummation of the |
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Private Placement, we expect to open an additional 10 stores in
the fall of 2005 and target an additional 35-40 new stores in
fiscal 2006. |
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While we are not currently in negotiations, from time to time,
we will explore acquisitions of regional chains or groups of
stores. Historically, we have been able to acquire stores at
prices below our cost to open new stores. For example, in fiscal
year 2002, we spent $1.8 million to acquire 33 former
Sam & Libby locations. We spent approximately $360,000
to convert those 33 locations into our formats. The expenditures
consisted mainly of minor remodeling, signage, and point of sale
equipment and software, and averaged approximately $11,000,
excluding inventory, for each location. These costs are
considerably below our typical cash outlay to open a new store
of $230,000, and accordingly, these stores have had a
substantially higher return on invested capital. |
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Management believes that the operating infrastructure we have in
place is capable of integrating a significant number of new
stores with little additional increase in general and
administrative expenses. Virtually all of our senior management
executives have held similar positions at specialty retail
chains of substantially greater size. We believe that our buying
teams have sufficient levels of experience to support our
expected new store growth. Finally, we believe that our
information and logistics systems are scalable to support
significant growth. |
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We opened 17 new stores in fiscal 2004, 3 in fiscal 2003 and a
total of 41 stores in key locations in fiscal year 2002,
including the 33 former Sam & Libby stores we acquired.
As of March 28, 2005, we have opened 5 stores in fiscal
2005. |
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Expanding Presence of New Format Stores. |
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We are in the process of remodeling existing Bakers stores into
our new format design which will provide a consistent look with
our newly opened stores. Through January 1, 2005, 73 Bakers
stores have been opened in or remodeled into the new store
format. Sales at the remodeled stores showed significant
increases in volume after they are opened in the new format. We
believe the new format stores average higher annual sales
because they feature a distinctive upscale contemporary format
that is attractive to our customers. |
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Construction costs to remodel stores into the new format average
approximately $200,000 to $275,000 and the remodeling requires
the store to be closed for six to seven weeks. We plan to
remodel existing stores into the new format in locations where
we believe the additional investment will produce a higher
return on investment than maintaining the current format. We
remodeled 14 stores in 2004 into the new format. We plan to
remodel approximately 20 existing stores into the new format
during fiscal 2005. Assuming the successful consummation of the
Private Placement, we expect to remodel an additional 5 stores
into the new format in fiscal 2005. We have identified
approximately 60 additional stores to be upgraded. Typically,
our stores are remodeled in connection with lease renewals.
Construction management for the remodeling is provided by third
party contractors for fixed fees. |
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In addition to transforming stores into the new concept, we are
performing minor remodeling at selected stores. Typically, the
minor remodeling is undertaken in conjunction with the signing
of a new lease. Construction costs for the minor remodels
average $40,000. These stores often generate lower sales volume
but a similar return on investment. |
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Continuously Introducing New Merchandise to Maintain
Inventory Freshness. |
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We 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 today’s
young women into the footwear and accessory styles they desire. |
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We employ a test and react strategy that constantly updates our
product mix while minimizing inventory risk. This strategy is
supported by our strong relationships with manufacturers which
allow |
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our merchandising and buying teams to negotiate short
lead-times, enabling us to test new styles and react quickly to
fashion trends and keep fast-moving inventory in stock. |
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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. |
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Increasing the Sale of Branded Merchandise. |
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Approximately 17.4% of our net shoe sales for fiscal year 2004
consisted of branded footwear, up from 9.3% in fiscal year 2000.
Bakers stores began to sell national branded footwear in fiscal
year 2000 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. |
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We believe the further penetration of national branded
merchandise as a percentage of our product mix will be a key
driver of same store sales growth, as it serves to increase
customer traffic and customer loyalty in our stores, which we
believe will also increase the sales of our private label
merchandise. |
Product Development and Merchandising
Our merchants analyze, interpret and translate current and
emerging lifestyle trends into footwear and accessories for our
target customers. Our merchants and senior management use
various methods to monitor changes in culture and fashion.
For example, we monitor current music, television, movie and
magazine themes as they relate to clothing and footwear styles.
Our buyers travel to major domestic and international markets,
such as New York, London and Milan, to gain an understanding of
fashion trends. 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.
A crucial element of our product development is our test and
react strategy, which lowers our inventory risk. We typically
buy small quantities of new footwear and deliver merchandise to
a cross-section of stores. We closely 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, in as little as a week, we can make initial
determinations as to the results of a product test.
In addition to our test and react strategy, we can also reduce
our fashion risk exposure by increasing 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 believe we
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.
Our private label merchandise, which comprised over 82.6% of our
net shoe sales in our stores for fiscal year 2004, is generally
sold under the Bakers label and, in some instances, is supplied
to us on an exclusive basis. Once our management team has
arrived at a consensus on fashion themes for the upcoming
season, our buyers translate these themes into our merchandise.
We currently have two dress footwear buyers, three casual
footwear buyers and two accessory buyers.
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To produce our private label footwear, we generally begin with a
shoe 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. Our disciplined
product development process has led to a reduction in 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 eight weeks. For more information, please see
“— Sourcing and Distribution.”
Our success depends upon our customers’ perception of new
and fresh merchandise. Our test and react strategy reduces our
risk on new styles of footwear. We also reduce our markdown risk
by re-interpreting our core product. Approximately one-half 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 product 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.
In 2000, our Bakers stores began to carry nationally recognized
branded merchandise which we believe increases the
attractiveness of our product offering to our target customers.
Our branded shoe sales comprised approximately 9.3% of net shoe
sales in fiscal year 2000, 13.6% in fiscal year 2001, 19.0% in
fiscal year 2002, 17.1% for fiscal year 2003, and 17.4% for
fiscal year 2004. We believe that 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
Skechers®, Guess Sport®, Steve Madden®,
Diesel®, bebe®and Chinese Laundry®. We believe
offering nationally recognized brands is a key element to
attracting appearance conscious young women. We believe it is
strategically important to increase the branded component of our
merchandise mix, which should drive comparable store sales.
Branded merchandise sells at a higher price point than our
private label merchandise. As a result, despite a lower gross
margin percentage, branded merchandise generates greater gross
profits per pair and leverages our operating costs.
Our accessories include handbags, jewelry, sunglasses, ear clips
and earrings, hosiery, 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. Our average
selling price for handbags is $15, and for all accessories,
excluding handbags, the average selling price is $5.
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The following table illustrates net sales by merchandise
category as a percentage of our total net sales for fiscal years
2001, 2002, 2003 and 2004:
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Private Label Footwear
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79.6 |
% |
|
|
73.0 |
% |
|
|
75.0 |
% |
|
|
74.0 |
% |
|
Branded Footwear
|
|
|
12.5 |
% |
|
|
17.2 |
% |
|
|
15.5 |
% |
|
|
15.6 |
% |
|
Accessories
|
|
|
7.9 |
% |
|
|
9.8 |
% |
|
|
9.5 |
% |
|
|
10.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
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 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, for a particular store’s profile, we consider:
|
|
|
| |
• |
selling history; |
| |
| |
• |
importance of branded footwear; |
| |
| |
• |
importance of accessories; |
| |
| |
• |
importance of aggressive fashion; |
| |
| |
• |
the stock capacity of the store; and |
| |
| |
• |
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 biannually,
but reforecasted 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 reforecasted merchandising
plan to adjust production orders as needed to meet inventory and
sales targets. This process keeps tight control over our
inventory levels and reduces markdowns.
Our buyers typically order merchandise 60 to 90 days in
advance of anticipated delivery. Frequently, we order
merchandise 30 to 60 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 also reduces our exposure to risk
because we are less likely to be overstocked with less desirable
items. During the recent challenging retail environment, we
reacted quickly to declining sales trends by reducing purchases
and keeping inventories in line to manage our markdown exposure.
10
We utilize rigorous clearance and markdown procedures to reduce
our inventory of slower moving styles. Our management carefully
monitors pricing and markdowns to facilitate the introduction of
new merchandise and to maintain the freshness of our fashion
image.
We have five 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.” During a clearance sale, we instruct our
stores systematically to lower the price of the items, and if
not sold, to ship them to 10 to 12 of our stores which have
special clearance sections. We believe that our test and react
strategy and our careful 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 2,400 square feet and are primarily located
in regional shopping malls. Seven of our stores, which are
located in dense urban markets such as New York City and
Chicago, have freestanding street locations.
Our stores are designed to create a clean, upscale boutique
environment, featuring contemporary finishings 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.
Following is a list of our stores by state as of January 1,
2005
| |
|
|
|
|
| |
|
No. | |
| |
|
Stores | |
| |
|
| |
|
Alabama
|
|
|
1 |
|
|
Arizona
|
|
|
4 |
|
|
Arkansas
|
|
|
1 |
|
|
California
|
|
|
31 |
|
|
Colorado
|
|
|
4 |
|
|
Connecticut
|
|
|
2 |
|
|
Delaware
|
|
|
1 |
|
|
Florida
|
|
|
18 |
|
|
Georgia
|
|
|
15 |
|
|
Idaho
|
|
|
1 |
|
|
Illinois
|
|
|
18 |
|
|
Indiana
|
|
|
5 |
|
|
Kansas
|
|
|
1 |
|
|
Louisiana
|
|
|
5 |
|
|
Maryland
|
|
|
6 |
|
|
Massachusetts
|
|
|
6 |
|
|
Michigan
|
|
|
9 |
|
|
Minnesota
|
|
|
2 |
|
|
Missouri
|
|
|
7 |
|
11
| |
|
|
|
|
| |
|
No. | |
| |
|
Stores | |
| |
|
| |
|
Nebraska
|
|
|
2 |
|
|
Nevada
|
|
|
3 |
|
|
New Hampshire
|
|
|
1 |
|
|
New Jersey
|
|
|
9 |
|
|
New Mexico
|
|
|
1 |
|
|
New York
|
|
|
17 |
|
|
North Carolina
|
|
|
2 |
|
|
Ohio
|
|
|
6 |
|
|
Oklahoma
|
|
|
2 |
|
|
Pennsylvania
|
|
|
7 |
|
|
Rhode Island
|
|
|
1 |
|
|
South Carolina
|
|
|
1 |
|
|
Texas
|
|
|
19 |
|
|
Utah
|
|
|
3 |
|
|
Virginia
|
|
|
4 |
|
|
Washington
|
|
|
2 |
|
|
Wisconsin
|
|
|
3 |
|
| |
|
|
|
|
Total Stores
|
|
|
220 |
* |
|
Total States
|
|
|
36 |
|
|
|
| * |
Excludes our Internet site, which is merchandised as a Bakers
store. |
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 operate our stores under two different concepts, Bakers and
Wild Pair. As of January 1, 2005, 192 of our stores were
Bakers stores and 28 stores were Wild Pair stores. As of
March 28, 2005, we operated 221 stores, 194 of which were
Bakers stores and 27 of which were 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 12 and 29.
Our Wild Pair stores feature fashion-forward merchandise for hip
young women and men between the ages of 17 and 24 and are
becoming recognized for reflecting 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 “club”
atmosphere and a fast, fun environment within our Wild Pair
stores.
Wild Pair stores carry a higher proportion of branded
merchandise, which generally sells at higher price points than
our Bakers footwear.
12
The following table compares our Bakers and Wild Pair formats:
| |
|
|
|
|
|
| |
|
Bakers |
|
Wild Pair |
| |
|
|
|
|
Target customer:
Key brands |
|
Women — ages 12-29 Skechers®, Guess
Sport®, Steve Madden®, bebe®, Diesel® and
Chinese Laundry® |
|
Men & women — ages 17-24 Steve
Madden®, Steve Madden Men’s®, Guess Sport®,
Skechers®, Candies®, Chinese Laundry®, Diesel
Women’s®, Diesel Men’s®, Luichiny®,
Rocket Dog®, Volatile®, Perry Ellis Men’s®
and Puma® |
|
Fashion content:
|
|
Widely-accepted |
|
Edgy, lifestyle-based |
|
Number of stores (as of
|
|
|
|
|
| |
January 1, 2005):
|
|
192 |
|
28 |
|
Approximate average size:
|
|
2,450 square feet |
|
1,800 square feet |
Our stores can operate profitably in a wide range of mall
classifications. We principally open our new stores in malls
that are considered “A” and “B” locations.
However, some of our stores are located in malls that are less
attractive and do not warrant the investment required to fully
remodel a store at its lease renewal. However, we will continue
to operate these stores as long as they meet profitability
requirements. In addition, these stores are valuable in
maintaining strong relationships with our national landlords.
Many of these stores are larger in size than our newly designed
stores, but have significantly lower per square foot occupancy
costs.
We expect new stores to average approximately $790,000 per
year in store volume and contribute approximately $110,000 of
cash flow from operating activities per year. Our typical cash
outlay to open a new store is approximately $230,000.
We closed 10 stores in fiscal year 2002, 21 stores in fiscal
year 2003 and 12 stores in fiscal 2004. We closed an additional
four stores in fiscal year 2005 through March 28, 2005.
Our store operations are organized into three divisions, east,
central and west, which are subdivided into 16 regions. Each
region is managed by a regional manager, who is typically
responsible for 12 to 16 stores. Each store is typically staffed
with a manager and an assistant manager, in addition to
approximately five 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 sales results, customer service training, hiring
of store level staff, payroll control and shortage control.
Merchandise selections, inventory management and visual
merchandising strategies for each store are largely determined
at the corporate level and are communicated by email 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. From time to time, we run sales contests to
encourage our sales associates to maximize sales volume. Store
managers receive base compensation plus incentive compensation
based on sales and inventory control. Regional and area managers
receive base compensation plus incentive compensation based on
meeting profitability benchmarks. Each of our managers controls
the payroll hours used each week in conjunction with a budget
provided by the regional manager.
13
We have well-established store operating policies and procedures
and use an in-store training regimen for all new 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. Our loss prevention
efforts include monitoring returns, voided transactions,
employee sales and deposits, as well as educating our store
personnel on loss prevention. We monitor 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. Since these systems were implemented, our shrinkage has
dropped significantly. In addition to these internal control
measures, we commission an independent loss prevention audit
twice per year.
Sourcing and Distribution
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.
We believe that this sourcing of footwear products and our short
lead times minimize our working capital investment and inventory
risk, and enable efficient and timely introduction of new
product designs. Although 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 any number
of domestic or international sources.
Management, or its agents, performs an array of quality control
inspection procedures at stages 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. |
Through 2003 substantially all merchandise for our stores was
initially received, inspected, processed and distributed through
one of our two distribution centers, each of which is part of a
third-party warehousing system. In 2004, we implemented new
procedures in which we are shipping a substantial amount of
products sourced from China directly to our stores through Los
Angeles, California, rather than shipping them first to our west
coast distribution center in Los Angeles. The remaining
merchandise that is manufactured in Asia is delivered to our
west coast distribution center and merchandise that is
manufactured elsewhere in the world is delivered to our east
coast distribution center located near Philadelphia,
Pennsylvania. 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
center using third party carriers, and any goods not shipped to
stores are stored in warehouse space in St. Louis, Missouri
for replenishment purposes.
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
14
include decisions about pricing, markdowns, reorders and
inventory management. Our customers use cash, checks and
third-party credit cards to purchase our products. We do not
issue private credit cards or make use of complicated financing
arrangements.
Recently, our focus is the further integration of our planning,
purchasing and point of sale systems. We have recently completed
the transition to a new point of sale system and implemented
Arthur Allocation and MarketMax assortment planning. These new
systems allow us to better execute our micro-merchandising
strategy through more efficient management and allocation of our
store inventories to reduce further our response times in
reaction to fashion trends. In addition, these systems also
allow us to identify and reduce our losses due to damage, theft
or other reasons, and to improve monitoring of employee
productivity.
Marketing Through In-Store Advertising
Our marketing consists primarily of an in-store, high-impact,
visual advertising campaign. Marketing materials are
particularly 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.
To cultivate brand loyalty, we successfully introduced our
Bakers Frequent Buying Card program nationwide in late 2001.
This program allows our customers to purchase a plastic,
bar-coded card bearing our logo in order to obtain a discount on
all future purchases in our stores until the expiration of the
card. We believe that this program has improved customer loyalty.
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:
|
|
|
| |
• |
department stores (such as Bloomingdale’s, Dillard’s,
Macy’s and May Department Stores); |
| |
| |
• |
national branded wholesalers (such as Candie’s, Nine West,
Steve Madden and Vans); |
| |
| |
• |
national branded off-price retailers (such as DSW, Rack Room and
Shoe Carnival); |
| |
| |
• |
national specialty retailers (such as Finish Line,
Journey’s, Naturalizer and Aldo’s); |
| |
| |
• |
regional chains (such as Cathy Jean and Sheik); |
15
|
|
|
| |
• |
discount stores (such as Wal-Mart, Target and K-Mart); and, to a
lesser extent, |
| |
| |
• |
apparel retailers (such as bebe, Charlotte Russe, Express,
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
Under Edison Brothers, 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, from Edison Brothers Stores,
Inc., the debtor-in-possession.
Employees
As of January 1, 2005, we employed approximately
582 full-time and 2,283 part-time employees. As of
January 1, 2005, we employed approximately 125 of our
employees in general administrative functions at our corporate
offices and warehouse, and 2,740 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 at least ten years. A number of our leases provide a lease
termination option in specified years of the lease if we do not
meet certain sales levels. In addition, leases for locations
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 seven years
remaining. We also lease a warehouse in St. Louis that
occupies approximately 107,000 square feet with a lease
term of approximately five years.
16
Intellectual Property and Proprietary Rights
We acquired the right and title to several trademarks in
connection with the Bakers acquisition, including our trademarks
Bakerstm
and Wild Pair®. 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 “— Our ability to expand
into some territorial and foreign jurisdictions under the
trademarks “Bakers’ and “Wild Pair’ is
restricted” and “— Our potential inability
or failure to register, renew or otherwise protect our
trademarks could have a negative impact on the value of our
brand names” below.
Cautionary Statements Regarding Forward-Looking Statements
and Certain Risks
This 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, including the risk
factors set forth below, may cause our actual results,
performances or achievements to be materially different from
those expressed or implied by our forward-looking statements:
|
|
|
| |
• |
our expectations regarding future financial results or
performance contained in Item 7 (“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”); |
| |
| |
• |
our business strategy; |
| |
| |
• |
the market opportunity for our services and products; |
| |
| |
• |
the successful closing of the Private Placement; |
| |
| |
• |
our estimates regarding our capital requirements and needs for
additional financing; |
| |
| |
• |
the risk factors described below; |
| |
| |
• |
any of our other plans, objectives, expectations and intentions
contained in this Form 10-K that are not historical
facts; and |
| |
| |
• |
changes in general economic and business conditions and the
risks referred to below. |
|
|
|
Our failure to identify and respond to changing consumer
fashion preferences in a timely manner would negatively impact
our sales, profitability and our image as a fashion resource for
our customers. |
The footwear industry is subject to rapidly changing consumer
fashion preferences. Our sales and net income 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 acceptance 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 and lower gross profits. 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
fiscal year 2002, the nine months ended October 4, 2003 and
the thirteen weeks ended October 2, 2004, changes in
consumer
17
fashion trends, primarily a decline in demand for boots and
booties and a preference for low priced flip-flops, negatively
impacted sales and profitability. See “Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
|
|
|
As a result of our recent restatement of financial
statements, we may be subject to liability under the securities
laws. |
On March 21, 2005, we filed an amended Annual Report on
Form 10-K/ A and amended Quarterly Reports on
Form 10-Q/ A to reflect a restatement of our previously
issued financial statements to correct our accounting for
landlord allowances and the commencement of lease terms. We may
be subject to liability under federal or state securities laws
relating to our previously filed financial statements, other
public disclosures of financial information based on those
statements and our public disclosures relating to the
effectiveness of our disclosure controls and procedures. Public
disclosure relating to some or all of these items were included
in our registration statements and periodic reports filed with
the SEC. We could be subject to claims by the purchasers in our
initial public offering, purchasers under our resale
registration statement and to others relating to transactions in
our securities. Any such liability could have a material adverse
effect on our financial position and on any investment in our
securities.
|
|
|
There is relatively limited trading in our common
stock. |
Prior to our initial public offering, there was no public market
for our common stock. The trading volume of our common stock
since our initial public offering has been relatively limited,
which we expect to continue. Therefore, our stock may be subject
to higher volatility or illiquidity than would exist if our
shares were traded more actively.
|
|
|
A decline in general economic conditions could lead to
reduced consumer demand for our footwear and accessories and
could lead to reduced sales and a delay in our expansion
plans. |
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,
consumer confidence and consumer perception of economic
conditions. A general slowdown in the United States economy or
an uncertain economic outlook would adversely affect consumer
spending habits, which would likely cause us to delay or slow
our expansion plans and result in lower net sales than expected
on a quarterly or annual basis.
|
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|
We are susceptible to operating losses which would
adversely affect our business and an investment in our common
stock. |
From time to time, we have had and in the future we could have
operating losses because of fashion preferences, general
economic conditions and other factors. For example, for the nine
months ended October 4, 2003, we incurred a net loss of
approximately $3.6 million and an operating loss of
$2.3 million. We have also incurred losses in other recent
periods. Such losses in future periods could adversely affect
our business and an investment in our common stock.
|
|
|
Our failure to integrate a significant number of new
stores could strain our resources and cause the performance of
our existing stores to suffer. |
Our growth will largely depend on our ability to open and
operate new stores successfully. We opened 17 new stores in
fiscal year 2004. If the Private Placement were not to close, we
would expect to open an additional 25 to 30 additional new
stores in fiscal year 2005 in new and existing markets. We
expect the net proceeds of the Private Placement to allow us to
open an additional 10 stores in the fall of 2005 and to target
the opening of 35-40 new stores in fiscal 2006, substantially
all in the new format. The successful integration of these new
stores and customer acceptance of our new store format may have
a material effect on our business. Although we have successfully
integrated a significant number of new stores in the past,
including the former Sam & Libby stores, that growth
primarily related to acquisitions. We expect a large portion of
our future growth to occur through the development of new
stores. Our proposed expansion will place increased demands
18
on our operational, managerial and administrative resources.
