UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

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

For the transition period from ________________ to ________________

BAKERS FOOTWEAR GROUP, INC.

Missouri (State or other jurisdiction of incorporation or organization)		43-0577980 (I.R.S. Employer Identification No.)

2815 Scott Avenue, St. Louis, Missouri (Address of principal executive offices)		63103 (Zip Code)

(314) 621-0699
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

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

Common Stock, par value $0.0001 per share, 9,295,916 shares issued and outstanding as of September 3, 2011.

 

 

BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q

		Page
Part I Financial Information
Item 1. Financial Statements (Unaudited)			3
Condensed Balance Sheets			3
Condensed Statements of Operations			4
Condensed Statement of Shareholders’ Deficit			5
Condensed Statements of Cash Flows			6
Notes to Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			24
Part II Other Information
Item 1. Legal Proceedings			25
Item 6. Exhibits			25
Signatures			26
Exhibit Index			27
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAKERS FOOTWEAR GROUP, INC.

CONDENSED BALANCE SHEETS

		July 31,				January 29,				July 30,
		2010				2011				2011
		(Unaudited)								(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	149,905			$	146,263			$	140,360
Accounts receivable			1,407,330				1,484,809				1,165,604
Inventories			21,626,346				25,911,508				24,914,073
Prepaid expenses and other current assets			934,568				970,883				1,098,809
Total current assets			24,118,149				28,513,463				27,318,846
Property and equipment, net			22,029,961				18,405,166				16,928,139
Other assets			924,497				1,087,058				939,041
Total assets		$	47,072,607			$	48,005,687			$	45,186,026
Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable		$	16,904,303			$	16,009,847			$	19,109,761
Accrued expenses			7,244,742				8,519,585				7,828,639
Subordinated secured term loan			1,550,049				—				—
Subordinated convertible debentures — current portion			—				—				1,000,000
Sales tax payable			914,007				1,122,024				909,740
Deferred income			1,143,402				1,120,444				873,750
Revolving credit facility			9,553,095				10,449,299				10,164,889
Total current liabilities			37,309,598				37,221,199				39,886,779
Accrued noncurrent rent liabilities			8,972,557				8,648,272				8,051,385
Subordinated convertible debentures			4,000,000				4,000,000				3,000,000
Subordinated debenture			—				4,123,327				4,153,266
Shareholders’ deficit:
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares outstanding			—				—				—
Common Stock, $0.0001 par value; 40,000,000 shares authorized, 7,384,056 shares outstanding at July 31, 2010, 9,228,916 shares outstanding at January 29, 2011 and 9,295,916 shares outstanding at July 30, 2011			739				923				930
Additional paid-in capital			39,455,857				40,443,888				40,623,715
Accumulated deficit			(42,666,144	)			(46,431,922	)			(50,530,049	)
Total shareholders’ deficit			(3,209,548	)			(5,987,111	)			(9,905,404	)
Total liabilities and shareholders’ deficit		$	47,072,607			$	48,005,687			$	45,186,026

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

		Thirteen				Thirteen				Twenty-six				Twenty-six
		Weeks				Weeks				Weeks				Weeks
		Ended				Ended				Ended				Ended
		July 31, 2010				July 30, 2011				July 31, 2010				July 30, 2011
Net sales		$	43,293,127			$	44,303,614			$	86,817,163			$	91,316,354
Cost of merchandise sold, occupancy, and buying expenses			31,360,215				31,333,392				64,147,955				66,088,948
Gross profit			11,932,912				12,970,222				22,669,208				25,227,406
Operating expenses:
Selling			9,625,021				9,897,855				19,429,309				20,094,785
General and administrative			3,902,762				4,205,433				7,693,314				8,328,083
Loss on disposal of property and equipment			8,608				16,443				60,277				19,792
Operating loss			(1,603,479	)			(1,149,509	)			(4,513,692	)			(3,215,254	)
Other income (expense):
Interest expense			(440,263	)			(444,744	)			(994,836	)			(905,519	)
Other, net			20,304				12,793				34,273				22,646
Loss before income taxes			(2,023,438	)			(1,581,460	)			(5,474,255	)			(4,098,127	)
Income tax expense			51,704				—				51,704				—
Net loss		$	(2,075,142	)		$	(1,581,460	)		$	(5,525,959	)		$	(4,098,127	)
Net loss per common share and diluted share		$	(0.28	)		$	(0.17	)		$	(0.75	)		$	(0.44	)

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENT OF SHAREHOLDERS’ DEFICIT
(Unaudited)

		Common Stock
		Shares								Additional
		Issued and								Paid-In				Accumulated
		Outstanding				Amount				Capital				Deficit				Total
Balance at January 29, 2011			9,228,916			$	923			$	40,443,888			$	(46,431,922	)		$	(5,987,111	)
Stock-based compensation expense			—				—				179,827				—				179,827
Issuance of restricted stock			67,000				7				—				—				7
Net loss			—				—				—				(4,098,127	)			(4,098,127	)
Balance at July 30, 2011			9,295,916			$	930			$	40,623,715			$	(50,530,049	)		$	(9,905,404	)

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

		Twenty-six				Twenty-six
		Weeks Ended				Weeks Ended
		July 31, 2010				July 30, 2011
Operating activities
Net loss		$	(5,525,959	)		$	(4,098,127	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			2,961,383				2,563,425
Accretion of debt discount			139,937				29,939
Stock-based compensation expense			175,874				179,827
Loss on disposal of property and equipment			60,278				19,792
Changes in operating assets and liabilities:
Accounts receivable			143,396				319,212
Inventories			(1,393,139	)			997,435
Prepaid expenses and other current assets			300,219				(127,926	)
Other assets			(73,462	)			148,017
Accounts payable			6,765,668				3,099,914
Accrued expenses and deferred income			(536,973	)			(1,149,924	)
Accrued noncurrent rent liabilities			(211,199	)			(596,887	)
Net cash provided by operating activities			2,806,023				1,384,697
Investing activities
Purchase of property and equipment			(460,767	)			(1,106,190	)
Proceeds from sale of property and equipment			3,172				—
Net cash used in investing activities			(457,595	)			(1,106,190	)
Financing activities
Net repayments under revolving credit facility			(978,592	)			(284,410	)
Proceeds from exercise of stock options			384				—
Principal payments on subordinated secured term loan			(1,375,000	)			—
Net cash used in financing activities			(2,353,208	)			(284,410	)
Net decrease in cash and cash equivalents			(4,780	)			(5,903	)
Cash and cash equivalents at beginning of period			154,685				146,263
Cash and cash equivalents at end of period		$	149,905			$	140,360
Supplemental disclosures of cash flow information
Cash paid for interest		$	789,173			$	832,085

See accompanying notes.

BAKERS FOOTWEAR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited

1. Basis of Presentation

     The accompanying unaudited condensed financial statements contain all adjustments that management believes are necessary to present fairly Bakers Footwear Group, Inc.’s (the Company’s) financial position, results of operations and cash flows for the periods presented. Such adjustments consist of normal recurring accruals. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The Company’s operations are subject to seasonal fluctuations and, consequently, operating results for interim periods are not necessarily indicative of the results that may be expected for other interim periods or for the full year. The condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission (“SEC”) and has made disclosures of all material subsequent events in the notes to the unaudited condensed interim financial statements.

2. Liquidity

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

     The Company’s losses in the first half of fiscal year 2011 and fiscal years after 2005 have had a significant negative impact on the Company’s financial position and liquidity. As of July 30, 2011, the Company had negative working capital of $12.6 million, unused borrowing capacity under its revolving credit facility of $0.4 million, and shareholders’ deficit of $9.9 million.

     The Company’s business plan for fiscal year 2011 continues to be based on mid-single digit increases in comparable store sales for the remainder of the year. Third quarter comparable store sales through September 3, 2011 are up 2.5%. Based on the business plan, the Company expects to maintain adequate liquidity for the remainder of fiscal year 2011. The business plan reflects continued focus on inventory management and on timely promotional activity. The Company believes that this focus on inventory should improve overall gross margin performance compared to fiscal year 2010. The plan also includes targeted increases in selling, general and administrative expenses to support the sales plan. The Company continues to work with its landlords and vendors to arrange payment terms that are reflective of its seasonal cash flow patterns in order to manage availability. The business plan for fiscal year 2011 reflects continued cash flow management but does not indicate a return to profitability. However, there is no assurance that the Company will achieve the sales, margin or cash flow contemplated in its business plan.

     On May 28, 2010, the Company amended its revolving credit facility. The amendment extended the maturity of the credit facility to May 28, 2013, modified the calculation of the borrowing base, added a new minimum availability or adjusted EBITDA interest coverage ratio covenant, added an obligation for the Company to extend the maturity of its subordinated convertible debentures, and made other changes to the agreement. The Company incurred fees and expenses of approximately $250,000 in connection with this amendment. The minimum availability or adjusted EBITDA interest coverage ratio covenant requires that either the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain a ratio of adjusted EBITDA to interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the calculation used previously in the Company’s subordinated secured term loan. The Company did not meet these covenants for the months of June and July 2010; however, this covenant violation was waived by the bank in connection with the Debenture and Stock Purchase Agreement discussed below. During the third and fourth quarters of fiscal year 2010 and the first and second quarters of 2011, the Company met the bank covenant based on maintaining unused availability greater than 20% on a daily basis. The Company’s business plan for fiscal year 2011 also anticipates meeting the bank covenant on this basis. The Company continues to closely monitor its availability and continues to be constrained by its limited unused borrowing capacity. As of September 3, 2011, the balance on the revolving line of credit was $11.7 million and unused borrowing capacity in excess of the covenant commitment was $0.6 million.

     Effective June 30, 2011, the Company amended its $4 million in aggregate principal amount of 9.5% subordinated convertible debentures, originally issued in June 2007. The amendments defer payment of principal under the debentures. Originally, all $4 million in principal amount was payable on June 30, 2012. Under the amendments, principal will be repaid in four equal annual installments of $1 million beginning on June 30, 2012. The interest rate on the debentures was also increased from 9.5% to 12% per annum. The amendments were consented to by the Company’s senior lender pursuant to an amendment to the Company’s senior credit facility. The bank amendment removed the covenant to refinance the subordinated convertible debentures and allows the Company to make the $1 million required principal payment on June 30, 2012, provided that certain conditions are met, including that the Company maintains at least a 1.0 to 1.0 ratio of adjusted EBITDA to its interest expense for the 12 month period ending May 26, 2012, all as calculated pursuant to the senior credit facility.