These increased demands could cause us to operate our business
less effectively, which in turn could cause deterioration in the
financial performance of our business.
If we fail to successfully implement our growth strategy, the
opening of new stores, in new or current markets, could be
delayed or prevented, could cost more than we have anticipated
and could divert resources from other areas of our business, any
of which would have a material adverse effect on our sales and
earnings growth.
|
|
|
Our sales and inventory levels fluctuate on a seasonal
basis, leaving our annual and quarterly operating results
particularly susceptible to changes in customer shopping
patterns. |
To prepare for peak shopping seasons, we must order and keep in
stock significantly more merchandise than we would carry during
other times of the year. Any unanticipated decrease in demand
for our products during these peak seasons could require us to
sell excess inventory at a substantial markdown, which could
reduce our net sales and gross margins and could negatively
impact our profitability.
Traditionally, our sales and net income during the second and
fourth quarters of our fiscal year are significantly higher due
primarily to increased shopping during the spring/summer prom
and wedding season and the winter holiday season. In contrast,
our sales and net income are typically lower during the first
quarter of our fiscal year due, in part, to the traditional
retail slowdown immediately following the winter holiday season
and during our third quarter because we have two of our five
clearance sales during the third quarter. In addition to our
normal seasonal fluctuations, some events, in particular the
Easter holiday, shift between fiscal quarters due to the nature
of our fiscal year. This shift will likely affect customer
shopping patterns and will influence our quarterly comparable
results.
|
|
|
Fluctuations in our quarterly results of operations could
cause the price of our common stock to decline
substantially. |
In addition to holiday shifts and customer shopping patterns,
our quarterly results are affected by a variety of other
factors, including:
|
|
|
| |
• |
fashion trends; |
| |
| |
• |
the effectiveness of our inventory management; |
| |
| |
• |
changes in our merchandise mix; |
| |
| |
• |
weather conditions; |
| |
| |
• |
changes in general economic conditions; and |
| |
| |
• |
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 example, quarterly
comparable store sales for fiscal year 2004 compared to fiscal
year 2003 were: an increase of 11.2% in the first quarter, an
increase of 4.7% in the second quarter, a decline of 6.0% in the
third quarter and a decline of 1.0% in the fourth quarter. While
in management’s opinion sales during these periods cannot
be used as an accurate indicator of annual results, if our
future quarterly results fail to meet the expectations of
research analysts, then the market price of our common stock
could decline substantially. For more information, please see
“Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Seasonality and Quarterly Fluctuations.”
|
|
|
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
19
retailers. Many of our competitors may be larger and have
substantially greater resources than we do. Our market share and
results of operations are adversely impacted by this significant
number of competitors. For more information about our
competition, please see “Business —
Competition.”
|
|
|
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 and
Chief Executive Officer, or Michele Bergerac, our President, or
other members of our senior management, our business could be
adversely affected if we are unable to employ a suitable
replacement in a timely manner.
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|
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. Because of our relatively
short lead times and fast inventory turns, any disruption in our
supply chain could more quickly impact our sales compared to
other retailers. 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.
|
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|
We rely on a small number of buying agents for 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 2004, our top five buying agents accounted for
approximately 22% of our merchandise purchases, with one buying
agent accounting for approximately 12% of our merchandise
purchases. Our buying agents 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.
|
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|
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; |
| |
| |
• |
changes in import tariffs, duties or quotas; |
20
|
|
|
| |
• |
the imposition of taxes or other charges on imports; |
| |
| |
• |
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; |
| |
| |
• |
expropriation or nationalization; |
| |
| |
• |
compliance with and changes in import restrictions and
regulations; |
| |
| |
• |
exposure to different legal standards and the burden of
complying with a variety of foreign laws and changing foreign
government policies; |
| |
| |
• |
international hostilities, war or terrorism; |
| |
| |
• |
changes in foreign governments, regulations, political unrest,
work stoppages, shipment disruption or delays; and |
| |
| |
• |
changes in economic conditions in countries in which our
manufacturers and suppliers are located. |
For example, in fiscal year 2002 the West Coast
Longshoremen’s strike increased our freight costs and
adversely affected our sales and operating margin for that
fiscal year.
In addition, 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.
|
|
|
Our reliance on manufacturers in China exposes us to
supply risks. |
Manufacturing facilities in China produce a significant portion
of our products. Generally, approximately two-thirds, or more,
of our private label footwear units are manufactured in China
and virtually all of our private label accessories are
manufactured in China each year. Recently, the continued
significant growth in the Chinese economy has resulted in
periodic energy and labor shortages, as well as transportation
and shipping bottlenecks. In addition, due to the overall volume
of Chinese imports, 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 polices 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 trademarks “Bakers” and
“Wild Pair” is restricted. |
When we acquired selected assets of the Bakers and Wild Pair
chains from Edison Brothers Stores, Inc. in a bankruptcy auction
in June 1999, we were assigned title to and the right to use the
trademarks “Bakers,” “The Wild Pair,”
“Wild Pair” 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
21
jurisdictions in which the Puerto Rican company was assigned the
rights. Consequently, we do not have the right to use the
trademarks “Bakers” and “Wild Pair” 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”
and “Wild Pair” trademarks, 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.
|
|
|
We rely on third parties to manage the shipping,
warehousing and distribution aspects of our business. If these
third parties do not adequately perform these functions, our
business would be 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. Merchandise not
shipped to our stores generally is shipped to our replenishment
warehouse in Sikeston, Missouri, where a third party provides
warehousing services or to our company operated warehouse in
St. Louis, Missouri. 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 anticipate the
termination of the agreement relating to our Sikeston, Missouri
warehouse and shifting those operations to our St. Louis
facility in the spring of 2005. We also continue to operate
under the terms of an expired agreement with the remaining third
party. If we need to replace one of these service providers, our
operations could be disrupted for more than 60 days while
we identify and integrate a replacement into our system. As a
result, the termination of these agreements or the failure by
any of these third parties to respond adequately to our
warehousing and distribution needs could materially negatively
impact our ability to maintain sufficient inventory in our
stores and consequently our profitability.
|
|
|
We are subject to risks associated with leasing our
stores, especially those stores where we acquired the lease
through bankruptcy auctions. |
We lease virtually all of our store locations under individual
leases. Approximately one-half of our stores are located in
properties managed by two national property management
companies. We acquired most of our 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 a majority of our leases, which
are generally drafted in favor of the landlord. In addition,
many of these leases contain provisions that, while applicable
to the business structure of Edison Brothers, which had multiple
wholly-owned subsidiaries that were the tenants under the
leases, would not have been necessary for our business structure.
22
A number of our leases include termination and default
provisions which apply if we do not meet certain sales levels or
in other circumstances. In addition, some of these leases
contain various restrictions relating to dilutions in, or
changes of, the ownership of our company. Some of these
provisions are difficult to interpret. A substantial portion of
our leases contain provisions which by their terms prohibit, or
could be interpreted to prohibit, a dilution in, or change in
ownership of our company, which may have been contravened by our
initial public offering and other prior or subsequent ownership
changes, including the Private Placement. Prior to our initial
public offering, as of January 3, 2004, approximately 22%
of our leases contained provisions which by their terms prohibit
a dilution in, or a change of, the ownership of our company
which may have been contravened by our initial public offering
and other prior or subsequent ownership changes. As of that same
date, similar provisions in an additional 21% of our leases may
be construed, depending on how these provisions are interpreted,
to have been triggered by our initial public offering and other
prior or subsequent ownership changes. 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 approximately 15% to 18% 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.
|
|
|
Our credit facility restricts our activities. |
We have a $25.0 million secured revolving credit facility
with Fleet Retail Group, Inc. As of January 1, 2005, we had
no outstanding balance under our credit facility and had
approximately $12.4 million in availability. For fiscal
year 2004, the largest outstanding balance under our credit
facility was $5.7 million prior to our initial public
offering and $2.7 million after our initial public
offering. For fiscal year 2003, the average daily outstanding
balance was $11.9 million. Our credit facility includes
financial and other customary covenants which, among other
things, restrict our business activities and our ability to
incur debt, make acquisitions and pay dividends. A change in
control of our company, including any person or group acquiring
beneficial ownership of 30% or more of our common stock or our
combined voting power (as defined in the credit facility), is
also prohibited.
In the event that we were to violate any of the covenants in our
credit facility, or if we were to violate the provisions of any
of our other lending arrangements or of more than 10% of our
leases (other than solely as a result of our initial public
offering), 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. Effective
September 1, 2004, we entered into an amendment to our
credit agreement which, among other things, extended its
maturity date to August 31, 2008.
For more information about our credit facility, please see
“Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
|
|
|
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. |
23
|
|
|
We are controlled by a small group of shareholders whose
interests may differ from other shareholders. |
Affiliates of Peter Edison and members of his family and our
current management are our largest shareholders. Accordingly,
they 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 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 to him a one time
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.
|
|
|
The public sale of our common stock by selling
shareholders could adversely affect the price of our common
stock. |
The market price of our common stock could decline as a result
of market sales by our selling shareholders, including prior
investors with registration rights, or the perception that these
sales will occur. These sales also might make it difficult for
us to sell equity securities in the future at a time and at a
price that we deem appropriate.
|
|
|
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, Peter Edison’s substantial beneficial ownership
position, our board’s authority to issue preferred stock
and the lack of cumulative voting in our articles 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 and Executive Officers of the
Registrant — Executive Officers of the
Registrant” is incorporated herein by reference.
24
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 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. |
Submission of Matters to a Vote of Security
Holders. |
None.
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
in the Nasdaq National Market under the symbol “BKRS”
since February 5, 2004. Prior to this time, there was no
public market for the Company’s common stock. The initial
public offering price of the Company’s common stock was
$7.75 per share. The initial public offering closed on
February 10, 2004. On March 12, 2004, we sold an
additional 324,000 shares of common stock at the same price
in connection with the full exercise of the underwriters’
over-allotment option. The closing sales price of Bakers
Footwear Group, Inc.’s common stock on the Nasdaq National
Market was $10.10 per share on March 24, 2005. As of
March 28, 2005, we estimate that there were approximately
36 holders of record of the Company’s common stock.
The following table summarizes the range of high and low sales
price for the Company’s common stock during 2004.
| |
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|
|
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|
|
| 2004 |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
First quarter(1)
|
|
$ |
11.85 |
|
|
$ |
7.51 |
|
|
Second quarter
|
|
|
11.91 |
|
|
|
9.27 |
|
|
Third quarter
|
|
|
10.76 |
|
|
|
7.22 |
|
|
Fourth quarter
|
|
|
10.15 |
|
|
|
7.20 |
|
|
|
| (1) |
Only includes the period from February 5, 2005 through
April 3, 2004. Our common stock was not quoted on Nasdaq
prior to our initial public offering. |
25
Dividends
Prior to our initial public offering, we operated under
Subchapter S of the Internal Revenue Code and comparable
provisions of some state income tax laws. By reason of our
treatment as an S corporation for Federal and state income
tax purposes, prior to our initial public offering we generally
distributed to our shareholders funds for the payment of income
taxes on our earnings. During the three most recent fiscal
years, we have declared quarterly distributions in the aggregate
consisting of amounts attributable to payment of those taxes as
follows:
| |
|
|
|
|
|
| |
|
Distribution | |
| |
|
| |
|
Fiscal 2002:
|
|
|
|
|
|
First Quarter
|
|
$ |
414,190 |
|
|
Second Quarter
|
|
|
950,541 |
|
|
Third Quarter
|
|
|
455,278 |
|
|
Fourth Quarter
|
|
|
163 |
|
| |
|
|
|
| |
Total
|
|
$ |
1,820,172 |
|
| |
|
|
|
|
Fiscal 2003:
|
|
|
|
|
|
First Quarter
|
|
$ |
540 |
|
|
Second Quarter
|
|
|
409 |
|
|
Third Quarter
|
|
|
0 |
|
|
Fourth Quarter
|
|
|
0 |
|
| |
|
|
|
| |
Total
|
|
$ |
949 |
|
| |
|
|
|
|
Fiscal 2004:
|
|
|
|
|
|
First Quarter
|
|
$ |
0 |
|
|
Second Quarter
|
|
|
13,385 |
|
|
Third Quarter
|
|
|
0 |
|
|
Fourth Quarter
|
|
|
0 |
|
| |
|
|
|
| |
Total
|
|
$ |
13,385 |
|
| |
|
|
|
In connection with our initial public offering, we revoked our S
election, effective on the first day of fiscal year 2004. In
connection with this revocation, all of our shareholders prior
to our initial public offering entered into a tax
indemnification agreement with us under which we have generally
agreed to indemnify them for any tax liabilities that may result
from the termination of our S corporation status.
Subsequent to January 3, 2004, we distributed $13,385 to
our prior S corporation shareholders in respect of taxes on
behalf of those shareholders as a result of our prior
S corporation status. Following our revocation, we are now
treated for Federal and state tax purposes as a corporation
under Subchapter C of the Internal Revenue Code.
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 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
In connection with the consummation of the initial public
offering on February 10, 2004, the Company issued to Ryan
Beck & Co., Inc. and BB&T Capital Markets, a
Division of Scott & Stringfellow, Inc., the
underwriters’ representatives for the initial public
offering, or their designees, five year warrants to purchase up
to 216,000 shares of the Company’s common stock,
subject to antidilution adjustments, at an exercise price of
$12.7875 per share of common stock. The representatives
paid a purchase price of $0.0001 per warrant, an
26
aggregate of $21.60. The warrant holders may exercise the
warrants at any time during the four-year period commencing
February 10, 2005 and ending February 10, 2009. In the
foregoing transaction, the Company relied on the exemption from
registration for private transactions not involving any public
offering pursuant to Section 4(2) under the Securities Act
of 1933 and/or the rules and regulations thereunder for
transactions by an issuer not involving any public offering.
In April 2002, the Company issued $4.9 million of
subordinated convertible debentures to a group of accredited
investors in an offering not involving a public offering.
Pursuant to an exchange agreement entered into on
January 2, 2004, the Company exchanged those debentures for
a new issuance of $4.9 million in subordinated convertible
debentures. The new subordinated convertible debentures
automatically converted into an aggregate of 653,331 shares
of the Company’s common stock at a conversion price of
$7.50 upon the consummation of the initial public offering. For
the issuance of the original debentures, the exchange of the
original debentures for the new issuance of debentures and the
issuance of the shares of common stock underlying the new
debentures the Company relied on the exemption(s) from
registration relating to offerings that did not involve any
public offering pursuant to Section 4(2) under the
Securities Act of 1933 and/or an exchange by the issuer with its
existing security holders exclusively where no commission or
other remuneration is paid or given directly or indirectly for
soliciting such exchange pursuant to Section 3(a)(9) under
the Securities Act of 1933.
Immediately prior to consummation of the initial public
offering, the Company had three classes of common stock
authorized, Class A common stock, Class B common stock
and Class C common stock, of which only shares of
Class A and Class B common stock were outstanding.
Upon the completion of the initial public offering, in
accordance with the then existing articles of incorporation,
1,693,244.92 shares of Class A common stock and
271,910 shares of Class B common stock automatically
converted into an aggregate of 1,965,150 shares of common
stock. The conversion was on 1.0-for-1.0 basis, excluding
fractional shares. As a result, the Company now has one class of
voting common stock issued and outstanding. In addition, holders
of Class C options amended their option award agreements to
purchase Class C common stock to cover 268,992 shares
of the new class of common stock. The Company relied on the
exemption from registration under the Securities Act of 1933
pursuant to Section 3(a)(9) and/or the rules and
regulations thereunder for securities exchanged by an issuer
with its existing security holders exclusively where no
commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.
In June 1999, the Company issued a subordinated note to
Mississippi Valley Capital Company in the aggregate principal
amount of $500,000, bearing interest at 6.0% per annum and
due January 31, 2003. In connection with this note, the
Company issued a warrant exercisable for 76,907 shares of
Class A common stock at an aggregate exercise price of
$76.91 to Mississippi Valley Capital Company. In January 2003,
the note and warrant held by Mississippi Valley Capital Company
were transferred to Mississippi Valley Capital, LLC, a
manager-managed limited liability company. On January 31,
2003, the note and the warrant were extended when the Company
amended and restated the note payable and warrant. The amended
and restated note bore interest at the rate of 10% per
annum and was due on March 1, 2004. The warrant became
exercisable upon completion of the initial public offering. The
amended and restated warrant was redeemable, if not exercised,
on March 1, 2004, for $850,000. The warrant has been
redeemed and the note paid in full. The note and warrant were
amended and restated in an offering not involving any public
offering pursuant to Section 4(2) under the Securities Act
of 1933.
In all the foregoing transactions in which the Company has
relied on the exemption from registration for private
transactions not involving any public offering pursuant to
Section 4(2) under the Securities Act of 1933 and/or the
rules and regulations thereunder for transactions by an issuer
not involving any public offering, sales of the securities were
without the use of an underwriter, and the certificates
evidencing the securities relating to the foregoing transactions
bore restrictive legends permitting the transfer thereof only
upon registration of such securities or an exemption under the
Securities Act. The recipients of securities in these
transactions represented their intention to acquire the
securities for investment purposes only and not with a view to
or for distribution in connection with these transactions. Each
security bore a restrictive legend and/or the recipient was a
party to an agreement restricting transfer and had adequate
access to information about us through such recipient’s
relationship with us or through information provided to them.
27
Use of Proceeds
On February 5, 2004, the Company commenced its initial
public offering. On February 10, 2004, the Company
consummated its initial public offering with the sale of
2,160,000 shares of common stock, excluding exercise of the
underwriters’ over-allotment option. In connection with the
Company’s initial public offering, the Company also sold
216,000 warrants to purchase shares of common stock to Ryan
Beck & Co., Inc. and BB&T Capital Markets, a
Division of Scott and Stringfellow, Inc. as the representatives
of the underwriters, or their designees. On March 12, 2004,
the Company sold an additional 324,000 shares of common
stock in connection with the exercise, by the underwriters, of
the full over-allotment option. The public offering price of the
common stock was $7.75 per share. We sold the warrants for
$0.0001 per warrant.
The shares of common stock sold in the offering and the warrants
to purchase common stock were registered under the Securities
Act of 1933, as amended, on two Registration Statements (Nos.
333-86332 and 333-112477) on Form S-1. The Securities and
Exchange Commission declared Registration Statement
No. 333-86332 effective on February 3, 2004.
Registration Statement No. 333-112477 was effective upon
filing on February 4, 2004 pursuant to Rule 462(b)
under the Securities Act of 1933. All 2,160,000 shares of
common stock sold to the public in the initial closing, plus all
324,000 shares of common stock covered by an over-allotment
option granted to the underwriters were sold at a price of
$7.75 per share. The warrants were sold to the
representatives of the underwriters at a price of
$0.0001 per warrant. Each warrant may be converted into one
share of common stock at an exercise price $12.7875. The
Registration Statements collectively registered
2,484,000 shares of common stock at a maximum aggregate
offering price of $26,772,000, 216,000 warrants at a maximum
aggregate offering price of $22, all of which common stock and
warrants were sold in the offering, and 216,000 shares of
common stock underlying the warrants at a maximum aggregate
offering price of $2,851,000.
The aggregate gross proceeds from the shares of common stock and
the warrants sold were approximately $19.3 million. The net
proceeds to the Company from the offering were approximately
$15.5 million after deducting the underwriting discount of
$1.9 million and $1.9 million of other expenses
incurred in connection with the offering. A reasonable estimate
for the amount of expenses incurred has been provided instead of
the actual amount of expenses. None of such payments were to
directors, officers, ten percent shareholders or affiliates of
the issuer.
As of January 1, 2005, the Company has used all of the net
proceeds received from the initial public offering for the
following purposes: $5.7 million to repay the balance on
its revolving credit agreement to Fleet Retail Group, Inc.,
$1.4 million to redeem outstanding warrants and a note
payable in favor of Mississippi Valley Capital, LLC,
$0.4 million to repay subordinated debt in favor of the
Company’s prior Class B shareholders, and
$8.0 million for the purchase of property and equipment,
primarily store fixtures and leasehold improvements related to
new and remodeled stores opened during 2004. The credit
agreement and the subordinated debt were secured, in part, by a
personal guaranty of Peter Edison, the Company’s Chairman
of the Board and Chief Executive Officer. Mississippi Valley
Capital, LLC is a member managed limited liability company, of
which Mr. Baur, one of the Company’s directors, is one
of the two managers. In addition, Mr. Baur’s children
are three of the four members. Mr. Baur is also a director
of Marshall & Ilsley Corporation, which is a ten
percent participant in the Company’s credit facility with
Fleet Retail Group, Inc.
Except as set forth above, none of proceeds were paid to
directors, officers, ten percent shareholders or affiliates of
the issuer.
Securities Authorized for Issuance Under Equity Compensation
Plans
The information set forth under the caption “Equity
Compensation Plan Information” in Item 12 hereof is
incorporated herein by reference.
28
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
During 2004, the Company did not repurchase any securities of
the Company.
|
|
| Item 6. |
Selected Financial Data. |
The following tables summarize certain selected financial data
for each of the fiscal years in the five year period ended
January 1, 2004 and have been derived from our audited
financial statements. Our audited financial statements for the
three fiscal years ended January 1, 2005, 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(6)(7) | |
| |
|
| |
| |
|
December 30, | |
|
January 5, | |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2000 | |
|
2002(1) | |
|
2003(4) | |
|
2004 | |
|
2005(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
140,709,517 |
|
|
$ |
140,841,929 |
|
|
$ |
151,147,810 |
|
|
$ |
148,223,553 |
|
|
$ |
150,514,663 |
|
|
Gross profit
|
|
|
38,433,775 |
|
|
|
42,384,857 |
|
|
|
44,794,494 |
|
|
|
44,826,960 |
|
|
|
46,647,798 |
|
|
Income (loss) before cumulative effect of change in accounting
and income taxes
|
|
|
1,583,447 |
|
|
|
4,897,376 |
|
|
|
(714,797 |
) |
|
|
1,629,906 |
|
|
|
465,533 |
|
|
Benefit from income taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(962,468 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
|
1,583,447 |
|
|
|
4,897,376 |
|
|
|
(714,797 |
) |
|
|
1,629,906 |
|
|
|
1,428,001 |
|
|
Cumulative effect of change in accounting(2)
|
|
|
— |
|
|
|
— |
|
|
|
2,774,899 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(3)
|
|
$ |
1,583,447 |
|
|
$ |
4,897,376 |
|
|
$ |
2,060,102 |
|
|
$ |
1,629,906 |
|
|
$ |
1,428,001 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
1.09 |
|
|
$ |
3.27 |
|
|
$ |
1.36 |
|
|
$ |
0.90 |
|
|
$ |
0.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.68 |
|
|
$ |
2.14 |
|
|
$ |
0.96 |
|
|
$ |
0.77 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
19,135,236 |
|
|
$ |
22,649,476 |
|
|
$ |
30,022,982 |
|
|
$ |
29,941,167 |
|
|
$ |
49,370,708 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, capital lease obligations and redeemable
securities, less current portion
|
|
$ |
3,286,974 |
|
|
$ |
4,518,298 |
|
|
$ |
9,343,154 |
|
|
$ |
7,695,365 |
|
|
$ |
679,414 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma information(3):
|
|
|
(Unaudited |
) |
|
|
(Unaudited |
) |
|
|
(Unaudited |
) |
|
|
(Unaudited |
) |
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
and income taxes
|
|
$ |
1,344,767 |
|
|
$ |
4,808,657 |
|
|
$ |
(878,442 |
) |
|
$ |
1,697,725 |
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
|
261,258 |
|
|
|
1,581,390 |
|
|
|
(302,363 |
) |
|
|
657,758 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
|
1,083,509 |
|
|
|
3,227,267 |
|
|
|
(576,079 |
) |
|
|
1,039,967 |
|
|
|
|
|
29
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended(6)(7) | |
| |
|
| |
| |
|
December 30, | |
|
January 5, | |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2000 | |
|
2002(1) | |
|
2003(4) | |
|
2004 | |
|
2005(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Cumulative effect of change in accounting(2)
|
|
|
— |
|
|
|
— |
|
|
|
1,763,934 |
|
|
|
— |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,083,509 |
|
|
$ |
3,227,267 |
|
|
$ |
1,187,855 |
|
|
$ |
1,039,967 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.73 |
|
|
$ |
2.10 |
|
|
$ |
0.75 |
|
|
$ |
0.49 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.47 |
|
|
$ |
1.41 |
|
|
$ |
0.54 |
|
|
$ |
0.47 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
We base our fiscal year on a 52/53 week period. The fiscal
year ended January 5, 2002 is a 53-week period. For more
information regarding our fiscal year, please see
“Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Fiscal
Year.” |
| |
| (2) |
Represents the cumulative effect of adopting
SFAS No. 142, Goodwill and Other Intangible Assets,
and recognizing as income from the unamortized deferred
credit related to the excess of fair value over cost arising
from the acquisition of Bakers. |
| |
| (3) |
Through January 3, 2004, we elected S corporation
status for Federal and state income tax purposes. Accordingly,
no provision has been made for Federal or certain state income
taxes. Pro forma net income has been computed as if we had been
fully subject to Federal, state and city taxes. Effective
January 4, 2004, we terminated our S election and will be
taxed as a C corporation. For a reconciliation of our historical
income (loss) before cumulative effect of change in accounting
to pro forma income (loss) before cumulative effect of change in
accounting and income taxes, please see Note 13 in the
financial statements. In accordance with SFAS No. 109,
we have reflected the net impact of the temporary differences
between the book and tax bases of our assets and liabilities as
of the date of conversion as a component of our provision for
income taxes for fiscal year 2004. This resulted in the
recognition of a nonrecurring income tax benefit of
approximately $1.2 million. As an S corporation, we
paid distributions to our shareholders in amounts sufficient to
allow them to pay income taxes related to an allocable share of
our taxable income and did not pay traditional cash dividends
per share. Such distributions are not comparable to dividends
that would be paid by a C corporation. The Company currently has
no plans to pay dividends. See the information under the caption
“Item 5. Market for Registrant’s Common Equity
and Related Stockholder Matters — Dividends”
which is incorporated herein by reference. |
| |
| (4) |
Reflects approximately $1.7 million in initial public
offering costs charged in fiscal year 2002 as a result of a
delay in the initial public offering process. In the first
quarter of fiscal year 2002, we completed the acquisition of 33
former Sam & Libby store locations for approximately
$1.8 million in cash. |
| |
| (5) |
On February 10, 2004, we consummated our initial public
offering with the sale of 2,160,000 shares of common stock.
On March 12, 2004, we sold an additional
324,000 shares of common stock in connection with the
exercise by the underwriters of the full over-allotment option.
All of the shares of common stock sold to the public were sold
at a price of $7.75 per share. The aggregate gross proceeds
from the initial public offering were approximately
$19.3 million. The net proceeds to us from the offering
were approximately $15.5 million. As of January 1,
2005, we have used the net proceeds received from the initial
public offering to repay $5.7 million on our revolving
credit agreement, $0.9 million to redeem outstanding
warrants, $0.9 million to repay subordinated debt and
$8.0 million for capital expenditures. Immediately prior to
our initial public offering, we had three classes of common
stock authorized, Class A common stock, Class B common
stock and Class C common stock, of which only shares of
Class A and Class B common stock were outstanding.
Upon the consummation of our initial public offering, in
accordance with our then existing articles of incorporation,
1,693,244.92 shares of Class A common stock and
271,910 shares of Class B common stock automatically
converted into an aggregate of 1,965,150 shares of common
stock on a 1.0 for 1.0 basis, excluding fractional shares.
Mandatory redemption rights in favor of certain holders of prior
Class A and Class B common stock were also |
30
|
|
|
terminated. Prior to the initial public offering, 1,426,188
Class A shares were classified within shareholders’
equity for accounting purposes and the 267,057 Class A and
271,910 Class B redeemable shares were classified within
liabilities for accounting purposes, less fractional shares. In
addition, upon the consummation of our initial public offering,
$4.9 million in aggregate principal amount of our
subordinated convertible debentures due 2007 were automatically
converted into 653,331 shares of our common stock. Further,
in connection with the closing of our initial public offering,
we sold to the representatives of the underwriters and their
designees warrants to purchase up to an aggregate of
216,000 shares of common stock at an exercise price equal
to $12.7875 per share, subject to antidilution adjustments,
for a purchase price of $0.0001 per warrant. See
Note 2 in the Notes to the Financial Statements for the
year ended January 1, 2005. |
|
|
| (6) |
On March 21, 2005, we filed an amended Annual Report on
Form 10-K/ A for fiscal 2003 and amended Quarterly Reports
on Form 10-Q/ A for the first three quarters of fiscal 2004
which reflected a restatement of our financial statements to
correct our accounting for landlord allowances and the
commencement of lease terms. |
| |
| (7) |
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
“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. |
|
|
| 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
Statements Regarding Forward-Looking Statements and Certain
Risks” 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 1, 2005, in addition to our 192
Bakers stores, we operated the 28 store Wild Pair chain that
targets men and women between the ages of 17 and 24 who desire
edgier, fashion forward footwear. As of March 28, 2005 we
operated 221 stores, of which 194 were Bakers stores and 27 were
Wild Pair stores.
During the first quarter of 2004, we completed our initial
public offering generating net proceeds of $15.5 million,
converted $6.8 million of convertible debt and redeemable
securities into common stock, and repaid $4.1 million of
debt obligations. This has significantly enhanced our financial
position and has enabled us to remodel existing stores and open
new stores. During fiscal year 2004 we opened 17 new stores. As
of January 1, 2005, we operated 220 stores, of which 192
were Bakers stores and 28 were Wild Pair stores.
We have developed new formats for our Bakers and Wild Pair
stores which have resulted in comparable store sales increases
at new format stores that exceed our corporate average. New
format stores may not necessarily continue to achieve such above
average growth beyond their first comparable year. We have
undertaken a program to remodel existing stores and open new
stores which should result in more than 50% of our Bakers stores
operating in the new format by the end of 2005. We expect
remodeled stores to be closed for approximately six or seven
weeks during the period of remodeling.
After experiencing a strong first half of 2004, we experienced
soft demand during the third quarter which largely offset the
sales and gross margin gains of the first half. Net sales and
gross margin recovered in the fourth quarter of 2004, primarily
due to the good performance of remodeled stores and new stores
opened during the second half of the year. Net sales were
$150.5 million for fiscal year 2004, an increase of
31
$2.3 million over fiscal year 2003. Our gross profit
increased by $1.8 million but this increase was less than
the $4.2 million increase in our operating expenses for
fiscal year 2004. As a result, our operating income decreased to
$1.1 million for fiscal year 2004, from $3.5 million
for fiscal year 2003, and our income before income taxes
decreased to $0.5 million in fiscal year 2004 from
$1.6 million in fiscal year 2003.
In the first quarter of fiscal year 2002, we completed the
acquisition of 33 store locations (formerly operated as
Sam & Libby) in 15 states for $1.8 million in
cash from SLJ Retail LLC. We also acquired the non-inventory
personal property, leasehold improvements, furniture, fixtures
and equipment related to the stores. We began operating 17 of
these stores as Wild Pair stores and 16 as Bakers stores in
April 2002. As a result of the Sam & Libby acquisition,
our results of operations for fiscal years 2002, 2003 and 2004
are not comparable in some significant respects.
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.
On March 21, 2005, we filed an amended Annual Report on
Form 10-K/ A for fiscal 2003 and amended Quarterly Reports
on Form 10-Q/ A for first three quarters of fiscal 2004
which reflected a restatement of our financial statements to
correct our accounting for landlord allowances and the
commencement of lease terms.
On March 31, 2005, we entered into a definitive securities
purchase agreement for a Private Placement. See
“Item 1. Business — Entry into Agreement for
Private Placement.” Assuming the consummation of the
Private Placement, we expect to receive approximately
$7.25 million to $7.5 million in net proceeds. If the
Private Placement were not to close, we would expect to open
25-30 new stores in fiscal 2005, substantially all in our new
format. Pending use of the net proceeds, the Private Placement
would improve our financial position and liquidity and allow us
to accelerate our expansion plans. We expect to use the net
proceeds from the Private Placement to open additional stores,
remodel existing stores, repay indebtedness under our revolving
line of credit and for other working capital purposes. We expect
the net proceeds of the Private Placement to allow us to open an
additional 10 stores in the fall of 2005 and to target the
opening of 35-40 new stores in fiscal 2006, substantially all in
the new format. We expect the Private Placement to close in
early April 2005, but it is subject to closing conditions.
Critical Accounting Policies
Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States,
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 are valued at the lower of cost or
market using the first-in first-out retail inventory method.
Permanent markdowns are recorded to reflect expected adjustments
to retail prices in accordance with the retail inventory method.
The process of determining our expected adjustments to retail
prices requires significant judgment by management. Among other
factors, management utilizes performance metrics to evaluate the
quality and freshness of inventory, including the number of
weeks of supply on hand, sell-through percentages and aging
categories of inventory by selling season, to make its best
estimate of the appropriate inventory markdowns. If market
conditions are less favorable than those projected by
management, additional inventory markdowns may be required.
32
|
|
|
Store closing and impairment charges |
At the beginning of fiscal year 2002, we adopted
SFAS No. 144, Accounting for the Disposal of
Long-Lived Assets. Based on the criteria in
SFAS No. 144, long-lived assets to be “held and
used” are reviewed for impairment when events or
circumstances exist that indicate the carrying amount of those
assets may not be recoverable. We regularly analyze the
operating results of our stores and assess the viability of
under-performing stores to determine whether they should be
closed or whether their associated assets, including furniture,
fixtures, equipment, and leasehold improvements, have been
impaired. Asset impairment tests are performed at least
annually, on a store-by-store basis. After allowing for an
appropriate start-up period, unusual nonrecurring events, and
favorable trends, fixed assets of stores indicated to be
impaired are written down to fair value. During the years ended
January 4, 2003, January 3, 2004 and January 1,
2005, we recorded $120,114, $127,133 and $202,801, respectively,
in noncash charges to earnings related to the impairment of
furniture, fixtures, and equipment, leasehold improvements and
other assets.
Through January 3, 2004, we were an S corporation
under Subchapter S of the Internal Revenue Code and comparable
state tax laws, and consequently were not subject to income
taxes on our earnings in those jurisdictions, other than state
franchise and net worth taxes. However, we were subject to
income taxes in some states which do not recognize
S corporation status. Our S corporation status was
terminated effective January 4, 2004 and, as a result, we
became subject to Federal and state income taxes as a C
corporation.
We calculate income taxes in accordance with
SFAS No. 109 Accounting for Income Taxes, which
requires the use of the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized based
on the 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.
No valuation allowance has been provided for the deferred tax
assets because we generated taxable income in prior periods and
we anticipate that future taxable income will be sufficient to
allow us to fully realize the amount of net deferred tax assets.
Fiscal Year
Our accounting period is based upon a traditional retail
calendar, which ends on the Saturday nearest January 31. Prior
to 2005, our fiscal year ended four weeks prior to the retail
calendar, as a result of our prior Subchapter S tax status. The
fiscal years ended January 4, 2003, January 3, 2004
and January 1, 2005 were 52-week periods. The difference in
the number of weeks for our fiscal years can affect yearly
comparisons. We refer to the fiscal year ended January 4,
2003 as “fiscal year 2002,” to the fiscal year ended
January 3, 2004 as “fiscal year 2003,” and to the
fiscal year ended January 1, 2005 as “fiscal year
2004.”
On March 11, 2005, we announced that we have changed our
fiscal year to the standard retail calendar, which closes on the
Saturday closest to the end of January. We will have a four week
transition period beginning on January 2, 2005 and ending
January 29, 2005. Our new fiscal year will begin on
January 30, 2005 and will end on January 28, 2006. The
results of the transition period will be reported on
Form 10-Q along with the results of the first quarter of
fiscal year 2005, ending April 30, 2005.
33
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 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of merchandise sold, occupancy and buying expense
|
|
|
70.4 |
|
|
|
69.8 |
|
|
|
69.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29.6 |
|
|
|
30.2 |
|
|
|
31.0 |
|
|
Selling expense
|
|
|
20.4 |
|
|
|
20.0 |
|
|
|
20.9 |
|
|
General and administrative expense
|
|
|
7.4 |
|
|
|
7.7 |
|
|
|
9.0 |
|
|
Loss on disposal of property and equipment
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
Impairment and disposal of long-lived assets
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Write off of deferred offering costs
|
|
|
1.1 |
|
|
|
— |
|
|
|
— |
|
|
Operating income
|
|
|
0.5 |
|
|
|
2.3 |
|
|
|
0.7 |
|
|
Other income (expense)
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
Interest expense
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
|
(0.6 |
) |
|
State income tax (expense) benefit
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
Benefit from income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
|
Cumulative effect of change in accounting
|
|
|
1.8 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.3 |
% |
|
|
1.1 |
% |
|
|
1.0 |
% |
| |
|
|
|
|
|
|
|
|
|
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 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Number of stores at beginning of period
|
|
|
202 |
|
|
|
233 |
|
|
|
215 |
|
|
Stores opened or acquired during period
|
|
|
41 |
|
|
|
3 |
|
|
|
17 |
|
|
Stores closed during period
|
|
|
(10 |
) |
|
|
(21 |
) |
|
|
(12 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Number of stores at end of period
|
|
|
233 |
|
|
|
215 |
|
|
|
220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 1, 2005 Compared to Fiscal
Year Ended January 3, 2004 |
Net sales. Net sales were $150.5 million in fiscal
year 2004, up from $148.2 million for fiscal year 2003, an
increase of $2.3 million. Sales in the first quarter were
strong, reflecting the fashion trend that started in the second
half of 2003. Sales in the second and third quarters were
negatively impacted by customer demand for low-priced flip flops
and athletics and soft demand for back-to-school casuals. Fourth
quarter sales improved due to strong demand in boots, closed
casuals and branded footwear, and due to the good performance of
remodeled stores and new stores opened during the second half of
the year. Comparable store sales in the fourth quarter of 2004
decreased 1.0% compared to 2003, but increased 1.9% for all of
fiscal year 2004. For the year we had slight growth in unit
sales and in average unit prices.
Gross profit. Gross profit increased to
$46.6 million in 2004 from $44.8 million in 2003, an
increase of $1.8 million. As a percentage of sales, gross
profit increased to 31.0% in 2004 from 30.2% in 2003. Gross
profit improved in the first half of 2004 but decreased
considerably during the third quarter reflecting significant
discounting and consumer preference for low priced flip flops
during the quarter. Gross profit recovered in the fourth quarter
of 2004 with a gross profit percentage of 37.8% comparable to
37.7% in the fourth quarter of 2003.
34
Selling expense. Selling expense increased to
$31.4 million in 2004 from $29.6 million in 2003, an
increase of $1.8 million. This increase was due primarily
to increased supplies and repair expenses and increased
depreciation expense.
General and administrative expense. General and
administrative expense increased to $13.5 million in 2004
from $11.5 million in 2003, an increase of
$2.0 million. This increase is attributable to higher
administrative payroll and to public company expenses incurred
in 2004.
Loss on disposal of property and equipment. Loss on
disposal of property and equipment increased to $475,000 in
fiscal year 2004 up from $189,000 in fiscal year 2003. The 2004
loss includes approximately $175,000 related to expensing
leasehold improvements and store fixtures due to the relocation
of one of our stores in New York City. The remaining increase
relates to increased remodeling activity during fiscal year 2004.
Interest expense. Interest expense decreased to
$0.9 million in 2004 from $1.7 million in 2003, a
decrease of $0.8 million. The decrease in interest expense
reflects the reduction in our borrowings compared to the prior
year.
Income tax benefit. Effective January 4, 2004, we
converted to a C corporation and became subject to federal and
state income taxes. In accordance with SFAS No. 109,
Accounting for Income Taxes, we have reflected the net
impact of the temporary differences between the book and tax
basis of our assets and liabilities as of the date of conversion
as a component of our provision for income taxes for 2004. We
recognized a nonrecurring income tax benefit of
$1.2 million upon conversion to a C corporation offset by
an income tax provision of $0.2 million related to our
income for fiscal year 2004. No valuation allowance has been
provided for our net tax assets because we generated taxable
income in prior periods and we anticipate that future taxable
income will be sufficient to allow us to fully realize these tax
assets. Because we were an S corporation during 2003 there
was no comparable income tax benefit for that year. On a pro
forma basis, had we been a C corporation for 2003, we would have
had a tax provision of $0.7 million for the year.
Net income. We had net income of $1.4 million in
fiscal 2004 compared to net income of $1.6 million in 2003.
If we had been taxed as a C corporation in 2003, our net income
would have been $1.0 million for that period.
|
|
|
Fiscal Year Ended January 3, 2004 Compared to Fiscal
Year Ended January 4, 2003 |
Net sales. Net sales decreased to $148.2 million in
fiscal year 2003 from $151.1 million in fiscal year 2002, a
decrease of $2.9 million. Net sales were negatively
impacted by a weak retail environment during the first quarter
of 2003 related to consumer concerns regarding the war in Iraq
and the closure of 19 stores. In the second and third quarters
of 2003, sales were negatively impacted by teenage customer
demand for low priced flip-flops. Net sales were positively
impacted by the inclusion of sales from the 33 former
Sam & Libby stores for the full year in 2003 compared
to only three quarters of 2002 and the reemergence of fashion
trends during the fourth quarter of 2003. Our comparable store
sales for fiscal year 2003 decreased by 3.2% compared to fiscal
year 2002. Comparable store sales for the fourth quarter of
fiscal year 2003 increased by 4.0% compared to the fourth
quarter of fiscal year 2002.