     Based on the Company’s business plan for fiscal year 2011, the Company believes that it will be able to comply with the minimum availability or adjusted EBITDA coverage ratio covenant in the revolving credit facility. However, given the inherent volatility in the Company’s sales performance, there is no assurance that the Company will be able to do so. In addition, in light of the Company’s historical sales volatility and the current state of the economy, the Company believes that there is a reasonable possibility that the Company may not be able to comply with its financial covenants. Failure to comply would be a default under the terms of the Company’s revolving credit facility and could result in the acceleration of all of the Company’s debt obligations. If the Company is unable to comply with its financial covenants, it will be required to seek one or more amendments or waivers from its lenders. The Company believes that it would be able to obtain any required amendments or waivers, but can give no assurance that it would be able to do so on favorable terms, if at all. If the Company is unable to obtain any required amendments or waivers, the Company’s lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against the Company. If such acceleration occurred, the Company currently has insufficient cash to pay the amounts owed and would be forced to obtain alternative financing.

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

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

3. Revolving Credit Facility

     The Company has a revolving credit agreement with a commercial bank (Bank). This agreement calls for a maximum line of credit of $30,000,000 subject to the calculated borrowing base as defined in the agreement, which is based primarily on the Company’s inventory level. The agreement is secured by substantially all assets of the Company. The credit facility is senior to the subordinated convertible debentures and the subordinated debenture. Interest is payable monthly at the bank’s base rate plus 3.5%. An unused line fee of 0.75% per annum is payable monthly based on the difference between the maximum line of credit and the average loan balance. The Company had approximately $1,054,000, $3,060,000 and $435,000 (under the terms of the new minimum availability covenant discussed below) of unused borrowing capacity under the revolving credit agreement based upon the Company’s borrowing base calculation as of July 31, 2010, January 29, 2011, and July 30, 2011. The agreement has certain restrictive financial and other covenants relating to, among other things, use of funds under the facility in accordance with the Company’s business plan, prohibiting a change of control, including any person or group acquiring beneficial ownership of 40% or more of the Company’s common stock or combined voting power (as defined in the credit facility), maintaining a minimum availability, prohibiting new debt, restricting dividends and the repurchase of the Company’s stock, and restricting certain acquisitions. The revolving credit agreement also provides that the Company can elect to fix the interest rate on a designated portion of the outstanding balance as set forth in the agreement based on the LIBOR (London Interbank Offered Rate) plus 4.0%.

     On May 28, 2010, the Company amended its revolving credit agreement. The amendment extended the maturity of the credit facility from January 31, 2011 to May 28, 2013, modified the calculation of the borrowing base, added a new minimum availability or adjusted EBITDA interest coverage ratio covenant, added an obligation for the Company to extend the maturity of its subordinated convertible debentures, and made other changes to the agreement. The Company incurred fees and expenses of approximately $250,000 in connection with this amendment. The minimum availability or adjusted EBITDA interest coverage ratio covenant requires that either the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of the Company’s adjusted EBITDA to its interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the calculation used previously in the Company’s subordinated secured term loan.

     In connection with an amendment to the Company’s subordinated convertible debentures, the Company amended its revolving credit facility to allow the Company to make a required $1 million principal payment in respect of the subordinated convertible debentures on June 30, 2012, provided that certain conditions are met, including that the Company maintains at least a 1.0 to 1.0 ratio of adjusted EBITDA to its interest expense for the 12 month period ending May 26, 2012, all as calculated pursuant to the senior credit facility.

4. Subordinated Debenture

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

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

5. Subordinated Convertible Debentures

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

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

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

     The Company uses Financial Accounting Standards Board (FASB) guidance in Accounting Standards Certification (ASC) 815, Derivatives and Hedging, related to determining whether an instrument (or embedded feature) is indexed to an entity’s own stock and established a two-step process for making such determination. The Company accounts separately for the fair value of the conversion feature of the convertible debentures. As of July 31, 2010, January 29, 2011 and July 30, 2011, the Company determined that the fair value of the conversion feature was de minimis. Significant future increases in the value of the Company’s common stock would result in an increase in the fair value of the conversion feature which would result in expense recognition in future periods.

6. Subordinated Secured Term Loan

     Effective February 4, 2008, the Company consummated a $7.5 million three-year subordinated secured term loan (the Loan) and issued 350,000 shares of the Company’s common stock as additional consideration. Net proceeds to the Company after transaction costs were approximately $6.7 million. The Company used the net proceeds to repay amounts owed under its senior revolving credit facility and for working capital purposes. The Loan was secured by substantially all of the Company’s assets and was subordinate to the Company’s revolving credit facility but had priority over the Company’s subordinated convertible debentures. The Loan required 36 monthly payments of principal and interest at an interest rate of 15% per annum and was fully repaid in January 2011.

7. Income Taxes

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

     Management believes it is more likely than not that it will not be able to realize benefits of net deferred tax assets and therefore has established a valuation allowance against its net deferred tax assets. As of July 30, 2011, the Company has increased the valuation allowance to $21.3 million. The Company has scheduled the reversals of its deferred tax assets and deferred tax liabilities and has concluded that based on the anticipated reversals a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

     As of July 30, 2011, the Company has approximately $32.4 million of net operating loss carryforwards that expire in 2022 available to offset future taxable income.