Gross profit. Gross profit was $44.8 million in both
fiscal year 2003 and fiscal year 2002. Gross profit for the
first three quarters of 2003 decreased $1.8 million
compared to the first three quarters of 2002, primarily due to
increases in occupancy and buying expenses. Gross profit in the
fourth quarter of fiscal year 2003 increased $1.9 million
over the fourth quarter of fiscal year 2002, reflecting improved
markdown experience and shrinkage control. As a percentage of
sales, gross profit increased to 30.2% in fiscal year 2003 from
29.6% in fiscal year 2002.
Selling expense. Selling expense decreased to
$29.6 million in fiscal year 2003 from $30.8 million
in fiscal year 2002, a decrease of $1.2 million. This
decrease was primarily attributable to more effective store
payroll management in fiscal year 2003, partially offset by a
$500,000 increase in depreciation and amortization expense
related to store fixtures and leaseholds.
35
General and administrative expense. General and
administrative expense increased to $11.5 million in fiscal
year 2003 from $11.2 million in fiscal year 2002, an
increase of $300,000. The increase was due to increased
incentive compensation resulting from the Company’s
improved profitability in 2003.
Income (loss) before cumulative effect of change in
accounting. Our income before cumulative effect of change in
accounting increased to $1.6 million for fiscal year 2003
from a loss of $700,000 in fiscal year 2002, an improvement of
$2.3 million. The change was primarily related to the
nonrecurring write off of deferred initial public offering costs
of $1.7 million in fiscal year 2002.
Net income. We had net income of $1.6 million in
fiscal year 2003 down from net income of $2.1 million in
fiscal year 2002. Net income for 2002 reflects $2.8 million
of income related to the cumulative effect of change in
accounting for goodwill. If we had been taxed as a C
corporation, our net income for fiscal year 2003 would have been
$1.0 million and our net income for fiscal year 2002 would
have been $1.2 million. For more information regarding pro
forma income taxes, please see Note 13 of the Financial
Statements.
Seasonality and Quarterly Fluctuations
The following table sets forth our summary operating results for
the quarterly periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended January 4, 2003 | |
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
32,059,325 |
|
|
$ |
39,405,673 |
|
|
$ |
36,259,634 |
|
|
$ |
43,423,178 |
|
|
Gross profit
|
|
|
10,041,763 |
|
|
|
11,719,538 |
|
|
|
8,396,851 |
|
|
|
14,636,342 |
|
|
Operating expenses
|
|
|
9,310,187 |
|
|
|
10,898,445 |
|
|
|
11,070,057 |
|
|
|
12,661,145 |
|
|
Operating income (loss)
|
|
|
731,576 |
|
|
|
821,093 |
|
|
|
(2,673,206 |
) |
|
|
1,975,197 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended January 3, 2004 | |
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
31,909,958 |
|
|
$ |
38,310,685 |
|
|
$ |
34,274,081 |
|
|
$ |
43,728,829 |
|
|
Gross profit
|
|
|
7,608,275 |
|
|
|
11,442,752 |
|
|
|
9,278,577 |
|
|
|
16,497,356 |
|
|
Operating expenses
|
|
|
10,472,365 |
|
|
|
10,261,703 |
|
|
|
9,850,830 |
|
|
|
10,784,301 |
|
|
Operating income (loss)
|
|
|
(2,864,090 |
) |
|
|
1,181,049 |
|
|
|
(572,253 |
) |
|
|
5,713,055 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended January 1, 2005 | |
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
34,305,013 |
|
|
$ |
38,904,743 |
|
|
$ |
31,589,495 |
|
|
$ |
45,715,412 |
|
|
Gross profit
|
|
|
9,741,953 |
|
|
|
12,600,049 |
|
|
|
7,030,918 |
|
|
|
17,274,878 |
|
|
Operating expenses
|
|
|
10,978,954 |
|
|
|
10,988,298 |
|
|
|
11,356,971 |
|
|
|
12,250,179 |
|
|
Operating income (loss)
|
|
|
(1,237,001 |
) |
|
|
1,611,751 |
|
|
|
(4,326,053 |
) |
|
|
5,024,699 |
|
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 net income in our second and fourth quarters
are typically much stronger than in our first and third quarters.
In addition to our normal seasonal fluctuations, some events, in
particular the Easter holiday, shift between fiscal quarters in
some years due to the nature of our fiscal year. This shift can
influence our quarterly comparable results. For example, Easter
occurred during the first quarter of fiscal year 2002, while in
most years, including fiscal years 2003 and 2004, Easter
occurred during the second quarter.
Quarterly comparisons may also be affected by the timing of
sales promotions and costs associated with remodeling stores,
opening new stores or acquiring stores.
36
Liquidity and Capital Resources
On February 10, 2004, we consummated our initial public
offering with the sale of 2,160,000 shares of common stock.
On March 12, 2004, we sold an additional
324,000 shares in satisfaction of the underwriters’
over-allotment option. We received net proceeds of approximately
$15.5 million in the offering. See
“— Initial Public Offering” below for more
information.
At January 1, 2005, we had total assets of
$49.4 million and shareholders’ equity of
$27.1 million compared to total assets of
$29.9 million and shareholders’ equity of
$3.3 million at January 3, 2004. At January 1,
2005, we had net working capital of $11.2 million, and
$12.4 million of unused borrowing capacity under our
revolving credit facility, based upon our borrowing base
calculation, compared to negative net working capital of
$0.8 million and $5.6 million of unused borrowing
capacity at January 3, 2004.
The improvement in our financial position primarily relates to
the proceeds from our initial public offering, the conversion of
our subordinated debentures and redeemable Class A and
Class B common stock into common stock, and our net income
in 2004.
Our cash requirements are primarily for working capital, capital
expenditures and principal payments on our debt and capital
lease obligations. In connection with our prior
S corporation status, we have also made cash distributions
to our shareholders to cover their taxes. Historically, these
needs for cash have been met by cash flows from operations,
borrowings under our revolving credit facility and sales of our
subordinated debt.
We anticipate that our cash flows from operations and borrowings
under our revolving credit facility will be sufficient for our
operating cash requirements for at least the next 12 months
and will allow us to further execute our business plan,
including our planned expansion.
Assuming the consummation of the Private Placement, we expect to
receive approximately between $7.25 million and
$7.5 million in net proceeds. If the Private Placement were
not to close, we would expect to open 25-30 new stores in fiscal
2006, substantially all in our new format. Pending use of the
net proceeds, the Private Placement would improve our financial
position and liquidity and allow us to accelerate our expansion
plans. We expect to use the net proceeds from the Private
Placement to open additional stores, remodel existing stores,
repay indebtedness under our revolving line of credit and for
other working capital purposes. We expect the net proceeds of
the Private Placement to allow us to open an additional 10
stores in the fall of 2005 and to target the opening of 35-40
new stores in fiscal 2006, substantially all in the new format.
We expect the Private Placement to close in early April, but it
is subject to closing conditions.
For fiscal year 2004, our net cash provided by operations was
$6.8 million compared to net cash provided by operations of
$8.9 million in fiscal year 2003, a decrease of
$2.1 million. The primary causes of this decrease were
decreased operating income in 2004 and a $4.0 million
increase in inventories in 2004 compared to a $1.5 million
decrease in inventories in 2003. The year-to-year inventory
changes relate primarily to the 17 new stores opened in 2004 and
to higher in-transit inventory levels at the end of fiscal year
2004 as we prepared for an early Easter in 2005.
Over two-thirds of our products are currently manufactured in
China. Recently the continued significant growth in the Chinese
economy has resulted in periodic energy and labor shortages, as
well as transportation and shipping bottlenecks. In addition,
due to the volume of Chinese imports, there have been delays at
ports on the west coast of the United States. We actively
monitor these matters and have accelerated the timing of our
product sourcing by approximately one week in order to minimize
the impact of any production or transportation delays.
We are committed under noncancelable operating leases for all
store and office spaces, expiring at various dates through 2020.
These leases generally provide 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 1, 2005, our
lease payment obligations under these leases totaled
$18.9 million for fiscal year 2005, and an aggregate of
$138.1 million through 2020.
37
In fiscal year 2004, our cash used in investing activities
amounted to $11.4 million compared to $2.4 million for
fiscal year 2003. During each year, cash used in investing
activities consisted of capital expenditures for furniture,
fixtures and leasehold improvements for both new and remodeled
stores, and new information systems. A substantial portion of
the 2004 capital expenditures relate to new and remodeled stores
opened during the third and fourth quarters of 2004.
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. As of
March 28, 2005, we have opened 5 new stores in fiscal 2005.
We plan to open approximately 25 to 30 new stores in fiscal year
2005 and 10 new stores in fiscal year 2006. In addition, we
anticipate using the net proceeds from the Private Placement to
open an additional 10 stores in fiscal 2005 and 35-40 new stores
in fiscal 2006. Capital expenditures for a new store including
point of sale equipment are expected to average approximately
$225,000 to $275,000. We generally receive landlord allowances
in connection with new stores averaging $25,000 to $75,000. The
average cash inventory investment for a new store is expected to
range from approximately $45,000 to $75,000, depending on the
size and sales expectation of the store and the timing of the
new store opening. Pre-opening expenses, such as marketing,
salaries, supplies, rent and utilities are expensed as incurred.
Remodeling the average existing store into the new format
typically costs approximately $200,000 to $275,000. For stores
that do not warrant this level of investment, the costs to
remodel are approximately $40,000. We remodeled 14 stores during
fiscal 2004. As of March 28, 2004, we completed the
remodeling of 5 stores.
Prior to the impact of the Private Placement, in connection with
store openings and remodelings, we have projected our capital
expenditures in fiscal year 2005 to be approximately
$12.2 million.
In fiscal year 2004, our net cash provided by financing
activities was $10.7 million compared to net cash used in
financing activities of $5.9 million in fiscal year 2003, a
difference of $16.6 million, due primarily to the proceeds
of our IPO. In fiscal year 2004, we used cash to repay the
$2.2 million balance on our revolving notes payable, repay
all of our outstanding debt obligations and make principal
payments on our capital lease obligations. In fiscal year 2003,
we made net repayments on our revolving note payable of
$4.8 million and made principal payments on our debt and
capital lease obligations.
As of January 1, 2005, the aggregate payments remaining on
our capital lease obligations were approximately
$1.8 million through 2008, including $0.9 million due
in fiscal year 2005, compared to remaining aggregate payments of
$3.2 million as of January 3, 2004.
We have a $25.0 million secured revolving credit facility
with Fleet Retail Group, Inc. Prior to September 1, 2004,
when our credit agreement was amended, amounts borrowed under
the facility bore interest at a rate equal to the base rate (as
defined in the agreement) plus 0.75% per annum, which was
equal to 4.75% per annum at January 3. 2004. If
contingencies identified in the agreement occur, the interest
rate may be increased by an additional two percentage points.
The revolving credit agreement also allows us to apply an
interest rate of LIBOR (as defined in the agreement) plus a
margin rate per annum to a designated portion of the outstanding
balance for a minimum of 30 days by entering into a basis
swap. The aggregate amount that we may borrow under the
agreement at any time is established by a formula, which is
based substantially on our inventory level but cannot be greater
than $25.0 million. The agreement is secured by
substantially all of our assets. In connection with the
administration of the agreement, we were required to pay a
facility fee of $3,000 per month. Pursuant to an amendment
effective September 1, 2004, the margin on our base rate
loans was reduced from 0.75% per annum to 0% per
annum, the margin on our LIBOR loans was reduced from
3.00% per annum to 1.75% to 2.25% per annum and our
monthly facility fee was reduced from $3,000 to $2,000. The
applicable interest rate under the facility as of
January 1, 2005 was 5.25%. As part of that amendment, we
agreed to pay a fee to Fleet of $62,500. In addition, we must
pay 0.25% per annum of the remaining unborrowed loan
capacity under the agreement. If contingencies related to early
termination of the credit facility were to occur, or if we were
to request and receive an accommodation from the lender in
connection with the facility, we may be required to pay
additional fees.
38
At January 3, 2004, we had $2.2 million outstanding
under the revolving credit facility, at a 4.28% effective
interest rate per annum, and approximately $5.6 million of
unused borrowing capacity available under the revolving credit
facility, based upon our borrowing base calculations. As of
January 1, 2005, we had no outstanding balance under our
credit facility and had approximately $12.4 million in
availability. We repaid the outstanding balance on the credit
facility during the first quarter of 2004 from the proceeds of
our IPO. On October 25, 2004, we made our first draw on our
revolving credit agreement since we repaid the balance from the
proceeds of our initial public offering in February 2004. The
highest outstanding balance on our facility during fiscal 2004
was $5.7 million prior to our initial public offering and
$2.7 million after our initial public offering. As of
March 25, 2005, we had an outstanding balance of
$4.6 million and approximately $11.8 million of unused
borrowing capacity, based on our borrowing base calculations. We
primarily have used the borrowings on our revolving credit
facility for working capital purposes and capital expenditures.
Our credit facility includes financial and other covenants
relating to, among other things, compliance with our business
plan, prohibiting a change of control, including any person or
group acquiring beneficial ownership of 30% or more of our
common stock or our combined voting power (as defined in the
credit facility), maintaining a minimum availability,
prohibiting new debt, and restricting dividends and the
repurchase of our stock. In the event that we were to violate
any of these covenants, or violate the provisions of any of our
other lending arrangements or of more than 10% of our leases,
the lender would have the right to accelerate repayment of all
amounts outstanding under the agreement, or to commence
foreclosure proceedings on our assets. Pursuant to an amendment
effective September 1, 2004, a financial covenant relating
to capital expenditures was eliminated and the maturity date of
the credit facility was extended to August 31, 2008. As
part of the amendment, our lender also released
Mr. Edison’s $500,000 limited guaranty of collection
under the facility.
We had two other long-term debt commitments outstanding at
January 3, 2004, both of which were subordinate to our
credit facility. One was a subordinated note, which required
quarterly principal and interest payments of up to $50,000 over
the term of the loan through January 2008. This note was secured
by a security agreement and a $393,000 standby letter of credit.
The balance on this loan was approximately $360,000 at
January 3, 2004. The other long-term commitment consisted
of a $500,000 secured subordinated note payable to a venture
capital institution, which is due at maturity on March 1,
2004 and a related warrant to purchase 76,907 shares
of our common stock, which was redeemable for $850,000 on
March 1, 2004. All of these obligations were repaid during
the first quarter of 2004 from the proceeds from our IPO. Prior
to the IPO, certain of our shareholders had mandatory redemption
rights. These rights were terminated upon the consummation of
the IPO.
We sold $4.9 million of our subordinated convertible
debentures due 2007 in a private offering during the first
quarter of fiscal year 2002. We used the net proceeds from the
sale of the debentures to finance the Sam & Libby
acquisition, to repay a portion of the amounts borrowed under
our credit facility and to provide capital for future store
openings. On January 2, 2004, we exchanged all of our
subordinated convertible debentures for new subordinated
convertible debentures in the same aggregate principal amount.
The new subordinated convertible debentures bore interest at 9%,
increasing over time to 11.0% per annum. The new
subordinated convertible debentures would have matured, if not
earlier converted, on April 4, 2007. The new subordinated
convertible debentures automatically converted into an aggregate
of 653,331 shares of our common stock at a fixed exercise
price of $7.50 upon our IPO. We have registered the common stock
issued in connection with the conversion of the subordinated
convertible debentures.
On February 10, 2004, we consummated our initial public
offering with the sale of 2,160,000 shares of common stock.
On March 12, 2004, we sold an additional
324,000 shares of common stock in connection with the
exercise, by the underwriters, of the full over-allotment
option. All of the shares of common stock sold to the public
were sold at a price of $7.75 per share. The aggregate
gross proceeds from the initial public offering were
approximately $19.3 million. The net proceeds to us from
the offering were approximately $15.5 million. We used all
of the net proceeds received from the initial public offering in
2004 to repay $5.7 million on our revolving credit
agreement, $0.9 million to redeem outstanding warrants,
$0.9 million to repay subordinated
39
debt and $8.0 million for capital expenditures. Pending use
of the proceeds, we invested in short-term, investment-grade
interest bearing instruments.
In connection with our initial public offering,
$4.5 million of subordinated convertible debentures
automatically converted into 653,331 shares of common stock
at a fixed exercise price of $7.50 per share. Our
Class A and Class B common stock was converted into
shares of our new common stock on a one to one basis, excluding
fractional shares, and $1.9 million of related redemption
obligations were terminated. At October 2, 2004, we had
5,102,481 shares of common stock outstanding.
In connection with the closing of our initial public offering,
we sold to the representatives of the underwriters and their
designees warrants to purchase up to an aggregate of
216,000 shares of common stock at an exercise price equal
to $12.7875 per share, subject to antidilution adjustments,
for a purchase price of $0.0001 per warrant for the
warrants. The warrants were restricted from sale, transfer,
assignment, pledge or hypothecation by any person until
February 10, 2005, except to some directors, officers,
employees and affiliates of the representatives of the
underwriters. The warrant holders may exercise the warrants as
to all or any lesser number of the underlying shares of common
stock at any time during the four-year period commencing on
February 10, 2005. In addition, we are required for a five
year period, (i) at the request of a majority of the
warrant holders, to use our best efforts to file one
registration statement, at our expense, covering the sale of the
shares of common stock underlying the warrants and (ii) at
the request of any holders of warrants, to file additional
registration statements covering the shares of common stock
underlying the warrants at the expense of those holders. We are
required to maintain the effectiveness of any demand
registration statement for up to nine consecutive months. Except
for the registration rights that we have granted to the prior
holders of our subordinated convertible debentures, we agreed
not to make any registered offering of our securities, with
limited exceptions, or to include any other shares on any such
demand registration statement, at any time that we are required
to maintain the effectiveness of a demand registration
statement, without first obtaining the consent of a majority of
the holders of warrants and warrant shares that are not then
held by the public or by us or other excepted persons who have a
relationship with us and our affiliates. In addition, we are
required to include the shares of common stock underlying the
warrants in any appropriate registration statement we file
during the six years following the consummation of the initial
public offering. We have also agreed not to offer, sell or grant
any securities convertible or exchangeable for common stock to
any of our directors, officers or employees at an exercise price
less that $7.75 per share for a period of three years after
February 5, 2004, without the prior written consent of the
representatives.
We also entered into a financial advisory agreement with Ryan
Beck, under which we have agreed to retain Ryan Beck as our
financial advisor in connection with any strategic or financial
transactions or other identified activities that we may
undertake during the two-year term of the agreement. In exchange
for these services, we have agreed to pay Ryan Beck a percentage
of the total consideration or transaction value calculated as
set forth in the agreement, related to such possible future
transactions (with some exceptions) and to reimburse Ryan Beck
for its reasonable expenses. We are not obligated under the
agreement to enter into any transaction, and we have no current
plans to do so during the term of the agreement, which Ryan Beck
may cancel at any time upon 10 days notice to us.
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.
Private Placement
The information set forth in Item 1 of this report under
“Item 1. Business — Entry into Agreement for
Private Placement” is incorporated herein by reference.
Off-Balance Sheet Arrangements
At January 1, 2005 and January 3, 2004, 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
40
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
January 1, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due in Period | |
| |
|
| |
| |
|
|
|
Less Than | |
|
1-3 | |
|
3-5 | |
|
More Than | |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-term debt obligations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital lease obligations(1)
|
|
|
1,802,880 |
|
|
|
935,051 |
|
|
|
792,806 |
|
|
|
75,023 |
|
|
|
— |
|
|
Operating lease obligations(2)
|
|
|
138,141,663 |
|
|
|
18,867,539 |
|
|
|
34,608,991 |
|
|
|
30,050,371 |
|
|
|
54,614,762 |
|
|
Purchase obligations(3)
|
|
|
23,162,182 |
|
|
|
23,153,819 |
|
|
|
8,363 |
|
|
|
— |
|
|
|
— |
|
|
Other long-term liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
$ |
163,106,725 |
|
|
$ |
42,956,409 |
|
|
$ |
35,410,160 |
|
|
$ |
30,125,394 |
|
|
$ |
54,614,762 |
|
|
|
| (1) |
Includes payment obligations relating to our point of sale
hardware and software leases. |
| |
| (2) |
Includes minimum payment obligations relating to our store
leases. |
| |
| (3) |
Includes merchandise on order and payment obligations relating
to miscellaneous service contracts. |
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), a
revision of SFAS No. 123, “Accounting for
Stock-Based Compensation.” SFAS 123R will require the
Company to, among other things, measure employee stock-based
compensation awards where applicable using a fair value method
and record related expense in the Company’s consolidated
financial statements. The provisions of SFAS 123R are
effective for the first interim or annual reporting period that
begins after June 15, 2005; therefore, the Company will
adopt the new requirements no later than the beginning of its
third quarter of fiscal 2005. Adoption of the expensing
requirements will reduce the Company’s reported earnings.
Management is currently evaluating the specific impacts of
adoption, which include whether the Company should adopt the
requirements on a retrospective basis and which valuation model
is most appropriate.
|
|
| Item 7A |
Quantitative and Qualitative Disclosures About Market
Risk. |
Our earnings and cash flows may be subject to fluctuations due
to changes in interest rates. Our financing arrangements include
both fixed and variable rate debt in which changes in interest
rates will impact the fixed and variable rate debt differently.
A change in the interest rate of fixed rate debt will impact the
fair value of the debt, whereas a change in the interest rate on
the variable rate debt will impact interest expense and cash
flows. Management does not believe that the risk associated with
changing interest rates would have a material effect on our
results of operations or financial condition.
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 8. |
Financial Statements and Supplementary Data. |
Our consolidated 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.
41
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. |
None.
|
|
| Item 9A. |
Controls and Procedures. |
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 1, 2005 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 2004.
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.
In February 2005, the Company, in consultation with its Audit
Committee and its independent registered public accountants,
concluded that it must correct its previously issued financial
statements to properly account for landlord allowances and the
commencement of lease terms. This correction resulted in the
restatement of operating results and financial position for the
fiscal years 1999 through 2003, which was reflected in an
amended Annual Report on Form 10-K/ A for fiscal year 2003
which was filed with the SEC on March 21, 2005, and for the
first thirty-nine weeks of 2004, which was reflected in amended
Quarterly Reports on Form 10-Q/ A which were filed with the
SEC on March 21, 2005.
The Public Company Accounting Oversight Board’s Auditing
Standard No. 2, An Audit of Internal Control Over Financial
Reporting Performed in Conjunction With an Audit of Financial
Statements, states that a restatement of financial statements in
prior filings with the SEC is a strong indicator of the
existence of a “material weakness” in the design or
operation of internal control over financial reporting. Based on
that definition, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that a material weakness
existed in the Company’s internal control over financial
reporting, and disclosed this to the Audit Committee and to the
independent registered public accountants.
The Company’s Chief Executive Officer and Chief Financial
Officer also concluded that this matter constituted
ineffectiveness of its disclosure controls and procedures as of
the end of the period covered by this Annual Report on
Form 10-K (January 1, 2005), in ensuring that material
information relating to the Company, required to be disclosed by
the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms.
The Company has remediated the material weakness in internal
control over financial reporting and the ineffectiveness of its
disclosure controls and procedures by conducting a review of its
accounting related to leases, and correcting its method of
accounting for tenant improvement allowances and rent holidays.
The Company has established procedures designed to ensure that
landlord allowances will be properly classified and that rent
expense will be recognized in the appropriate periods in the
Company’s financial statements.
42
|
|
| Item 9B. |
Other Information. |
None.
PART III.
|
|
| Item 10. |
Directors and Executive Officers of the Registrant. |
Information set forth in the Company’s 2005 Proxy Statement
under the caption “Information Regarding Board of Directors
and Committees” is hereby incorporated by reference. No
other sections of the 2005 Proxy Statement are incorporated
herein by this reference. The following information with respect
to the executive officers of the Company as of March 28,
2005 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
|
|
|
49 |
|
|
Chairman of the Board and Chief Executive Officer |
|
Michele A. Bergerac
|
|
|
49 |
|
|
President and Director |
|
Mark D. Ianni
|
|
|
44 |
|
|
Executive Vice President — General Merchandise Manager |
|
Lawrence L. Spanley, Jr.
|
|
|
58 |
|
|
Executive Vice President — Chief Financial Officer,
Treasurer and Secretary |
|
Stanley K. Tusman
|
|
|
58 |
|
|
Executive Vice President — Inventory and Information
Management |
|
Joseph R. Vander Pluym
|
|
|
53 |
|
|
Executive Vice President — Stores |
Peter A. Edison has over 27 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 currently serves as
chairman of the board of directors of Dave & Busters,
Inc. He has served as our Chairman of the Board and Chief
Executive Officer since October 1997.
Michele A. Bergerac has over 27 years of experience
in the junior and contemporary women’s shoe business
including a 17-year career in various divisions of the May
Company and five years with Bakers. Ms. Bergerac started at
Abraham & Straus as an Assistant Buyer. Her buying and
merchandising career with the May Company included positions at
G. Fox, May Corporate, May Company California and Foley’s,
where she was the Vice President of Footwear, prior to being
hired by Edison Brothers as President of Edison Footwear Group
in 1998. Ms. Bergerac has served as our President since
June 1999.
Mark D. Ianni has over 24 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 Divisional
Merchandise Manager of Dress Shoes prior to his current position
of General Merchandise Manager. Mr. Ianni has served as our
Executive Vice President — General Merchandise Manager
since June 1999.
Lawrence L. Spanley, Jr. has over 30 years of
retail accounting and finance experience. Mr. Spanley spent
much of his career at Senack Shoes, a division of Interco. Since
1994, Mr. Spanley has served as either our Chief Financial
Officer or our Vice President — Finance, and at
various times as our Treasurer and Secretary.
43
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 — Inventory and Information Management
since June 1999.
Joseph R. Vander Pluym is a 30-year veteran of store
operations with a track record of building and motivating high
energy, high service field organizations. Mr. Vander Pluym
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. Vander Pluym has served as either our Vice
President — Stores or our Executive Vice
President — Stores since June 1999.
Edison Brothers Stores, Inc. 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.
Each of the executive officers has entered into an employment
agreement with the Company. Information with respect to the
executive officers set forth in the Company’s 2005 Proxy
Statement under the caption “Executive
Compensation — Employment Contracts, Termination of
Employment and Change-in-Control Arrangements” 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 2005 Proxy Statement under the caption
“Section 16(a) Beneficial Ownership Reporting
Compliance” is incorporated herein by this reference. No
other sections of the 2005 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 2005 Proxy Statement is
incorporated herein by this reference. No other sections of the
2005 Proxy Statement are incorporated by this reference.
|
|
| Item 11. |
Executive Compensation. |
The information set forth in the Company’s 2005 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 2005 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 2005 Proxy
Statement under the caption “Stock Ownership of Management
and Certain Beneficial Owners” is hereby incorporated by
reference. No other sections of the 2005 Proxy Statement are
incorporated herein by this reference.
44
Equity Compensation Plan Information
As of January 1, 2005, we have only the Baker Footwear
Group, Inc. 2003 Stock Option Plan (the “2003 Plan”)
under which our equity securities are authorized for issuance to
employees or non-employee directors in exchange for goods or
services. The 2003 Plan was approved by our shareholders prior
to the consummation of our initial public offering.
The following table shows for this plan the number of shares of
common stock to be issued upon exercise of options outstanding
at January 1, 2005, the weighted average exercise price of
those options, and the number of shares of common stock
remaining available for future issuance, excluding shares to be
issued upon exercise of outstanding options. We do not have any
equity compensation plans assumed by us in mergers.
Equity Compensation Plan Table
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
| |
|
|
|
|
|
Remaining Available for | |
| |
|
|
|
|
|
Future Issuance Under | |
| |
|
Number of Securities | |
|
Weighted-Average | |
|
Equity Compensation Plans | |
| |
|
to be Issued Upon | |
|
Exercise Price of | |
|
(Excluding Securities | |
| |
|
Exercise of Outstanding | |
|
Outstanding Options, | |
|
to be Issued Upon | |
| Plan Category |
|
Options, Warrants and Rights | |
|
Warrants and Rights | |
|
Exercise) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders(1)
|
|
|
568,592 |
|
|
$ |
4.09 |
|
|
|
300,400 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
568,592 |
|
|
$ |
4.09 |
|
|
|
300,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Prior to our initial public offering, we had a predecessor stock
option plan in effect which allowed us to grant nonqualified
stock options. Under the 2003 Plan, which was approved by our
shareholders as of January 3, 2004, all of the options
granted under the predecessor stock option plan are deemed to be
covered by the 2003 Plan. All of the option holders under the
predecessor plan also agreed to amend their option award
agreements to have their options governed by the 2003 Plan on
generally the same terms and conditions. At January 1,
2005, under the 2003 Plan, there was a total of
268,992 shares of common stock to be issued upon exercise
of outstanding and fully exercisable options at a weighted
average exercise price of $0.01 per share. On
February 10, 2004, after the consummation of our initial
public offering, we granted nonqualified stock options to
purchase 304,500 shares of our common stock to certain
of our employees and directors at an exercise price of
$7.75 per share, the initial public offering price,
pursuant to the 2003 Plan. Of these options, as of
January 1, 2005, options relating to 4,900 shares have
been forfeited. The options vest in five equal annual
installments beginning on the first anniversary of the date of
grant. As of January 1, 2005, 300,400 shares of common
stock remain available for future issuance (excluding shares to
be issued upon exercise of outstanding options). See
Note 15 to the Financial Statements. |
The information set forth under the caption “Executive
Compensation — 2003 Stock Option Plan” in the
Company’s 2005 Proxy Statement is incorporated herein by
reference. No other sections of the 2005 Proxy Statement are
incorporated by this reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions. |
The information set forth under the caption “Certain
Relationships and Related Transactions” in the
Company’s 2005 Proxy Statement is hereby incorporated by
reference. No other sections of the 2005 Proxy Statement are
incorporated herein by this reference.
|
|
| Item 14. |
Principal Accountant Fees and Services. |
The section of the 2005 Proxy Statement entitled “Principal
Accountant Fees and Services” is hereby incorporated by
reference. No other sections of the 2005 Proxy Statement are
incorporated herein by this reference.
45
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, 10.1.1,
10.2, 10.5, 10.8, 10.9, 10.13 through 10.16 and 10.20 through
10.25. The exhibits were filed with the SEC but were not
included in the printed version of the Annual Report to
Shareholders. |
46
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. |
April 1, 2005
|
|
| |
|
| |
Peter A. Edison |
| |
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) |
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 and Chief Executive Officer, Director
(Principal Executive Officer) |
|
April 1, 2005 |
| |
*
(Lawrence
L. Spanley, Jr.) |
|
Executive Vice President, Chief Financial Officer, Treasurer and
Secretary (Principal Financial Officer and Principal Accounting
Officer) |
|
April 1, 2005 |
| |
*
(Andrew
N. Baur) |
|
Director |
|
April 1, 2005 |
| |
*
(Michele
Bergerac) |
|
Director |
|
April 1, 2005 |
| |
*
(Timothy
F. Finley) |
|
Director |
|
April 1, 2005 |
| |
*
(Harry
E. Rich) |
|
Director |
|
April 1, 2005 |
| |
*
(Scott
C. Schnuck) |
|
Director |
|
April 1, 2005 |
|
|
| * |
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 |
|
|
| Number |
|
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 |
|
Debenture Purchase Agreement dated April 4, 2002 by and
among the Company and the persons on the attached signature
pages (incorporated by reference to Exhibit 4.1 of the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed April 16, 2002). |
| |
| |
4 |
.1.1 |
|
Convertible Debenture Exchange Agreement dated January 2,
2004 by and among the Company, Special Situations Private Equity
Fund, L.P., Special Situations Cayman Fund, L.P., Special
Situations Fund III, L.P., Julian Edison, The Crown
Advisors, LLC, Crown Investment Partners, L.P. and SWB Holdings,
Inc. (incorporated by reference to Exhibit 4.1.1 of
Amendment No. 3 to the Company’s Registration
Statement on Form S-1 (File No. 333-86332), filed
January 8, 2004). |
| |
| |
4 |
.1.2 |
|
Form of Subordinated Convertible Debenture dated January 2004
(included as Exhibit A to Exhibit 4.1.1). |
| |
| |
4 |
.2.1 |
|
Second Registration Rights Agreement dated January 2, 2004
by and among the Company and the selling shareholders named
therein (incorporated by reference to Exhibit 4.2.1 of
Amendment No. 3 to the Company’s Registration
Statement on Form S-1 (File No. 333-86332), filed
January 8, 2004). |
| |
| |
4 |
.2.2 |
|
Letter to Ryan Beck & Co., Inc. and BB&T Capital
Markets, as representatives of the underwriters, relating to
restrictions on transferability of common stock underlying
convertible debentures, executed by all holders of subordinated
convertible debentures. (incorporated by reference to
Exhibit 4.2.2 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 |
.3 |
|
Representatives’ Warrant Agreement, dated February 10,
2004 by and among the Company, Ryan Beck & Co., Inc.
and BB&T Capital Markets, a Division of Scott &
Stringfellow, Inc. (incorporated by reference to
Exhibit 4.3 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 |
.4 |
|
Amended and Restated Intercreditor and Subordination Agreement
dated January 2, 2004 by and among Fleet Retail Group Inc.
(f/k/a Fleet Retail Finance, Inc.), the selling shareholders
named therein and the Company (incorporated by reference to
Exhibit 4.4 of Amendment No. 3 to the Company’s
Registration Statement on Form S-1 (File
No. 333-86332), filed January 8, 2004). |
| |
| |
4 |
.5 |
|
Letter to Ryan Beck & Co., Inc. and BB&T Capital
Markets, as representatives of the underwriters, relating to
restrictions on transferability of common stock, executed by all
directors, officers and shareholders prior to the initial public
offering. (incorporated by reference to Exhibit 4.5 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 |
.6 |
|
Form of common stock certificate. (incorporated by reference to
Exhibit 4.6 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 |
.7 |
|
Warrants issued by the Company to representatives of the
underwriters, or their designees. (incorporated by reference to
Exhibit 4.7 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)). |
| |
| |
10 |
.1 |
|
Bakers Footwear Group, Inc. 2003 Stock Option Plan (incorporated
by reference to Exhibit 10.1 of Amendment No. 3 to the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed January 8, 2004). |
| |
| |
10 |
.1.1 |
|
Form of Nonqualified Option Award Agreement under Bakers
Footwear Group, Inc. 2003 Stock Option Plan. |
| |
| |
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 (File
No. 333-86332), filed January 8, 2004). |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
| |
10 |
.3 |
|
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 (File No. 333-86332), filed April 16,
2002). |
| |
| |
10 |
.4 |
|
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 (File
No. 333-86332), filed April 16, 2002). |
| |
| |
10 |
.5 |
|
Consultant Agreement dated May 18, 2001 by and between the
Company and Mark H. Brown & Associates, LLC
(incorporated by reference to Exhibit 10.11 to the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed April 16, 2002). |
| |
| |
10 |
.6 |
|
Letter of Understanding Between Transmodal Associates, Inc. and
Cargotrans Transitarios Internacionais (incorporated by
reference to Exhibit 10.13 of Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed June 4, 2002). |
| |
| |
10 |
.7 |
|
Motor Transportation Contract dated October 25, 1999
between Combined Express, Inc. and the Company (incorporated by
reference to Exhibit 10.14 of Amendment No. 1 to
Registration Statement on Form S-1 (File
No. 333-86332), filed June 4, 2002). |
| |
| |
10 |
.8 |
|
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 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.9 |
|
Employment Agreement dated April 1, 2002 by and between the
Company and Michele Bergerac (incorporated by reference to
Exhibit 10.16 of Amendment No. 4 to the Company’s
Registration Statement on Form S-1 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.10 |
|
Amended and Restated Loan and Security Agreement dated
June 11, 2002 by and between Fleet Retail Group, Inc.
(f/k/a Fleet Retail Finance, Inc.) and the Company (incorporated
by reference to Exhibit 10.17 of Amendment No. 2 to
the Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed December 4, 2003). |
| |
| |
10 |
.10.1 |
|
First Amendment to Amended and Restated Loan and Security
Agreement dated February 20, 2003 by and between Fleet
Retail Group, Inc. (f/k/a Fleet Retail Finance, Inc.) and the
Company (incorporated by reference to Exhibit 10.17.1 of
Amendment No. 2 to the Company’s Registration
Statement on Form S-1 (File No. 333-86332), filed
December 4, 2003). |
| |
| |
10 |
.10.2 |
|
Amended & Restated Intercreditor Subordination
Agreement among the Company, Mississippi Valley Capital, LLC and
Fleet Retail Group Inc. (f/k/a Fleet Retail Finance, Inc.) dated
April 8, 2003 (included in Exhibit 10.10.1). |
| |
| |
10 |
.10.3 |
|
Security Agreement in favor of Mississippi Valley Capital, LLC
dated January 31, 2003, (included in Exhibit 10.10.1). |
| |
| |
10 |
.10.4 |
|
Second Amendment to Amended and Restated Loan and Security
Agreement dated as of November 26, 2003 by and between
Fleet Retail Group, Inc. (f/k/a Fleet Retail Finance, Inc.) and
the Company (incorporated by reference to Exhibit 10.17.4
of Amendment No. 2 to the Company’s Registration
Statement on Form S-1 (File No. 333-86332), filed
December 4, 2003). |
| |
| |
10 |
.10.5 |
|
Third Amendment and Waiver and Consent Agreement dated
January 2, 2004 by and between Fleet Retail Group, Inc.
(f/k/a Fleet Retail Finance, Inc.) and the Company (incorporated
by reference to Exhibit 10.17.5 of Amendment No. 3 to
the Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed January 8, 2004). |
| |
| |
10 |
.10.6 |
|
Limited Guaranty of Collection by Peter Edison in favor of Fleet
Retail Group, Inc. (f/k/a Fleet Retail Finance, Inc.) dated as
of January 18, 2000 (incorporated by reference to
Exhibit 10.17.6 of Amendment No. 5 to the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed January 30, 2004). |
| |
| |
10 |
.10.7 |
|
Fourth Amendment and Waiver and Consent Agreement dated
January 28, 2004 by and between Fleet Retail Group, Inc.
(f/k/a Fleet Retail Finance, Inc.) and the Company (incorporated
by reference to Exhibit 10.17.7 of Amendment No. 5 to
the Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed January 30, 2004). |
| |
| |
10 |
.10.8 |
|
Form of Revolving Credit Note in favor of Fleet Retail Group,
Inc. (f/k/a Fleet Retail Finance, Inc.) dated as of
January 18, 2000 (included in Exhibit 10.10). |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
| |
10 |
.10.9 |
|
Confirmation and Release of Guaranty Agreement by Peter Edison
dated as of June 11, 2002 (included in Exhibit 10.10). |
| |
| |
10 |
.10.10 |
|
Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 1, 2004, by and between
Fleet Retail Group, Inc. (f/k/a Fleet Retail Finance Inc.) and
the Company (incorporated by reference to Exhibit 10.17.10
to the Company’s Current Report on Form 8-K, filed
September 10, 2004). |
| |
| |
10 |
.10.11 |
|
Termination of Guaranty between Peter A. Edison and Fleet Retail
Group, Inc. (f/k/a Fleet Retail Finance Inc.) (incorporated by
reference to Exhibit 10.17.11 to the Company’s Current
Report on Form 8-K, filed September 10, 2004). |
| |
| |
10 |
.11 |
|
Tax Indemnification Agreement among the Company and its
shareholders dated January 3, 2004. (incorporated by
reference to Exhibit 10.18 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). |
| |
| |
10 |
.12 |
|
Software License Agreement dated June 3, 1999 by and
between JDA Software, Inc. and the Company (incorporated by
reference to Exhibit 10.19 of Amendment No. 4 to the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.13 |
|
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 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.14 |
|
Employment Agreement dated December 12, 2003 by and between
the Company and Joe Vander Pluym (incorporated by reference to
Exhibit 10.21 of Amendment No. 4 to the Company’s
Registration Statement on Form S-1 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.15 |
|
Employment Agreement dated December 12, 2003 by and between
the Company and Mark Ianni (incorporated by reference to
Exhibit 10.22 of Amendment No. 4 to the Company’s
Registration Statement on Form S-1 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.16 |
|
Employment Agreement dated December 17, 2003 by and between
the Company and Lawrence Spanley, Jr. (incorporated by
reference to Exhibit 10.23 of Amendment No. 4 to the
Company’s Registration Statement on Form S-1 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.17 |
|
Amendment to Software License Agreement and Software Support
Agreement dated June 4, 1999 by and between JDA Software,
Inc. and the Company (incorporated by reference to
Exhibit 10.30 of Amendment No. 4 to the Company’s
Registration Statement on Form S-1 (File
No. 333-86332), filed January 20, 2004). |
| |
| |
10 |
.18 |
|
Financial Advisor Agreement, dated February 4, 2004, by and
between Ryan Beck & Co., Inc. and the Company.
(incorporated by reference to Exhibit 10.31 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)). |
| |
| |
10 |
.19 |
|
Underwriting Agreement, dated February 4, 2004, by and
among the Company, Ryan Beck & Co. Inc. and BB&T
Capital Markets, a Division of Scott & Stringfellow
Inc., as representatives of the underwriters named therein.