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

		Thirteen				Thirteen				Twenty-six				Twenty-six
		Weeks Ended				Weeks Ended				Weeks Ended				Weeks Ended
		July 31, 2010				July 30, 2011				July 31, 2010				July 30, 2011
Current:
Federal		$	(425,208	)		$	(596,993	)		$	(1,345,940	)		$	(1,336,085	)
State and local			(44,314	)			(122,955	)			(243,729	)			(280,607	)
Total current			(469,522	)			(719,948	)			(1,589,669	)			(1,616,692	)
Deferred:
Federal			(211,275	)			106,687				(379,617	)			54,012
State and local			(38,414	)			19,398				(69,021	)			9,820
Total deferred			(249,689	)			126,085				(448,638	)			63,832
Valuation allowance			770,915				593,863				2,090,011				1,552,860
Total income tax expense		$	51,704			$	—			$	51,704			$	—

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

		Thirteen				Thirteen				Twenty-six				Twenty-six
		Weeks Ended				Weeks Ended				Weeks Ended				Weeks Ended
		July 31, 2010				July 30, 2011				July 31, 2010				July 30, 2011
Federal income tax at statutory rate		$	(708,203	)		$	(553,511	)		$	(1,915,990	)		$	(1,434,344	)
Impact of State NOL carryback refund restrictions			51,704				—				51,704				—
Impact of graduated Federal rates			20,234				15,815				54,743				40,981
State and local taxes, net of federal income taxes			(89,490	)			(69,960	)			(242,099	)			(181,263	)
Change in valuation allowance			770,915				593,863				2,090,012				1,552,860
Permanent differences			6,544				13,793				13,334				21,766
Total income tax expense		$	51,704			$	—			$	51,704			$	—

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

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

		July 31, 2010				January 29, 2011				July 30, 2011
Deferred tax assets:
Net operating loss carryforward		$	10,683,566			$	10,775,110			$	12,391,802
Vacation accrual			405,885				405,473				414,833
Inventory			997,214				1,191,540				1,091,098
Stock-based compensation			1,185,109				1,258,512				1,328,645
Accrued rent			3,499,297				3,372,826				3,140,040
Property and equipment			1,833,074				2,842,665				3,097,084
Total deferred tax assets			18,604,145				19,846,126				21,463,502
Deferred tax liabilities:
Prepaid expenses			150,101				103,629				168,145
Valuation allowance			(18,454,044	)			(19,742,497	)			(21,295,357	)
Net deferred tax assets		$	—			$	—			$	—

     The Company’s federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of July 30, 2011, the Company has not recorded any unrecognized tax benefits. The Company’s policy, if it had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

8. Stock-Based Compensation

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

     The number of stock options granted, their grant-date weighted-average fair value, and the significant assumptions used to determine fair-value during the twenty-six weeks ended July 31, 2010 and July 30, 2011, are as follows:

		Twenty-six				Twenty-six
		Weeks Ended				Weeks Ended
		July 31, 2010				July 30, 2011
Options granted			227,000				75,000
Weighted-average fair value of options granted		$	1.96			$	0.63
Assumptions
Dividends			0	%			0	%
Risk-free interest rate			2.8	%			2.2	%
Expected volatility			97	%			99	%
Expected option life		6 years				6 years

9. Loss Per Share

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

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

		Thirteen				Thirteen				Twenty-six				Twenty-six
		Weeks				Weeks				Weeks				Weeks
		Ended				Ended				Ended				Ended
		July 31, 2010				July 30, 2011				July 31, 2010				July 30, 2011
Numerator:
Net loss		$	(2,075,142	)		$	(1,581,460	)		$	(5,525,959	)		$	(4,098,127	)
Numerator for loss per share			(2,075,142	)			(1,581,460	)			(5,525,959	)			(4,098,127	)
Interest expense related to convertible debentures			—				—				—				—
Numerator for diluted loss per share		$	(2,075,142	)		$	(1,581,460	)		$	(5,525,959	)		$	(4,098,127	)
Denominator:
Denominator for basic loss per share — weighted average shares			7,384,056				9,295,916				7,383,566				9,278,982
Effect of dilutive securities
Stock options			—				—				—				—
Subordinated convertible debentures			—				—				—				—
Denominator for diluted earnings (loss) per share — adjusted weighted average shares and assumed conversions			7,384,056				9,295,916				7,383,566				9,278,982

     The diluted earnings per share calculation for the thirteen weeks ended July 30, 2011 excludes 33,724 incremental shares related to outstanding stock options and 518,299 incremental shares underlying subordinated convertible debentures because they are antidilutive. The diluted earnings per share calculation for the twenty-six weeks ended July 30, 2011 excludes 32,151 incremental shares related to outstanding stock options and 518,299 incremental shares underlying subordinated convertible debentures because they are antidilutive. The diluted earnings per share calculation for the thirteen weeks ended July 31, 2010 excludes 34,230

incremental shares related to outstanding stock options and 481,348 incremental shares underlying subordinated convertible debentures because they are antidilutive. The diluted earnings per share calculation for the twenty-six weeks ended July 31, 2010 excludes 35,532 incremental shares related to outstanding stock options and 481,348 incremental shares underlying subordinated convertible debentures because they are antidilutive.