(incorporated by reference to Exhibit 10.32 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)). |
| |
| |
10 |
.20 |
|
Letter to Peter Edison dated March 1, 2004 outlining the
2004 bonus levels. (incorporated by reference to
Exhibit 10.33 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)). |
| |
| |
10 |
.21 |
|
Letter to Michele Bergerac dated March 1, 2004 outlining
the 2004 bonus levels. (incorporated by reference to
Exhibit 10.34 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)). |
| |
| |
10 |
.22 |
|
Letter to Mark Ianni dated March 1, 2004 outlining the 2004
bonus levels. (incorporated by reference to Exhibit 10.35
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)). |
| |
| |
10 |
.23 |
|
Letter to Stan Tusman dated March 1, 2004 outlining the
2004 bonus levels. (incorporated by reference to
Exhibit 10.36 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)). |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
| |
10 |
.24 |
|
Letter to Joe Vander Pluym dated March 1, 2004 outlining
the 2004 bonus levels. (incorporated by reference to
Exhibit 10.37 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)). |
| |
| |
10 |
.25 |
|
Letter to Larry Spanley dated March 1, 2004 outlining the
2004 bonus levels. (incorporated by reference to
Exhibit 10.38 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)). |
| |
| |
11 |
.1 |
|
Statement regarding computation of per share earnings
(incorporated by reference from Note 16 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). |
INDEX TO FINANCIAL STATEMENTS
Years Ended January 3, 2004 and January 1, 2005
Contents
F-1
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 1, 2005
and January 3, 2004 and the related statements of
operations, shareholders’ equity, and cash flows for each
of the three years in the period ended January 1, 2005.
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 audit 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 1, 2005 and
January 3, 2004 and the results of its operations and its
cash flows for each of the three years in the period ended
January 1, 2005 in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 2002
the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
St. Louis, Missouri
March 9, 2005, except for
of Note 20, as to which the
dates are March 10, 2005 and
March 31, 2005, respectively
F-2
BAKERS FOOTWEAR GROUP, INC.
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
| |
|
January 3, | |
|
January 1, | |
| |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
574,475 |
|
|
$ |
6,675,135 |
|
| |
Accounts receivable
|
|
|
1,051,854 |
|
|
|
1,237,450 |
|
| |
Other receivables
|
|
|
186,011 |
|
|
|
645,855 |
|
| |
Inventories
|
|
|
12,780,256 |
|
|
|
16,790,753 |
|
| |
Prepaid expenses and other current assets
|
|
|
1,029,908 |
|
|
|
1,048,347 |
|
| |
Deferred income taxes
|
|
|
— |
|
|
|
1,904,963 |
|
| |
|
|
|
|
|
|
|
Total current assets
|
|
|
15,622,504 |
|
|
|
28,302,503 |
|
|
Property and equipment, net
|
|
|
13,395,838 |
|
|
|
20,714,211 |
|
|
Other assets
|
|
|
922,825 |
|
|
|
353,994 |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
29,941,167 |
|
|
$ |
49,370,708 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
3,529,652 |
|
|
$ |
6,662,044 |
|
| |
Accrued expenses
|
|
|
5,986,873 |
|
|
|
7,457,043 |
|
| |
Sales tax payable
|
|
|
1,257,294 |
|
|
|
1,422,716 |
|
| |
Deferred income
|
|
|
809,122 |
|
|
|
914,814 |
|
| |
Revolving credit agreement
|
|
|
2,169,474 |
|
|
|
— |
|
| |
Class A stock purchase warrants
|
|
|
837,500 |
|
|
|
— |
|
| |
Class A stock redemption obligation
|
|
|
210,799 |
|
|
|
— |
|
| |
Current maturities of capital lease obligations
|
|
|
947,332 |
|
|
|
667,698 |
|
| |
Current maturities of long-term subordinated debt
|
|
|
645,501 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,393,547 |
|
|
|
17,124,315 |
|
|
Long-term subordinated debt, less current maturities
|
|
|
214,409 |
|
|
|
— |
|
|
Obligations under capital leases, less current maturities
|
|
|
1,347,112 |
|
|
|
679,414 |
|
|
Accrued rent liabilities
|
|
|
2,597,770 |
|
|
|
3,686,119 |
|
|
Deferred income taxes
|
|
|
— |
|
|
|
806,323 |
|
|
Class A stock purchase warrants
|
|
|
— |
|
|
|
— |
|
|
Class A stock redemption obligation
|
|
|
1,178,527 |
|
|
|
— |
|
|
Class B stock redemption obligation
|
|
|
455,316 |
|
|
|
— |
|
|
Subordinated convertible debentures
|
|
|
4,500,000 |
|
|
|
— |
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.0001 par value; 5,000,000 shares
authorized, no shares outstanding
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.0001 par value; 40,000,000 shares
authorized, 5,102,481 shares outstanding at January 1,
2005
|
|
|
— |
|
|
|
510 |
|
| |
Class A stock, $0.001 par value; 3,000,000 shares
authorized, 1,426,188 shares outstanding at January 3,
2004
|
|
|
1,426 |
|
|
|
— |
|
| |
Class B stock, $0.001 par value; 500,000 shares
authorized, no shares outstanding
|
|
|
— |
|
|
|
— |
|
| |
Class C stock, $0.001 par value; 1,500,000 shares
authorized, no shares outstanding
|
|
|
— |
|
|
|
— |
|
| |
Additional paid-in capital
|
|
|
3,756,814 |
|
|
|
25,623,630 |
|
| |
Retained earnings (accumulated deficit)
|
|
|
(503,754 |
) |
|
|
1,450,397 |
|
| |
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
3,254,486 |
|
|
|
27,074,537 |
|
| |
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$ |
29,941,167 |
|
|
$ |
49,370,708 |
|
| |
|
|
|
|
|
|
See accompanying notes.
F-3
BAKERS FOOTWEAR GROUP, INC.
STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
151,147,810 |
|
|
$ |
148,223,553 |
|
|
$ |
150,514,663 |
|
|
Cost of merchandise sold, occupancy, and buying expenses
|
|
|
106,353,316 |
|
|
|
103,396,593 |
|
|
|
103,866,865 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
44,794,494 |
|
|
|
44,826,960 |
|
|
|
46,647,798 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
|
30,836,538 |
|
|
|
29,599,090 |
|
|
|
31,366,210 |
|
| |
General and administrative
|
|
|
11,178,931 |
|
|
|
11,454,347 |
|
|
|
13,529,986 |
|
| |
Loss on disposal of property and equipment
|
|
|
95,785 |
|
|
|
188,629 |
|
|
|
475,405 |
|
| |
Impairment of long-lived assets
|
|
|
120,114 |
|
|
|
127,133 |
|
|
|
202,801 |
|
| |
Write-off of deferred initial public offering costs
|
|
|
1,708,466 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
854,660 |
|
|
|
3,457,761 |
|
|
|
1,073,396 |
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense
|
|
|
(1,626,306 |
) |
|
|
(1,671,739 |
) |
|
|
(936,607 |
) |
| |
State income tax (expense) benefit
|
|
|
163,645 |
|
|
|
(67,819 |
) |
|
|
— |
|
| |
Other income (expense), net
|
|
|
(106,796 |
) |
|
|
(88,297 |
) |
|
|
328,744 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
and income taxes
|
|
|
(714,797 |
) |
|
|
1,629,906 |
|
|
|
465,533 |
|
|
Benefit from income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(962,468 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
|
(714,797 |
) |
|
|
1,629,906 |
|
|
|
1,428,001 |
|
|
Cumulative effect of change in accounting
|
|
|
2,774,899 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,060,102 |
|
|
$ |
1,629,906 |
|
|
$ |
1,428,001 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
1.36 |
|
|
$ |
0.90 |
|
|
$ |
0.31 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.96 |
|
|
$ |
0.77 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma income tax information (Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) before cumulative effect of change in accounting
and income taxes
|
|
$ |
(878,442 |
) |
|
$ |
1,697,725 |
|
|
|
|
|
| |
Provision for (benefit from) income taxes
|
|
|
(302,363 |
) |
|
|
657,758 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
|
(576,079 |
) |
|
|
1,039,967 |
|
|
|
|
|
|
Cumulative effect of change in accounting, net of taxes
|
|
|
1,763,934 |
|
|
|
— |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,187,855 |
|
|
$ |
1,039,967 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.75 |
|
|
$ |
0.49 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.54 |
|
|
$ |
0.47 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
BAKERS FOOTWEAR GROUP, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Class A, Class B, and | |
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
Class C Common Stock | |
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
Retained | |
|
|
| |
|
Shares | |
|
|
|
Shares | |
|
|
|
Additional | |
|
Deferred | |
|
Earnings | |
|
|
| |
|
Issued and | |
|
|
|
Issued and | |
|
|
|
Paid-In | |
|
Stock | |
|
(Accumulated | |
|
|
| |
|
Outstanding | |
|
Amount | |
|
Outstanding | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Deficit) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at January 5, 2002
|
|
|
— |
|
|
$ |
— |
|
|
|
1,426,188 |
|
|
$ |
1,426 |
|
|
$ |
3,608,740 |
|
|
$ |
(371,286 |
) |
|
$ |
(1,840,550 |
) |
|
$ |
1,398,330 |
|
| |
Distributions to shareholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,820,172 |
) |
|
|
(1,820,172 |
) |
| |
Compensation cost from stock option grants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
243,665 |
|
|
|
— |
|
|
|
243,665 |
|
| |
Accretion of Class A redeemable stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(55,114 |
) |
|
|
(55,114 |
) |
| |
Accretion of Class B redeemable stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(58,575 |
) |
|
|
(58,575 |
) |
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,060,102 |
|
|
|
2,060,102 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 4, 2003
|
|
|
— |
|
|
|
— |
|
|
|
1,426,188 |
|
|
|
1,426 |
|
|
|
3,608,740 |
|
|
|
(127,621 |
) |
|
|
(1,714,309 |
) |
|
|
1,768,236 |
|
| |
Distributions to shareholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(75,949 |
) |
|
|
(75,949 |
) |
| |
Compensation cost from stock option grants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
148,074 |
|
|
|
127,621 |
|
|
|
— |
|
|
|
275,695 |
|
| |
Accretion of Class A redeemable stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(126,629 |
) |
|
|
(126,629 |
) |
| |
Accretion of Class B redeemable stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(216,773 |
) |
|
|
(216,773 |
) |
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,629,906 |
|
|
|
1,629,906 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2004
|
|
|
— |
|
|
|
— |
|
|
|
1,426,188 |
|
|
|
1,426 |
|
|
|
3,756,814 |
|
|
|
— |
|
|
|
(503,754 |
) |
|
|
3,254,486 |
|
|
Adjust accumulated deficit and shareholder distributions to
reflect conversion from S Corporation to C Corporation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(442,140 |
) |
|
|
— |
|
|
|
503,754 |
|
|
|
61,614 |
|
| |
Accretion of Class A redeemable stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(116,854 |
) |
|
|
(116,854 |
) |
| |
Accretion of Class B redeemable stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
139,250 |
|
|
|
139,250 |
|
| |
Exchange of Class A and B common stock for new common
stock
|
|
|
1,965,150 |
|
|
|
197 |
|
|
|
(1,426,188 |
) |
|
|
(1,426 |
) |
|
|
1,823,475 |
|
|
|
— |
|
|
|
— |
|
|
|
1,822,246 |
|
| |
Shares issued in connection with Initial Public Offering
|
|
|
2,484,000 |
|
|
|
248 |
|
|
|
— |
|
|
|
— |
|
|
|
15,530,745 |
|
|
|
— |
|
|
|
— |
|
|
|
15,530,993 |
|
| |
Conversion of convertible debentures into common stock
|
|
|
653,331 |
|
|
|
65 |
|
|
|
— |
|
|
|
— |
|
|
|
4,954,736 |
|
|
|
— |
|
|
|
— |
|
|
|
4,954,801 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,428,001 |
|
|
|
1,428,001 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005
|
|
|
5,102,481 |
|
|
$ |
510 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
25,623,630 |
|
|
$ |
— |
|
|
$ |
1,450,397 |
|
|
$ |
27,074,537 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
BAKERS FOOTWEAR GROUP, INC.
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,060,102 |
|
|
$ |
1,629,906 |
|
|
$ |
1,428,001 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cumulative effect of change in accounting
|
|
|
(2,774,899 |
) |
|
|
— |
|
|
|
— |
|
| |
Depreciation and amortization
|
|
|
2,595,842 |
|
|
|
2,941,110 |
|
|
|
3,368,834 |
|
| |
Deferred income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(1,098,640 |
) |
| |
Amortization of deferred debt issuance costs
|
|
|
92,286 |
|
|
|
20,415 |
|
|
|
— |
|
| |
Stock-based compensation expense
|
|
|
243,665 |
|
|
|
275,695 |
|
|
|
— |
|
| |
Beneficial conversion of subordinated debentures
|
|
|
— |
|
|
|
— |
|
|
|
163,333 |
|
| |
Amortization of debt discount
|
|
|
124,160 |
|
|
|
12,447 |
|
|
|
9,820 |
|
| |
Accretion of stock warrants
|
|
|
140,094 |
|
|
|
150,640 |
|
|
|
12,500 |
|
| |
Impairment of long-lived assets
|
|
|
120,114 |
|
|
|
127,133 |
|
|
|
202,801 |
|
| |
Loss on disposal of property and equipment
|
|
|
95,785 |
|
|
|
188,629 |
|
|
|
475,405 |
|
| |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable and other receivables
|
|
|
233,175 |
|
|
|
(243,609 |
) |
|
|
(645,441 |
) |
| |
|
Inventories
|
|
|
(2,989,356 |
) |
|
|
1,499,346 |
|
|
|
(4,010,497 |
) |
| |
|
Prepaid expenses and other current assets
|
|
|
(48,630 |
) |
|
|
(399,124 |
) |
|
|
(18,439 |
) |
| |
|
Other assets
|
|
|
(90,853 |
) |
|
|
(454,483 |
) |
|
|
510,369 |
|
| |
|
Accounts payable
|
|
|
(41,264 |
) |
|
|
562,712 |
|
|
|
3,132,392 |
|
| |
|
Accrued expenses and deferred income
|
|
|
(618,421 |
) |
|
|
2,151,187 |
|
|
|
2,156,394 |
|
| |
|
Accrued rent liabilities
|
|
|
905,817 |
|
|
|
452,912 |
|
|
|
1,088,349 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
47,617 |
|
|
|
8,914,916 |
|
|
|
6,775,181 |
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(7,160,161 |
) |
|
|
(2,404,538 |
) |
|
|
(11,409,438 |
) |
|
Proceeds from sale of property and equipment
|
|
|
1,793 |
|
|
|
2,914 |
|
|
|
44,025 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,158,368 |
) |
|
|
(2,401,624 |
) |
|
|
(11,365,413 |
) |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances (repayments) under revolving notes payable
|
|
|
4,391,942 |
|
|
|
(4,873,744 |
) |
|
|
(2,169,474 |
) |
|
Proceeds from issuance of subordinated convertible debentures
|
|
|
4,900,000 |
|
|
|
— |
|
|
|
— |
|
|
Net proceeds from Initial Public Offering
|
|
|
— |
|
|
|
— |
|
|
|
15,530,993 |
|
|
Payments to retire stock warrants
|
|
|
— |
|
|
|
— |
|
|
|
(850,000 |
) |
|
Principal payments under capital lease obligations
|
|
|
(591,000 |
) |
|
|
(844,223 |
) |
|
|
(947,332 |
) |
|
Principal payments of subordinated debt
|
|
|
(265,321 |
) |
|
|
(219,901 |
) |
|
|
(859,910 |
) |
|
Cash distributions to shareholders
|
|
|
(1,820,172 |
) |
|
|
(949 |
) |
|
|
(13,385 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
6,615,449 |
|
|
|
(5,938,817 |
) |
|
|
10,690,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(495,302 |
) |
|
|
574,475 |
|
|
|
6,100,660 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
495,302 |
|
|
|
— |
|
|
|
574,475 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
— |
|
|
$ |
574,475 |
|
|
$ |
6,675,135 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for state income taxes
|
|
$ |
106,685 |
|
|
$ |
31,126 |
|
|
$ |
142,735 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
1,019,404 |
|
|
$ |
1,650,270 |
|
|
$ |
776,580 |
|
| |
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$ |
718,804 |
|
|
$ |
1,021,500 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
January 1, 2005
|
|
| 1. |
Summary of Significant Accounting Policies |
Bakers Footwear Group, Inc., formerly Weiss and Neuman Shoe Co.,
(the Company) was incorporated in 1926 and is engaged in the
sale of shoes and accessories through over 200 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, and sandals.
As discussed in Note 2, on February 10, 2004, the
Company completed an initial public offering (IPO).
The Company’s accounting period is based upon a retail
calendar, ending on the Saturday nearest January 31. The
Company’s fiscal year ends four weeks prior to a retail
calendar. The fiscal years ended January 4, 2003,
January 3, 2004, and January 1, 2005 were 52-week
periods.
As discussed in Note 20, on March 10, 2005, the
Company changed its fiscal year end to the standard retail
calendar, ending on the Saturday nearest January 31. After a
four week transition period ending January 29, 2005, the
Company’s next fiscal year end will be January 28,
2006. This change in fiscal years has no impact on the
presentation of these financial statements.
The preparation of the financial statements in conformity with
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.
Certain reclassifications of prior year presentations have been
made to conform to the current year presentation.
|
|
|
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
mutual fund as well as in its depository accounts.
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. Permanent
markdowns are recorded to reflect expected adjustments to retail
prices in accordance with the retail inventory method. In
determining permanent markdowns, 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,
F-7
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
among other factors. The ultimate amount realized from the sale
of inventories could differ materially from management’s
estimates.
Property and equipment are stated at cost. Costs related to
software developed for internal use, including internal payroll
costs, are capitalized in accordance with the American Institute
of Certified Public Accountants’ Statement of Position
98-1, Accounting for the Costs of Computer Software Developed
for or Obtained for Internal Use. Depreciation and
amortization is calculated using the straight-line method over
the estimated useful lives ranging from three years 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 |
At least annually, management determines whether any property or
equipment or any other assets have been impaired based on the
criteria established in Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Based on these
criteria, long-lived assets to be “held and used” are
reviewed for impairment when events or circumstances exist that
indicate the carrying amount of those assets may not be
recoverable.
The Company determines the fair value of these assets using the
present value of the estimated future cash flows over the
remaining store lease period. During the years ended
January 4, 2003, January 3, 2004 and January 1,
2005, the Company recorded $120,114, $127,133, and $202,801,
respectively, in noncash charges to earnings related to the
impairment of furniture, fixtures, and equipment, leasehold
improvements, and other assets.
Retail sales are recognized at the point of sale and are
recorded net of returns and exclude sales tax. Non-store sales
through the Company’s Web site are recognized as revenue at
the point when title passes. Title passes to the customer at the
time the product is shipped to the customer on an FOB shipping
point basis. The Company does not record an allowance for sales
returns due to immateriality.
Cost of merchandise sold includes the cost of merchandise,
buying costs, and occupancy costs.
The Company leases its store premises and its headquarters
facilities under operating leases. Many leases entered into by
the Company include options under which the Company may extend
the lease term beyond the initial commitment period, subject to
terms agreed to at lease inception. Some leases also include
early termination options which can be exercised under specific
conditions.
The Company recognizes rent expense for each lease on the
straight line basis, first aggregating all future minimum rent
payments including any predetermined fixed escalations of the
minimum rentals, net of any negotiated landlord allowances and
exclusive of any executory costs, and then 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. The Company records the
difference between the recognized rent expense and amounts
payable or receivable under the leases as accrued rent
liabilities on the accompanying balance sheets.
F-8
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Many of the leases covering retail stores require contingent
rentals based on retail sales volume in addition to the minimum
monthly rental charge. The Company records expense for
contingent rentals during the period in which the retail sales
volume exceeded the respective targets or when management
determines that it is probable that such targets will be met.
SFAS No. 123, Accounting for Stock-Based
Compensation, establishes the use of the fair value-based
method of accounting for all stock-based compensation
arrangements. SFAS No. 123 permits companies to use
the intrinsic value accounting method specified in Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations
to account for stock-based employee compensation arrangements.
The Company uses the intrinsic value-based method to account for
stock-based employee compensation arrangements and complies with
the disclosure provisions of SFAS No. 123.
Had compensation cost for all options been determined based on
the grant date fair values of the options in accordance with
SFAS No. 123, net income and earnings per share would
have been adjusted to the pro forma amounts indicated below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Net income as reported
|
|
$ |
2,060,102 |
|
|
$ |
1,629,906 |
|
|
$ |
1,428,001 |
|
|
Add: Stock based compensation expense included in net income as
reported
|
|
|
243,665 |
|
|
|
275,695 |
|
|
|
— |
|
|
Deduct: Stock based compensation expense determined under fair
value method, net of related income tax effect
|
|
|
(243,665 |
) |
|
|
(275,695 |
) |
|
|
(366,030 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
2,060,102 |
|
|
$ |
1,629,906 |
|
|
$ |
1,061,971 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
1.36 |
|
|
$ |
0.90 |
|
|
$ |
0.31 |
|
| |
Pro forma
|
|
$ |
1.36 |
|
|
$ |
0.90 |
|
|
$ |
0.23 |
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.96 |
|
|
$ |
0.77 |
|
|
$ |
0.28 |
|
| |
Pro forma
|
|
$ |
0.96 |
|
|
$ |
0.77 |
|
|
$ |
0.21 |
|
The weighted-average fair value of options granted during the
year ended January 1, 2005 was $4.68. The fair value of
these options was estimated at grant date using the
Black-Scholes option pricing model assuming no dividends, a
risk-free interest rate of 3%, expected volatility of 64%, and
expected option life of 6 years.
The fair value of options granted in years prior to the IPO was
estimated using the minimum value option pricing model, which
does not consider stock price volatility, because the Company
did not have actively traded equity securities For the year
ended January 3, 2004, the fair value of the Company’s
stock-based awards was estimated assuming no dividends, a
risk-free interest rate of 4%, and expected option life of
4 years.
The effect of applying SFAS No. 123 on pro forma net
income is not necessarily representative of the effects on
reported net income for future periods due to, among other
things, the vesting period of the stock options and the fair
value of additional stock options in future years.
F-9
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Marketing Expense
The Company expenses costs of marketing and advertising,
including the cost of newspaper and magazine advertising,
promotional materials, in-store displays, and point-of-sale
marketing as advertising expense, when incurred. Consideration
received from vendors in connection with the promotion of their
products is netted against advertising expense. Marketing and
advertising expense totaled $927,044 $469,242, and $555,940 for
the years ended January 4, 2003 January 3, 2004, and
January 1, 2005, respectively.
Offering Costs
The Company initiated its efforts to file a registration
statement with the Securities and Exchange Commission relating
to an IPO in April 2002. The Company determined that it would
delay the IPO for a period in excess of 90 days and, as a
result, during the year ended January 4, 2003, wrote off
$1,708,466 of costs initially deferred in connection with the
registration process.
At January 3, 2004 the Company had deferred $733,933 of
costs incurred to date, included in other assets in the
accompanying balance sheet, related to the resumption of the IPO
process. Upon consummation of the IPO on February 10, 2004
these costs, along with IPO costs incurred subsequent to
January 3, 2004, were charged against additional paid-in
capital. See Note 2 for discussion of the completion of the
IPO.
Earnings per Share
Basic earnings per common share are computed using the weighted
average number of common shares outstanding during the year.
Diluted earnings per common share are computed using the
weighted average number of common shares and potential dilutive
securities that were outstanding during the period. Potential
dilutive securities consist of outstanding stock options,
warrants, convertible debentures, and the effect of treating the
redeemable Class A and Class B stock as permanent
capital (see Note 14).
Income Taxes
Prior to January 4, 2004, the Company elected, by the
consent of its shareholders, to be taxed under the provisions of
Subchapter S of the Internal Revenue Code (the Code). Under the
Subchapter S provisions of the Code, the shareholders include
the Company’s operating results in their personal income
tax returns. Accordingly, through January 3, 2004, the
Company was not subject to federal and certain state corporate
income tax. However, the Company was subject to income taxes in
certain states in which it conducts business.
In connection with the IPO, effective January 4, 2004, the
Company elected, by the consent of its shareholders, to revoke
its status as an S corporation and become subject to
taxation as a C corporation. Disclosures regarding accounting
for income taxes as of and for the year ended January 1,
2005 are at Note 12.
The unaudited pro forma income tax information included in the
statements of operations and Note 13 is presented in
accordance with SFAS No. 109, Accounting for Income
Taxes, as if the Company were a C corporation and thus
subject to federal and certain state income taxes for periods
prior to January 4, 2004.
Distributions to Shareholders
Through January 3, 2004, the Company was an
S Corporation and the shareholders, rather than the
Company, were responsible for federal and most state and local
income tax liabilities related to the taxable income generated
by the Company. The Company’s policy was to make periodic
distributions to its shareholders in amounts estimated to be
sufficient to allow the shareholders to pay the income taxes on
their proportionate share of the Company’s taxable income.
In certain states where the Company has operations, the Company
made such shareholder distributions in connection with filing
composite income tax returns on
F-10
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
behalf of the shareholders. Total distributions to shareholders
were $1,820,172 and $75,949 for the years ended January 4,
2003 and January 3, 2004, respectively. Distributions
recorded for the year ended January 3, 2004 included
accrued distributions of $75,000 at January 3, 2004 related
to composite state income tax returns to be filed for the year
then ended. Upon filing final S Corporation income tax
returns for the year ended January 3, 2004, the Company
determined that distributions were over accrued at
January 3, 2004 by $61,614, and, as a result, the Company
adjusted paid-in capital in connection with the conversion to a
C corporation by that amount.
Store Lease Acquisitions
In March 2002, the Company completed the acquisition of 33 store
leases from SLJ Retail, LLC (SLJ) for a purchase price of
$1,800,000. The assets purchased consisted of all of the
seller’s leasehold interests relating to the 33 stores, as
well as all furniture, fixtures, and equipment located in the
respective stores. The total consideration paid was allocated to
leasehold improvements and fixtures.
Deferred Income
The Company has a frequent buying program where customers can
purchase a frequent buying card entitling them to a 10% discount
on all purchases for a 12-month period. The Company ratably
recognizes the revenue from the sale of the card over the
12-month life of the card and records the related discounts at
the point of sale when the card is used.
The Company recognized income of $597,118, $1,144,210, and
$1,671,282, for the years ended January 4, 2003,
January 3, 2004, and January 1, 2005, 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 $791,114, $1,489,160, and $2,032,178 for the years ended
January 4, 2003, January 3, 2004, and January 1,
2005, 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. 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
$70,151, $93,017, and $201,329 for the years ended
January 4, 2003, January 3, 2004, and January 1. 2005,
respectively.
Goodwill
On June 22, 1999, the Company acquired the assets,
primarily inventory and furniture, fixtures, and equipment, of
198 Bakers locations (including Leeds and Wild Pair stores)
located throughout the United States from Edison Brothers
Stores, Inc. for $8,977,098 in cash and the assumption of
$353,000 in liabilities. The acquisition was accounted for using
the purchase method. Accordingly, the assets acquired were
adjusted to their fair values as of the acquisition date.
Because the fair values of the assets acquired exceeded the
consideration paid, including $118,000 in acquisition-related
expenses, the value of all noncurrent assets was reduced to
zero, and the Company recorded a deferred credit of $5,562,568
representing the excess of fair value of assets acquired over
the cost of the acquisition.
F-11
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The excess of acquired net assets over cost was amortized using
the straight-line method over a period of five years until the
adoption of SFAS No. 142 in 2002. The Company recorded
as income its unamortized deferred credit of $2,774,899 in 2002
as a cumulative effect of a change in accounting principle.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), a
revision of SFAS No. 123, “Accounting for
Stock-Based Compensation.” SFAS 123R will require the
Company to, among other things, measure employee stock-based
compensation awards where applicable using a fair value method
and record related expense in the Company’s consolidated
financial statements. The provisions of SFAS 123R are
effective for the first interim or annual reporting period that
begins after June 15, 2005; therefore, the Company will
adopt the new requirements no later than the beginning of its
third quarter of fiscal 2005. Adoption of the expensing
requirements will reduce the Company’s reported earnings.
Management is currently evaluating the specific impacts of
adoption, which include whether the Company should adopt the
requirements on a retrospective basis and which valuation model
is most appropriate.
|
|
| 2. |
Initial Public Offering |
On February 10, 2004, the Company completed its IPO and
sold 2,160,000 shares of common stock at $7.75 per
share. On March 12, 2004, the Company sold an additional
324,000 shares of common stock at $7.75 per share when
the underwriters exercised their over-allotment option. The net
proceeds to the Company were approximately $15,531,000 after
deducting the underwriting discount and other expenses incurred
in connection with the IPO.
The Company used the proceeds from the IPO to repay the
$5,680,743 balance on its revolving credit agreement, repay
$859,910 of subordinated debt, and repurchase stock warrants for
$850,000. The Company used the remaining proceeds for working
capital purposes, primarily for the purchase of inventory in the
ordinary course of business and capital expenditures.
Effective with the IPO, all shares of the Company’s
existing Class A, Class B, and Class C common
stock were exchanged for shares of new common stock on a one to
one basis, excluding fractional shares, and the Company’s
related repurchase obligations were terminated.
The Company issued stock purchase warrants covering
216,000 shares of common stock with an exercise price of
$12.7875 per share, subject to antidilution adjustments, to
representatives of the underwriters. The warrants became
exercisable on February 10, 2005 and expire on
February 10, 2009. At the same time, the Company entered
into a two-year financial advisory agreement with one of the
representatives of the underwriters in connection with any
strategic or financial transactions.
The subordinated convertible debentures were converted into
653,331 shares of common stock at a conversion rate of
$7.50 per share. The Company recognized a beneficial
conversion expense of $163,333 for the difference between the
$7.75 IPO price and the $7.50 conversion price.
F-12
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
|
|
| 3. |
Property and Equipment |
Property and equipment consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Estimated Useful | |
|
January 3, | |
|
January 1, | |
| |
|
Lives | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Furniture, fixtures, and equipment
|
|
|
3-6 years |
|
|
$ |
9,876,056 |
|
|
$ |
12,903,343 |
|
|
Leasehold improvements
|
|
|
up to 10 years |
|
|
|
8,711,747 |
|
|
|
14,266,954 |
|
|
Computer equipment and software
|
|
|
3 years |
|
|
|
2,616,003 |
|
|
|
3,006,633 |
|
|
Construction in progress
|
|
|
|
|
|
|
390,251 |
|
|
|
1,683,114 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
21,594,057 |
|
|
|
31,860,044 |
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
8,198,219 |
|
|
|
11,145,833 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
13,395,838 |
|
|
$ |
20,714,211 |
|
| |
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment was
$2,595,842, $2,941,110, and $3,368,834 for the years ended
January 4, 2003, January 3, 2004, and January 1,
2005, respectively.
Accrued expenses consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
January 3, | |
|
January 1, | |
| |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
Employee compensation and benefits
|
|
$ |
2,884,291 |
|
|
$ |
2,716,204 |
|
|
Accrued rent
|
|
|
414,234 |
|
|
|
245,346 |
|
|
Other
|
|
|
2,688,348 |
|
|
|
4,495,493 |
|
| |
|
|
|
|
|
|
| |
|
$ |
5,986,873 |
|
|
$ |
7,457,043 |
|
| |
|
|
|
|
|
|
|
|
| 5. |
Capital Lease Obligations |
Assets under capital leases totaling $4,218,660 and $4,134,925
at January 3, 2004 and January 1, 2005, respectively
relate primarily to equipment obtained to support the
Company’s integrated “point of sale” system and
are included as a component of property and equipment.
Accumulated amortization on assets capitalized under capital
leases totals $1,463,335 and $2,259,210 at January 3, 2004
and January 1, 2005, respectively.
Obligations under capital leases were $2,294,444 and $1,347,112
at January 3, 2004 and January 1, 2005, respectively.
Future minimum lease payments at January 1, 2005 under
capital leases are as follows:
| |
|
|
|
|
|
|
Fiscal year:
|
|
|
|
|
| |
2005
|
|
$ |
935,051 |
|
| |
2006
|
|
|
536,507 |
|
| |
2007
|
|
|
256,299 |
|
| |
2008
|
|
|
75,023 |
|
| |
|
|
|
|
Total minimum lease payments
|
|
|
1,802,880 |
|
|
Less amount representing interest
|
|
|
455,768 |
|
| |
|
|
|
|
Present value of minimum lease payments (including current
portion of $667,698)
|
|
$ |
1,347,112 |
|
| |
|
|
|
F-13
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
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. Future minimum lease payments, excluding
executory costs, at January 1, 2005 are as follows:
| |
|
|
|
|
|
|
Fiscal year:
|
|
|
|
|
| |
2005
|
|
|
18,867,539 |
|
| |
2006
|
|
|
18,064,804 |
|
| |
2007
|
|
|
16,544,187 |
|
| |
2008
|
|
|
15,597,201 |
|
| |
2009
|
|
|
14,453,170 |
|
| |
Thereafter
|
|
|
54,614,762 |
|
| |
|
|
|
| |
|
$ |
138,141,663 |
|
| |
|
|
|
Rent expense, including occupancy costs, was $24,959,938,
$26,647,996, and $27,114,210 for the years ended January 4,
2003, January 3, 2004, and January 1, 2005,
respectively. Certain leases provide for contingent rent based
on sales. Contingent rent, a component of rent expense, was
$343,716, $326,059, and $265,641 for the years ended
January 4, 2003, January 3, 2004, and January 1,
2005, respectively.
|
|
| 7. |
Revolving Credit Agreement |
The Company has a revolving credit agreement with a commercial
bank. This agreement calls for a maximum line of credit of
$25,000,000 subject to the calculated borrowing base as defined
in the agreement. The revolving credit agreement matures on
August 31, 2008 and is secured by substantially all assets
of the Company. Interest is payable monthly at the bank’s
base rate (5.25% per annum at January 1, 2005). The
weighted average interest rate approximated 5.42% in 2002, 4.87%
in 2003, and 5.68% in 2004. An unused line fee of 0.25% per
annum is payable monthly based on the difference between
$25,000,000 and the average loan balance. At January 1,
2005, the Company has approximately $12,400,000 of unused
borrowing availability under the revolving credit agreement
based upon the Company’s borrowing base calculation. The
agreement has a restrictive financial covenant requiring the
Company to maintain borrowing availability greater than
$1,500,000.
The revolving credit agreement also provides that the Company
can fix the interest rate on a designated portion of the
outstanding balance for periods of at least 30 days based
on the LIBOR (London Interbank Offered Rate) plus 1.75% to 2.50%
by entering into a basis swap. Such swaps do not meet the
criteria for hedge accounting and accordingly, changes in the
fair value of the swaps are included in current results of
operations. The basis swaps entered into during 2002, 2003 and
2004 did not have a material effect on the financial statements.
From February 20, 2003 through February 20, 2004, the
Company’s revolving credit agreement provided for a
Sublimit Facility up to an additional $2,000,000, subject to
certain borrowing base restrictions as defined. There were no
amounts outstanding under the Sublimit Facility at
January 3, 2004.
The agreement allows up to $10,000,000 of letters of credit to
be outstanding, subject to the overall line limits. At
January 3, 2004 and January 1, 2005, the Company had
no outstanding letters of credit.
F-14
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following notes payable are subordinate to the revolving
credit agreement and are secured by substantially all assets of
the Company:
| |
|
|
|
|
|
| |
|
January 3, | |
| |
|
2004 | |
| |
|
| |
|
Subordinated note payable to Class B shareholders,
principal and interest payable in quarterly installments of
$30,000 up to $50,000 over the term of the loan, at 8% per
annum through January 2008. Secured by a $393,000 standby letter
of credit and personal guarantee of the principal shareholder.
This note was repaid in March 2004
|
|
$ |
359,910 |
|
|
Subordinated note payable, principal and interest, at
9% per annum, due January 31, 2003 Interest of $12,500
is payable quarterly. Note accretes to the original face amount
of $500,000 at January 31, 2003. This note was repaid in
March 2004
|
|
|
500,000 |
|
| |
|
|
|
| |
|
|
859,910 |
|
| |
Less current maturities
|
|
|
645,501 |
|
| |
|
|
|
| |
|
$ |
214,409 |
|
| |
|
|
|
On April 8, 2003, the Company entered into an amended and
restated subordinated note agreement and an amended and restated
warrant agreement which extended the maturity date of the
subordinated note payable and the Class A stock purchase
warrants to March 1, 2004. At January 4, 2003, the
subordinated note payable and the Class A stock purchase
warrants had balances of $487,553 and $686,860, respectively.
The subordinated note payable, with a face amount of $500,000,
bears interest at 10% per annum, payable quarterly. The
face amount of the note is payable at maturity. The amended and
restated warrant agreement provides for an increase in the
minimum repurchase amount of $150,000. The warrants are accreted
as interest expense, using the effective interest method to the
revised minimum repurchase amount of $850,000 over the remaining
term of the note. The revised minimum purchase amount of
$850,000 was paid in March 2004.
|
|
| 9. |
Subordinated Convertible Debentures |
Effective with the IPO, on February 10, 2004, the
subordinated convertible debentures discussed below converted
into 653,331 shares of the Company’s common stock.
On April 4, 2002, the Company issued $4,900,000 of
subordinated convertible debentures. Effective January 2,
2004, the Company exchanged these $4,900,000 principal
subordinated convertible debentures (existing convertible
debentures) for $4,900,000 principal subordinated convertible
debentures (new convertible debentures). The new convertible
debentures were recorded at fair value, or $4,500,000. In
connection with the extinguishment of the existing convertible
debentures, the Company wrote off the related unamortized debt
issuance costs and recognized an immaterial gain.
The new convertible debentures bear interest at 7%, increasing
to 9% on January 1, 2004 and 11% on January 1, 2005.
Interest is payable quarterly, in arrears. Principal is due and
payable on April 4, 2007 (the maturity date). The
Company’s periodic interest cost is determined using the
interest method assuming an April 4, 2007 maturity of the
debentures. The debentures automatically convert upon an IPO,
into the fixed number of 653,331 shares of common stock.
The new convertible debentures also provide for certain
registration rights in the event of an IPO.
|
|
| 10. |
Employee Benefit Plan |
The Company established a 401(k) savings plan effective
July 1, 2000, 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
F-15
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
a maximum amount allowed under Internal Revenue Service
guidelines. The plan provides for Company matching of employee
contributions on a discretionary basis. The Company contributed
$0, $35,000, and $20,862 for the years ended January 4,
2003, January 3, 2004, and January 1, 2005,
respectively.
|
|
| 11. |
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.
Effective January 4, 2004, the Company elected, by the
consent of its shareholders, to revoke its status as an
S corporation and become subject to taxation as a C
corporation. Under the S corporation provisions of the
Internal Revenue Code, the individual shareholders included
their pro rata portion of the Company’s taxable income in
their personal income tax returns. Accordingly, through
January 3, 2004, the Company was not subject to federal and
certain state corporate income taxes. However, the Company was
subject to income taxes in certain states in which it conducts
business.
As a result of this change in tax status, the Company recorded
deferred tax assets and liabilities for the temporary
differences between the book and tax basis of assets and
liabilities at the time of conversion. The Company recognized a
net benefit of $1,158,043 for the impact of these amounts as a
component of the provision for income taxes for the year ended
January 1, 2005.
Significant components of the benefit from income taxes on
income (loss) before cumulative effect of change in accounting
are as follows:
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
January 1, | |
| |
|
2005 | |
| |
|
| |
|
Current:
|
|
|
|
|
| |
Federal
|
|
$ |
— |
|
| |
State and local
|
|
|
136,172 |
|
| |
|
|
|
|
Total current
|
|
|
136,172 |
|
| |
|
|
|
|
Deferred:
|
|
|
|
|
| |
Federal
|
|
|
(868,365 |
) |
| |
State and local
|
|
|
(230,275 |
) |
| |
|
|
|
|
Total deferred (credit)
|
|
|
(1,098,640 |
) |
| |
|
|
|
|
Total benefit from income taxes
|
|
$ |
(962,468 |
) |
| |
|
|
|
F-16
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The differences between the benefit from income taxes at the
statutory U.S. federal income tax rate of 34% and those
reported in the statements of operations are as follows:
| |
|
|
|
|
| |
|
Year Ended | |
| |
|
January 1, | |
| |
|
2005 | |
| |
|
| |
|
Federal income tax at 34% Statutory rate
|
|
$ |
158,281 |
|
|
State and local income taxes, net of federal income taxes
|
|
|
14,787 |
|
|
Permanent differences
|
|
|
22,507 |
|
|
Conversion from S Corporation to C Corporation status
|
|
|
(1,158,043 |
) |
| |
|
|
|
|
Total benefit from income taxes
|
|
$ |
(962,468 |
) |
| |
|
|
|
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.
The Company has a net operating loss carryforward for federal
income tax purposes of approximately $1,925,000 that will expire
in 2024.
Components of the Company’s deferred tax assets and
liabilities are as follows:
| |
|
|
|
|
|
| |
|
January 1, | |
| |
|
2005 | |
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
| |
Net operating loss carryforward
|
|
$ |
732,028 |
|
| |
Vacation accrual
|
|
|
353,950 |
|
| |
Inventory
|
|
|
818,985 |
|
| |
Stock-based compensation
|
|
|
426,634 |
|
| |
Accrued rent
|
|
|
1,413,911 |
|
| |
|
|
|
|
Total deferred tax assets
|
|
|
3,745,508 |
|
| |
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
| |
Property and equipment
|
|
|
2,646,868 |
|
| |
|
|
|
|
Total deferred tax liabilities
|
|
|
2,646,868 |
|
| |
|
|
|
|
Net deferred tax assets
|
|
$ |
1,098,640 |
|
| |
|
|
|
13. Pro Forma Income
Taxes — Unaudited
Effective January 4, 2004, the Company revoked its
S corporation status and therefore will be subject to
corporate federal and state income taxes as a C corporation.
Because the Company was an S corporation through the year
ended January 3, 2004, deferred taxes have not been
reflected in the financial statements. The statements of
operations for the years ended January 4, 2003 and
January 3, 2004 include a pro forma adjustment for income
taxes that would have been recorded if the Company was a C
corporation, calculated in accordance with
SFAS No. 109.
The differences between pro forma income taxes at the statutory
U.S. federal income tax rate of 34% and those reported in
the statements of operations relate to the impact of state and
local taxes and, in periods prior to the adoption of
SFAS No. 142, the amortization of excess of acquired
net assets over cost.
F-17
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The unaudited pro forma information on the accompanying
statements of operations pertaining to income (loss) before
cumulative effect of change in accounting and income taxes has
been adjusted to reflect a reduction in other income
(expense) for these state income tax expenses.