10. Commitments and Contingencies

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

11. Fair Value of Financial Instruments

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

		July 31, 2010
		Carrying
		Amount				Fair Value
Cash and cash equivalents		$	149,905			$	149,905
Revolving credit facility			9,553,095				9,553,095
Subordinated secured term loan			1,550,049				1,565,855
Subordinated convertible debentures			4,000,000				2,799,363

		January 29, 2011
		Carrying
		Amount				Fair Value
Cash and cash equivalents		$	146,263			$	146,263
Revolving credit facility			10,449,299				10,449,299
Subordinated debenture			4,123,327				4,039,445
Subordinated convertible debentures			4,000,000				3,052,837

		July 30, 2011
		Carrying
		Amount				Fair Value
Cash and cash equivalents		$	140,360			$	140,360
Revolving credit facility			10,164,889				10,164,889
Subordinated debenture			4,153,266				4,071,852
Subordinated convertible debentures			4,000,000				2,815,412

     The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The carrying amount of the revolving credit facility approximates fair value because the facility has a floating interest rate. The fair values of the subordinated secured term loan and the subordinated convertible debentures have been estimated based on current rates available to the Company for similar debt of the same maturity.

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

The following discussion should be read in conjunction with the Company’s unaudited condensed financial statements and notes thereto provided herein and the Company’s audited financial statements and notes thereto in our annual report on Form 10-K for the fiscal year ended January 29, 2011. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. The factors that might cause such a difference also include, but are not limited to, those discussed in our Annual Report on Form 10-K under “Item 1. Business — Cautionary Note Regarding Forward-Looking Statements and Risk Factors” and under “Item 1. Business — Risk Factors” and those discussed elsewhere in our Annual Report on Form 10-K and related notes thereto and elsewhere in this quarterly report.

Overview

     We are a national, mall-based, specialty retailer of distinctive footwear and accessories targeting young women who demand quality fashion products. We feature private label and national brand dress, casual and sport shoes, boots, sandals and accessories. As of July 30, 2011, we operated 232 stores, including 216 Bakers stores and 16 Wild Pair stores located in 34 states.

     During the first half of 2011, our net sales increased 5.2% compared to the first half of 2010, reflecting strength in our dress shoe category. Comparable store sales in the first half of 2011 increased 7.1%, compared to a decrease of 0.7% in the first half of last year. Gross profit percentage increased to 27.6% of sales in the first half of 2011 compared to 26.1% in the first half of 2010. Our net loss for the first half of 2011 decreased to $4.1 million from $5.5 million in the first half of 2010. At the end of the first half of fiscal year 2011 our inventory was 15.2% higher than at the end of the first half of fiscal year 2010 reflecting both the increased proportion of dress shoes in our product mix and increased product costs generally.

     We incurred net losses of $9.3 million and $9.1 million in fiscal years 2010 and 2009. These losses have had a significant negative impact on our financial position and liquidity. As of July 30, 2011, we had negative working capital of $12.6 million, unused borrowing capacity under our revolving credit facility of $0.4 million, and a shareholders’ deficit of $9.9 million.

     Our business plan for the remainder of fiscal year 2011 is based on mid-single digit increases in comparable store sales. Through September 3, 2011, comparable store sales year-to-date has increased 6.4%. Based on our business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2011. The business plan reflects continued focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance compared to fiscal year 2010. The plan also includes targeted increases in selling, general and administrative expenses to support the sales plan. We continue to work with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage availability. The business plan for fiscal year 2011 reflects continual improvement in cash flow but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in our business plan.

     Under the terms of our revolving credit facility we are subject to certain financial and other covenants. The minimum availability or adjusted EBITDA interest coverage ratio covenant requires that either we maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the calculation used previously in our subordinated secured term loan. We did not meet these covenants for the months of June and July 2010; however, this covenant violation was waived by the bank in connection with the August 2010 debt and equity issuance discussed below. Beginning with the third quarter of fiscal year 2010, we have met the bank covenant based on maintaining unused availability greater than 20% on a daily basis. Our business plan for the remainder of 2011 also anticipates meeting the bank covenant on this basis. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of September 3, 2011, the balance on our revolving line of credit was $11.7 million, and our unused borrowing capacity in excess of the covenant minimum was $0.6 million.

     In June 2011, we amended our $4 million in aggregate principal amount of 9.5% subordinated convertible debentures, which were originally issued in June 2007. The amendments defer payment of principal under the debentures. Originally, all $4 million in principal amount was payable on June 30, 2012. Under the amendments, principal will be repaid in four equal annual installments of $1 million beginning on June 30, 2012. The interest rate on the debentures was also increased from 9.5% to 12% per annum. The amendments were consented to by our senior lender pursuant to an amendment to our senior credit facility. The bank amendment removed the covenant to refinance our subordinated convertible debentures and allows us to make the $1 million required principal payment on June 30, 2012, which is the only principal payment now required under the debentures prior to maturity of the credit facility on May 28, 2013, provided that certain conditions are met. These conditions include a requirement that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12 month period ending May 26, 2012, all as calculated pursuant to the senior credit facility.

     Based on our business plan for the remainder of fiscal year 2011, we believe that we will be able to comply with the minimum availability or adjusted EBITDA coverage ratio covenant in our revolving credit facility. However, given the inherent volatility in our sales performance, there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility and the current state of the economy, we believe that there is a reasonable possibility that we may not be able to comply with the financial covenants. Failure to comply would be a default under the terms of the revolving credit facility and could result in the acceleration of all of our debt obligations. If we are unable to comply with our financial covenants, we will be required to seek one or more additional amendments or waivers from our lenders. We believe that we would be able to obtain any required amendments or waivers, but can give no assurance that we would be able to do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment of debt obligations and taking collection action against us. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to obtain alternative financing.