The following table reconciles the Company’s historical
income (loss) before cumulative effect of change in accounting
to pro forma income (loss) before cumulative effect of change in
accounting and income taxes.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Historical income (loss) before cumulative effect of change in
accounting
|
|
$ |
(714,797 |
) |
|
$ |
1,629,906 |
|
|
State income tax expense (benefit)
|
|
|
(163,645 |
) |
|
|
67,819 |
|
| |
|
|
|
|
|
|
|
Pro forma income (loss) before cumulative effect of change in
accounting and income taxes
|
|
$ |
(878,442 |
) |
|
$ |
1,697,725 |
|
| |
|
|
|
|
|
|
Significant components of the pro forma provision for (benefit
from) income taxes on income (loss) before cumulative effect of
change in accounting are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
(352,771 |
) |
|
$ |
801,763 |
|
|
State and local
|
|
|
(41,503 |
) |
|
|
94,325 |
|
| |
|
|
|
|
|
|
|
Total current
|
|
|
(394,274 |
) |
|
|
896,088 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
82,236 |
|
|
|
(213,243 |
) |
| |
State and local
|
|
|
9,675 |
|
|
|
(25,087 |
) |
| |
|
|
|
|
|
|
|
Total deferred (credit)
|
|
|
91,911 |
|
|
|
(238,330 |
) |
| |
|
|
|
|
|
|
|
Total income tax (benefit) provision
|
|
$ |
(302,363 |
) |
|
$ |
657,758 |
|
| |
|
|
|
|
|
|
The differences between the pro forma provision for (benefit
from) income taxes at the statutory U.S. federal income tax
rate of 34% and those reported in the statements of operations
are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Statutory federal income tax rate
|
|
|
(34.00 |
)% |
|
|
34.00 |
% |
|
State and local income taxes, net of federal income taxes
|
|
|
(4.00 |
)% |
|
|
4.00 |
% |
|
Permanent differences
|
|
|
3.58 |
% |
|
|
0.74 |
% |
| |
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(34.42 |
)% |
|
|
38.74 |
% |
| |
|
|
|
|
|
|
Deferred income taxes arise from temporary differences in the
recognition of income and expense for income tax purposes. Pro
forma 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 as if the Company was a C corporation.
F-18
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Components of the Company’s pro forma deferred tax assets
and liabilities are as follows:
| |
|
|
|
|
|
| |
|
January 3, | |
| |
|
2004 | |
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
| |
Vacation accrual
|
|
$ |
230,768 |
|
| |
Inventory
|
|
|
693,424 |
|
| |
Stock-based and accrued bonus compensation
|
|
|
536,834 |
|
| |
Accrued rent
|
|
|
987,152 |
|
| |
Other
|
|
|
21,660 |
|
| |
|
|
|
|
Total deferred tax assets
|
|
|
2,469,838 |
|
| |
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
| |
Property and equipment
|
|
|
1,311,795 |
|
| |
|
|
|
|
Total deferred tax liabilities
|
|
|
1,311,795 |
|
| |
|
|
|
|
Net deferred tax assets
|
|
$ |
1,158,043 |
|
| |
|
|
|
As discussed in Note 2, effective February 10, 2004
the Company completed its IPO. In connection with the IPO, all
Class A, Class B and Class C common stock was
converted into the Company’s new common stock. The
following discussion of Class A, Class B and
Class C common stock relates to their rights and privileges
as of January 3, 2004.
As of January 3, 2004, the Company had three classes of
common stock: Class A, Class B, and Class C. All
voting rights were vested with the Class A and Class C
common stock. The Articles of Incorporation provided that all
classes of common stock had equal rights with respect to
distributions and liquidation preference.
All Class A shares were subject to a shareholder agreement
which limited the shareholder’s ability to sell stock and
provided the Company the right to purchase stock from the
shareholders at a price based on net book value in certain
circumstances defined in the agreement or at a price based on
the appraised value of the Company in the event of the death of
a Class A shareholder. The shareholder agreement provided
for certain registration rights and co-sale rights in connection
with an IPO.
During fiscal 1999, the Company sold 605,595 shares of
Class A stock for $2,418,116, net of issuance costs. Of the
total amount sold, 284,257 shares contained put options,
and these shares were classified as a Class A stock
redemption obligation in the accompanying balance sheets. These
options gave the option holders the right to cause the Company
to redeem all, but not less than all, shares held by the
individuals in June 2004 or June 2005. The purchase price for
such redemption was to be equal to the greater of (a) the
book value of the shares as defined in the agreement or
(b) a variable minimum redemption amount based upon
timeframes specified in the agreement. The difference between
the minimum redemption amount and the original issue price of
the shares holding put options was accreted over the redemption
period.
In January 2001, 17,200 of the Class A shares were sold
among shareholders at the original issue price. Under the
purchase agreement, put options attached to certain of these
shares did not transfer to the new shareholders and were
therefore terminated. Accordingly, the original value of $69,906
associated with these shares was transferred from temporary
capital into permanent paid-in capital at that time. In
addition, this transaction decreased the minimum redemption
amount, which is accounted for as a change in accounting
F-19
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
estimate and thus impacts the periodic accretion charges on a
prospective basis with no adjustment to prior periods.
The Class A stock redemption obligation was $1,389,326 at
January 3, 2004.
Class B Stock
Beginning after October 31, 2007 (ten years from the date
of original issuance), the Company had the option to purchase
all, but not less than all, of the 271,910 Class B shares
held by the respective Class B shareholders, which
represented all issued and outstanding shares. In the event the
Company did not exercise its purchase option, the principal
Class A shareholder would have the option to purchase all,
but not less than all, of the outstanding Class B shares.
Upon the death of a Class B shareholder, the Company and
the principal Class A shareholder have generally the same
repurchase rights and at the same price as those in place after
October 31, 2007.
The Class B shareholders also had the right to cause the
Company to redeem all 271,910 Class B shares upon the
Company’s final principal payment related to the
outstanding subordinated note payable with these shareholders in
January 2008 (see Note 9). The Class B shareholders
could cause such redemption to occur earlier upon the occurrence
of certain events, as defined in the agreement. The purchase
price upon the redemption of the Class B shares was based
on net book value per share in accordance with the agreement.
Periodic changes in the redemption value were recognized
immediately by the Company as they occurred. Thus, the carrying
value of the Class B shares was adjusted to equal the
redemption amount at the end of each reporting period through an
offset to retained earnings. The value of the Class B stock
redemption obligation was $455,316 as of January 3, 2004.
Stock Purchase Warrants
On February 10, 2004, in connection with the IPO, the
Company issued stock purchase warrants covering
216,000 shares of common stock with an exercise price of
$12.7875 per share, subject to antidilution adjustments, to
representatives of the underwriters. The warrants became
exercisable on February 10, 2005 and expire on
February 10, 2009.
In accordance with the terms described below, on March 1,
2004, the Company retired its stock purchase warrant obligation
by the payment of $850,000 to the warrant holder.
The Company issued warrants that entitled the note holder to
acquire 76,907 shares of Class A common stock at an
exercise price of $0.001 per share. The note holder could
also put the warrants to the Company on the maturity date of the
related subordinated note, March 1, 2004. The minimum
stated repurchase obligation for the warrants on that date was
$850,000. At the date of issuance in fiscal 1999, the Company
determined the fair value of the subordinated note payable and
allocated the proceeds received between the note and warrants
based on their respective fair values at the time of issuance.
The value allocated to the warrants, of $307,551, was recorded
as a debt discount to be charged to interest expense over the
life of the notes using the effective interest method. Interest
expense recorded with respect to the amortization of the debt
discount was $124,160, $12,447, and $0 for the years ended
January 4, 2003, January 3, 2004, and January 1,
2005, respectively.
The warrants are being accreted, using the effective interest
method, to the minimum repurchase amount of $850,000 over the
term of the note as interest expense, which was $140,094,
$150,640, and $12,500 for the years ended January 4, 2003,
January 3, 2004, and January 1, 2005, respectively.
F-20
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
|
|
| 15. |
Stock-Based Compensation |
The Company has established the Bakers Footwear Group, Inc. 2003
Stock Option Plan (the 2003 Plan) under which qualified or
non-qualified options to purchase up to 868,992 shares of
the Company’s common stock are available to be granted to
employees or non-employee directors at an option price
determined by the Board of Directors, which administers the 2003
Plan. No option can be for a term of more than 10 years
from the date of grant. In general, options vest at 20% per
year on each annual anniversary date of the option grant. No
options have been exercised since the inception of the 2003 Plan.
Prior to the IPO, the Company had a predecessor stock option
plan in effect which allowed the Company to grant nonqualified
stock options. Under the 2003 Plan, all of the options granted
under the predecessor stock option plan are deemed to be covered
by the 2003 Plan. All of the option holders under the
predecessor plan also agreed to amend their option award
agreements to have their options governed by the 2003 Plan on
generally the same terms and conditions.. On February 10,
2004, after the consummation of the IPO, the Company granted
nonqualified stock options to purchase 304,500 shares
of common stock to certain employees and directors at an
exercise price of $7.75 per share, the IPO price, pursuant
to the 2003 Plan. The options vest in five equal annual
installments beginning on the first anniversary of the date of
grant.
Stock option activity during the years ended January 4,
2003, January 3, 2004, and January 1, 2005 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding | |
|
Exercisable | |
| |
|
| |
|
| |
| |
|
Number of | |
|
Weighted Average | |
|
Number of | |
|
Weighted Average | |
| |
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at January 5, 2002
|
|
|
244,274 |
|
|
$ |
0.01 |
|
|
|
122,138 |
|
|
$ |
0.01 |
|
| |
Granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Vested
|
|
|
— |
|
|
|
— |
|
|
|
61,068 |
|
|
|
0.01 |
|
| |
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Forfeited
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 4, 2003
|
|
|
244,274 |
|
|
|
0.01 |
|
|
|
183,206 |
|
|
|
0.01 |
|
| |
Granted
|
|
|
24,718 |
|
|
|
0.01 |
|
|
|
24,718 |
|
|
|
0.01 |
|
| |
Vested
|
|
|
— |
|
|
|
— |
|
|
|
61,068 |
|
|
|
0.01 |
|
| |
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Forfeited
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2004
|
|
|
268,992 |
|
|
|
0.01 |
|
|
|
268,992 |
|
|
|
0.01 |
|
| |
Granted
|
|
|
304,500 |
|
|
|
7.75 |
|
|
|
— |
|
|
|
— |
|
| |
Vested
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
7.75 |
|
| |
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Forfeited
|
|
|
(4,900 |
) |
|
|
7.75 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005
|
|
|
568,592 |
|
|
|
4.09 |
|
|
|
269,992 |
|
|
|
0.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of the stock
options outstanding at January 1, 2005 is approximately
9 years.
F-21
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The Company has elected to follow APB No. 25 and related
interpretations in accounting for its stock options and the
disclosure-only provisions of SFAS No. 123. Under APB
No. 25, compensation expense is recognized over the vesting
period based on the amount by which the fair value of the
underlying common stock exceeds the exercise price of stock
options at the date of grant. In 2003, the Company issued 24,718
options with an exercise price of $0.01 and an estimated
grant-date fair value of $6.00 per share which vested
immediately and were included in compensation expense.
The following table sets forth the computation of basic and
diluted earnings per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) before cumulative effect of change in accounting
|
|
$ |
(714,797 |
) |
|
$ |
1,629,906 |
|
|
$ |
1,428,001 |
|
| |
Cumulative effect of change in accounting
|
|
|
2,774,899 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
2,060,102 |
|
|
|
1,629,906 |
|
|
|
1,428,001 |
|
| |
Accretion on redeemable stock
|
|
|
(113,685 |
) |
|
|
(343,404 |
) |
|
|
22,396 |
|
| |
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings per share
|
|
|
1,946,417 |
|
|
|
1,286,502 |
|
|
|
1,450,397 |
|
|
Add accretion on redeemable stock
|
|
|
113,685 |
|
|
|
343,404 |
|
|
|
(22,396 |
) |
|
Interest expense related to convertible debentures
|
|
|
— |
|
|
|
— |
|
|
|
26,387 |
|
|
Interest expense related to warrants
|
|
|
140,094 |
|
|
|
150,640 |
|
|
|
7,750 |
|
| |
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$ |
2,200,196 |
|
|
$ |
1,780,546 |
|
|
$ |
1,462,138 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator for basic earnings per share — weighted
average shares
|
|
|
1,426,188 |
|
|
|
1,426,188 |
|
|
|
4,690,527 |
|
| |
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock options
|
|
|
243,663 |
|
|
|
258,218 |
|
|
|
319,778 |
|
| |
|
Stock purchase warrants
|
|
|
76,888 |
|
|
|
76,897 |
|
|
|
12,254 |
|
| |
|
Convertible debentures
|
|
|
— |
|
|
|
— |
|
|
|
68,205 |
|
| |
|
Redeemable securities
|
|
|
538,967 |
|
|
|
538,967 |
|
|
|
56,837 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share — adjusted
weighted average shares and assumed conversions
|
|
|
2,285,706 |
|
|
|
2,300,270 |
|
|
|
5,147,601 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
$ |
(0.50 |
) |
|
$ |
1.14 |
|
|
$ |
0.30 |
|
|
Cumulative effect of change in accounting
|
|
|
1.94 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.44 |
|
|
|
1.14 |
|
|
|
0.30 |
|
|
Accretion on Class A and Class B redeemable stock
|
|
|
(0.08 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income allocable to common shareholders
|
|
$ |
1.36 |
|
|
$ |
0.90 |
|
|
$ |
0.31 |
|
| |
|
|
|
|
|
|
|
|
|
F-22
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
|
January 1, | |
| |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
$ |
(0.31 |
) |
|
$ |
0.71 |
|
|
$ |
0.28 |
|
|
Cumulative effect of change in accounting
|
|
|
1.21 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.90 |
|
|
|
0.71 |
|
|
|
0.28 |
|
|
Interest expense related to Class A stock purchase warrants
and convertible debentures
|
|
|
0.06 |
|
|
|
0.06 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income allocable to common shareholders
|
|
$ |
0.96 |
|
|
$ |
0.77 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
The following table sets forth the earnings per share for the
unaudited pro forma income tax information on the accompanying
statements of operations (see Note 13):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
| |
|
January 4, | |
|
January 3, | |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
$ |
(0.40 |
) |
|
$ |
0.73 |
|
|
Cumulative effect of change in accounting, net of taxes
|
|
|
1.23 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Net income
|
|
|
0.83 |
|
|
|
0.73 |
|
|
Accretion on Class A and Class B redeemable stock
|
|
|
(0.08 |
) |
|
|
(0.24 |
) |
| |
|
|
|
|
|
|
|
Net income allocable to common shareholders
|
|
$ |
0.75 |
|
|
$ |
0.49 |
|
| |
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
|
|
$ |
(0.26 |
) |
|
$ |
0.47 |
|
|
Cumulative effect of change in accounting, net of taxes
|
|
|
0.80 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Net income
|
|
|
0.54 |
|
|
|
0.47 |
|
|
Interest expense related to Class A stock purchase warrants
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Net income allocable to common shareholders(1)
|
|
$ |
0.54 |
|
|
$ |
0.47 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
The diluted earnings per share calculation for the year ended
January 3, 2004 excludes incremental shares of 76,897 and
interest expense, net of tax, of $93,397 related to the
outstanding stock purchase warrants because they are
antidilutive. |
F-23
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
|
|
| 17. |
Fair Value of Financial Instruments |
The carrying values and fair values of the Company’s
financial instruments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
January 3, 2004 | |
|
January 1, 2005 | |
| |
|
| |
|
| |
| |
|
Carrying | |
|
|
|
Carrying | |
|
|
| |
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents
|
|
$ |
574,475 |
|
|
$ |
574,475 |
|
|
$ |
6,675,135 |
|
|
$ |
6,675,135 |
|
|
Revolving notes payable and long-term subordinated debt,
including current maturities
|
|
|
3,029,384 |
|
|
|
3,060,885 |
|
|
|
— |
|
|
|
— |
|
|
Subordinated convertible debentures
|
|
|
4,500,000 |
|
|
|
4,500,000 |
|
|
|
— |
|
|
|
— |
|
|
Capital lease obligations, including current maturities
|
|
|
2,294,444 |
|
|
|
3,002,054 |
|
|
|
1,347,112 |
|
|
|
1,686,600 |
|
|
Stock purchase warrants
|
|
|
837,500 |
|
|
|
843,465 |
|
|
|
— |
|
|
|
— |
|
The carrying amount of cash equivalents approximates fair value
because of the short maturity of those instruments. The fair
values of long-term debt and capital lease obligations have been
estimated based on current rates offered to the Company for debt
of the same maturities. The fair value of stock purchase
warrants is estimated based upon the minimum repurchase amount
discounted based on current rates offered to the Company for
debt of the same maturity.
|
|
| 18. |
Related Party Transactions |
The Company purchases merchandise inventory from a vendor
affiliated with the Company through common ownership. Such
purchases were approximately $865,000 $733,000, and $450,082
during the years ended January 4, 2003, January 3,
2004, and January 1, 2005, respectively. Accounts payable
related to such purchases were approximately $85,000 and $7,000
at January 3, 2004 and January 1, 2005, respectively.
Holders of $918,368 of the $4,500,000 outstanding subordinated
convertible debentures are related parties, including a relative
of the principal shareholder and an entity affiliated with the
Company through a common director. Upon the IPO these debentures
were converted into 133,333 of the 653,331 shares of common
stock resulting from the conversion.
In addition, the Company maintains certain of its cash and cash
equivalents with a financial institution also affiliated with
the Company through common ownership. A portion of the
Company’s credit facility is payable to this affiliated
financial institution. The transactions with this affiliate are
executed in the normal course of business.
F-24
BAKERS FOOTWEAR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
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|
| 19. |
Quarterly Financial Data — Unaudited |
Summarized quarterly financial information for fiscal years 2003
and 2004 is as follows:
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|
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|
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|
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|
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| |
|
First | |
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Second | |
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Third | |
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Fourth | |
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| |
|
Fiscal year 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales
|
|
$ |
31,909,958 |
|
|
$ |
38,310,685 |
|
|
$ |
34,274,081 |
|
|
$ |
43,728,829 |
|
| |
Gross profit
|
|
|
7,608,275 |
|
|
|
11,442,752 |
|
|
|
9,278,577 |
|
|
|
16,497,356 |
|
| |
Net income (loss)
|
|
|
(3,297,586 |
) |
|
|
714,276 |
|
|
|
(1,035,772 |
) |
|
|
5,248,988 |
|
| |
Basic earnings (loss) per share
|
|
|
(2.15 |
) |
|
|
0.49 |
|
|
|
(0.74 |
) |
|
|
3.30 |
|
| |
Diluted earnings (loss) per share
|
|
|
(2.15 |
) |
|
|
0.33 |
|
|
|
(0.74 |
) |
|
|
2.29 |
|
| |
Pro forma income tax information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
|
(2,049,522 |
) |
|
|
462,356 |
|
|
|
(641,431 |
) |
|
|
3,254,374 |
|
| |
Basic earnings (loss) per share
|
|
|
(1.28 |
) |
|
|
0.31 |
|
|
|
(0.46 |
) |
|
|
1.88 |
|
| |
Diluted earnings (loss) per share
|
|
|
(1.28 |
) |
|
|
0.21 |
|
|
|
(0.46 |
) |
|
|
1.42 |
|
|
Fiscal year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales
|
|
$ |
34,305,013 |
|
|
$ |
38,904,743 |
|
|
$ |
31,589,495 |
|
|
$ |
45,715,412 |
|
| |
Gross profit
|
|
|
9,741,953 |
|
|
|
12,600,049 |
|
|
|
7,030,918 |
|
|
|
17,274,878 |
|
| |
Net income (loss)
|
|
|
165,969 |
|
|
|
922,429 |
|
|
|
(2,786,486 |
) |
|
|
3,126,089 |
|
| |
Basic earnings (loss) per share
|
|
|
0.05 |
|
|
|
0.18 |
|
|
|
(0.55 |
) |
|
|
0.61 |
|
| |
Diluted earnings (loss) per share
|
|
|
0.05 |
|
|
|
0.17 |
|
|
|
(0.55 |
) |
|
|
0.57 |
|
Note: The Company recognized a nonrecurring income tax benefit
of $1,158,043 in the first quarter of fiscal year 2004 as a
result of converting from S Corporation to a C Corporation
for tax purposes.
On March 10, 2005, by a vote of its board of directors, the
Company changed its fiscal year end to the Saturday closest to
January 31. Previously the Company’s fiscal year ended four
weeks earlier.
|
|
|
Private Placement of Common Stock and Warrants |
On March 31, 2005, the Company and certain qualified
investors entered into an agreement under which the Company will
sell for $8,750,000, 1,000,000 shares of common stock and
warrants to purchase 250,000 shares of common stock at an
exercise price of $10.18 per share. Net proceeds to the Company,
after placement fees and expenses, are expected to approximate
between $7,250,000 to $7,500,000. The Company will also issue
125,000 stock purchase warrants to the placement agent on
generally the same terms as the investors upon closing. This
transaction is subject to customary closing conditions and is
expected to close in April 2005.
F-25