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

     For comparison purposes, we classify our stores as comparable or non-comparable. A new store’s sales are not included in comparable store sales until the thirteenth month of operation. Sales from remodeled stores are excluded from comparable store sales during the period of remodeling. We include our Internet and call center sales (“Multi-Channel Sales”) as one store in calculating our comparable store sales.

Critical Accounting Policies

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

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

Merchandise inventories

     Merchandise inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. Consideration received from vendors relating to inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying expenses after an agreement with the vendor is executed and when the related inventory is sold. We physically count all merchandise inventory on hand annually, generally during the month of January, and adjust the recorded balance to reflect the results of the physical count. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of merchandise sold, occupancy, and buying costs. Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. In determining permanent

markdowns, we consider current and recently recorded sales prices, the length of time product is held in inventory, and quantities of various product styles contained in inventory, among other factors. The process of determining our expected adjustments to retail prices requires significant judgment by management. The ultimate amount realized from the sale of inventories could differ materially from our estimates. If market conditions are less favorable than those projected, additional inventory markdowns may be required.

Store closing and impairment charges

     Long-lived assets to be “held and used” are reviewed for impairment when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. We regularly analyze the operating results of our stores and assess the viability of under-performing stores to determine whether they should be closed or whether their associated assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events, and favorable trends, fixed assets of stores indicated to be impaired are written down to fair value based on management’s estimate of future store sales and expenses, which are considered Level 3 inputs.

Stock-based compensation expense

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

Deferred income taxes

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

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

     We have concluded that the realizability of net deferred tax assets is unlikely and maintain a full valuation allowance against our net deferred tax assets. We have scheduled the reversals of our deferred tax assets and deferred tax liabilities and have concluded that based on the anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax assets over deferred tax liabilities.

     We anticipate that until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, we will not recognize any material income tax expense or benefit in our statement of operations for future periods, as pretax profits or losses generally will generate tax effects that will be offset by decreases or increases in the valuation allowance with no net

effect on the statement of operations. If a pattern of continuing profitability is re-established and we conclude that it is more likely than not that deferred income tax assets are realizable, we will reverse any remaining valuation allowance which will result in the recognition of an income tax benefit in the period that it occurs.

     We regularly analyze filing positions in all of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. Our federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of July 30, 2011, we have not recorded any unrecognized tax benefits. Our policy, if we had unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and other expense, respectively.

Results of Operations

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

		Thirteen				Thirteen				Twenty-				Twenty-
		Weeks				Weeks				six Weeks				six Weeks
		Ended				Ended				Ended				Ended
		July 31,				July 30,				July 31,				July 30,
		2010				2011				2010				2011
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of merchandise sold, occupancy and buying expense			72.5				70.7				73.9				72.4
Gross profit			27.5				29.3				26.1				27.6
Selling expense			22.2				22.3				22.4				22.0
General and administrative expense			9.0				9.5				8.8				9.1
Loss on disposal of property and equipment			—				—				0.1				—
Operating loss			(3.7	)			(2.5	)			(5.2	)			(3.5	)
Interest expense			(1.0	)			(1.0	)			(1.1	)			(1.0	)
Loss before income taxes			(4.7	)			(3.5	)			(6.3	)			(4.5	)
Provision for income taxes			0.1				—				0.1				—
Net loss			(4.8	)%			(3.5	)%			(6.4	)%			(4.5	)%

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

		Thirteen				Thirteen				Twenty-				Twenty-
		Weeks				Weeks				six Weeks				six Weeks
		Ended				Ended				Ended				Ended
		July 31,				July 30,				July 31,				July 30,
		2010				2011				2010				2011
Number of stores at beginning of period			239				231				238				232
Stores opened during period			—				1				2				1
Stores closed during period			(2	)			—				(3	)			(1	)
Number of stores at end of period			237				232				237				232

Thirteen Weeks Ended July 30, 2011 Compared to Thirteen Weeks Ended July 31, 2010

     Net sales. Net sales increased to $44.3 million for the thirteen weeks ended July 30, 2011 (second quarter 2011) from $43.3 million for the thirteen weeks ended July 31, 2010 (second quarter 2010), an increase of $1.0 million. During the second quarter, sales were driven by increased demand for dress shoes including our exclusive H by Halston and Wild Pair brands. Our comparable store sales for the second quarter of 2011, including multi-channel sales, increased by 4.7% compared to a 0.2% increase in comparable store sales in the second quarter of 2010. Average unit selling prices increased 8.6% while unit sales decreased 5.2% compared to the second quarter of 2010. Our multi-channel sales increased 16.2% to $2.7 million.

     Gross profit. Gross profit increased to $13.0 million in the second quarter of 2011 from $11.9 million in the second quarter of 2010, an increase of $1.1 million or 8.7%. As a percentage of sales, gross profit increased to 29.3% in the second quarter of 2011 from 27.5% in the second quarter of 2010. We attribute the increase in gross profit to the following components: an increase of $0.7 million from improved gross margin percentage, an increase of $0.5 million from higher comparable store sales, partially offset by a decrease

of $0.3 million from net store closures. Total markdown costs were $5.4 million in the second quarter of 2011 compared to $5.8 million in the second quarter of 2010.

     Selling expense. Selling expense increased to $9.9 million in the second quarter of 2011 from $9.6 million in the second quarter of 2010, an increase of $0.3 million or 2.8%, and increased as a percentage of sales to 22.3% from 22.2%. This increase was primarily the result of $0.2 million increase in store payroll expenses and $0.1 million in higher marketing expenses.

     General and administrative expense. General and administrative expense increased to $4.2 million in the second quarter of 2011 from $3.9 million in the second quarter of 2010, an increase of $0.3 million or 7.8%, and increased as a percentage of sales to 9.5% from 9.0%. The increase resulted from increased payroll related expenses.

     Interest expense. Interest expense remained flat at $0.4 million year over year.

     Net loss. We had a net loss of $1.6 million in the second quarter of 2011 compared to a net loss of $2.1 million in the second quarter of 2010.

Twenty-six Weeks Ended July 30, 2011 Compared to Twenty-six Weeks Ended July 31, 2010

     Net sales. Net sales increased to $91.3 million for the twenty-six weeks ended July 30, 2011 (first half 2011) from $86.8 million for the twenty-six weeks ended July 31, 2010 (first half 2010), an increase of $4.5 million or 5.2%, During the first half, sales were driven by increased demand for dress shoes including our exclusive H by Halston and Wild Pair brands. Our comparable store sales for the first half of 2011, including multi-channel sales, increased by 7.1% compared to a 0.7% decrease in comparable store sales in the first half of 2010. Average unit selling prices increased 10.2% and unit sales decreased 3.8% compared to the first half of 2010. Our multi-channel sales increased 10.9% to $5.5 million for the first half of 2011.

     Gross profit. Gross profit increased to $25.2 million in the first half of 2011 from $22.7 million in the first half of 2010, an increase of $2.5 million or 11.3%. As a percentage of sales, gross profit increased to 27.6% in the first half of 2011 from 26.1% in the first half of 2010. We attribute the increase in gross profit dollars to the following components: an increase of $1.6 million from higher comparable store sales, an increase of $1.4 million from improved gross margin percentage, partially offset by a decrease of $0.4 million from net store closures. Total markdown costs were $12.8 million in the first half of 2011 compared to $12.2 million in the first half of 2010.

     Selling expense. Selling expense increased to $20.1 million in the first half of 2011 from $19.4 million in the first half of 2010, an increase of $0.7 million or 3.4%, but decreased as a percentage of sales to 22.0% from 22.4%. The increase was primarily the result of $0.5 million increase in store payroll, $0.4 million increase in marketing expenses, $0.1 million increase in credit card expenses, partially offset by $0.3 million in lower store depreciation expense.

     General and administrative expense. General and administrative expense increased to $8.3 million in the first half of 2011 from $7.7 million in the first half of 2010, an increase of $0.6 million or 8.3%, and increased as a percentage of sales to 9.1% from 8.8%. The increase was primarily the result of $0.3 million of higher group health insurance costs, a $0.2 million increase in payroll costs, $0.2 million increase in travel expenses, partially offset by a $0.1 million decrease in depreciation expense.

     Interest expense. Interest expense decreased to $0.9 million in the first half of 2011 from $1.0 million in the first half of 2010.

     Net loss. We had a net loss of $4.1 million in the first half of 2011 compared to a net loss of $5.5 million in the first half of 2010.

Seasonality and Quarterly Fluctuations

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

Liquidity and Capital Resources

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

     Our losses in the first half of fiscal year 2011 and recent years have had a significant negative impact on our financial position and liquidity. As of July 30, 2011, we had negative working capital of $12.6 million, unused borrowing capacity under our revolving credit facility of $0.4 million, and negative shareholders’ equity of $9.9 million.

     Our business plan for the remainder of fiscal year 2011 is based on mid-single digit increases in comparable store sales for the remainder of the year. Through September 3, 2011, year-to-date comparable store sales have increased 6.4%. Based on our business plan, we expect to maintain adequate liquidity for the remainder of fiscal year 2011. The business plan reflects continued focus on inventory management and on timely promotional activity. We believe that this focus on inventory should improve overall gross margin performance compared to fiscal year 2010. The plan also includes targeted increases in selling, general and administrative expenses to support the sales plan. We continue to work with our landlords and vendors to arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage availability. The business plan for fiscal year 2011 reflects improvement in cash flow but does not indicate a return to profitability. However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in our business plan.

     We closely monitor the financial covenants under our revolving credit facility. The facility’s minimum availability or adjusted EBITDA interest coverage ratio covenant requires that either we maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the calculation used previously in our subordinated secured term loan. We did not meet these covenants for the months of June and July 2010; however, this covenant violation was waived by the bank in connection with the August 2010 debt and equity issuance. Beginning with the third quarter of fiscal year 2010, we have met the bank covenant based on maintaining unused availability greater than 20% on a daily basis. Our business plan for 2011 also anticipates meeting the bank covenant on this basis. We continue to closely monitor our availability and continue to be constrained by our limited unused borrowing capacity. As of September 3, 2011, the balance on our revolving line of credit was $11.7 million, and our unused borrowing capacity in excess of the covenant minimum was $0.6 million.

     In June 2011, we amended our $4 million in aggregate principal amount of 9.5% subordinated convertible debentures, which were originally issued in June 2007. The amendments defer payment of principal under the debentures. Originally, all $4 million in principal amount was payable on June 30, 2012. Under the amendments, principal will be repaid in four equal annual installments of $1 million beginning on June 30, 2012. The interest rate on the debentures was also increased from 9.5% to 12% per annum. The amendments were consented to by our senior lender pursuant to an amendment to our senior credit facility. The bank amendment removed the covenant to refinance our subordinated convertible debentures and allows us to make the $1 million required principal payment on June 30, 2012, which is the only principal payment now required under the debentures prior to maturity of the credit facility on May 28, 2013, provided that certain conditions are met. These conditions include a requirement that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12 month period ending May 26, 2012, all as calculated pursuant to the senior credit facility.

     Based on our business plan for fiscal year 2011, we believe that we will be able to comply with the minimum availability or adjusted EBITDA coverage ratio covenant in our revolving credit facility. However, given the inherent volatility in our sales performance, there is no assurance that we will be able to do so. In addition, in light of our historical sales volatility and the current state of the economy, we believe that there is a reasonable possibility that we may not be able to comply with the financial covenants. Failure to comply would be a default under the terms of the revolving credit facility and could result in the acceleration of all of our debt obligations. If we are unable to comply with our financial covenants, we will be required to seek one or more additional amendments or waivers from our lenders. We believe that we would be able to obtain any required amendments or waivers, but can give no assurance that we would be able to do so on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our lenders would have the right to exercise remedies specified in the loan agreements, including accelerating the repayment

of debt obligations and taking collection action against us. If such acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be forced to obtain alternative financing.

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

     Our independent registered public accounting firm’s report issued in our most recent Annual Report on Form 10-K included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern, including our recent losses and working capital deficiency. See Note 2 to our financial statements. Our financial statements do not include any adjustments relating to the recoverability and classification of assets carrying amounts or the amount of and classification of liabilities that may result should we be unable to continue as a going concern. We have taken several steps that we believe will be sufficient to allow us to continue as a going concern and to improve our liquidity, operating results and financial condition. See “Item 1. Business — Risk Factors — The report issued by our independent registered public accounting firm on our fiscal year 2010 financial statements contains language expressing substantial doubt about our ability to continue as a going concern” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

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

		July 31, 2010				January 29, 2011				July 30, 2011
Cash		$	149,905			$	146,263			$	140,360
Inventories			21,626,346				25,911,508				24,914,073
Total current assets			24,118,149				28,513,463				27,318,846
Property and equipment, net			22,029,961				18,405,166				16,928,139
Total assets			47,072,607				48,005,687				45,186,026
Accounts payable			16,904,303				16,009,847				19,109,761
Revolving credit facility			9,553,095				10,449,299				10,164,889
Subordinated convertible debentures			4,000,000				4,000,000				4,000,000
Subordinated debenture			—				4,123,327				4,153,266
Subordinated secured term loan			1,550,049				—				—
Total current liabilities			37,309,598				37,211,199				39,886,779
Total shareholders’ deficit			(3,209,548	)			(5,987,111	)			(9,905,404	)
Net working capital			(13,191,449	)			(8,707,737	)			(12,567,933	)
Unused borrowing capacity*			1,054,189				3,060,582				434,661

Operating activities

     Cash provided by operating activities was $1.4 million in the first half of 2011 compared to $2.8 million in the first half of 2010. Besides our net loss of $4.1 million, the most significant sources of cash provided by operating activities in the first half of 2011 primarily relate to a $1.4 million increase of accounts payable, accrued expenses and rent liabilities, as we continue to work with our vendors and landlords to maintain payment terms that are reflective of our seasonal cash flow patterns, and a $1.0 million decrease in inventory levels at the beginning of fiscal year. The most significant sources of cash provided by operating activities in the first half of 2010 primarily relate to a $6.2 million increase of accounts payable and accrued expenses, offset by a $1.4 million increase in inventory from levels at the beginning of fiscal year.

     Inventories at July 30, 2011 were $1.0 million lower than at January 29, 2011, and $3.3 million, or 15.2%, higher than at July 31, 2010, reflecting an acceleration of fall merchandise receipts. Although we believe that at July 30, 2011, inventory levels and valuations are appropriate given current and anticipated sales trends, there is always the possibility that fashion trends could change suddenly. We monitor our inventory levels closely and will take appropriate actions, including taking additional markdowns, as necessary, to maintain the freshness of our inventory.

Investing activities

     Cash used in investing activities was $1.1 million in the first half of 2011 compared to $0.5 million for the first half of 2010. During each period, cash used in investing activities substantially consisted of capital expenditures for furniture, fixtures and leasehold improvements for both new and remodeled stores.

     We currently anticipate that our capital expenditures in fiscal year 2011, primarily related to new stores, store remodelings, distribution and general corporate activities, will be approximately $1.7 million, which we expect to fund from internally generated cash flow.

Financing activities

     Cash used in financing activities was $0.3 million in the first half of 2011 compared to $2.4 million in cash used by financing activities for the first half of 2010. The use of cash in the first half of 2011 was the repayments of $0.3 million on our revolving line of credit. In the first half of fiscal year 2010, the principal uses of cash were the repayments of $1.0 million on our revolving line of credit and $1.4 million of principal payments on the subordinated secured term loan.

Revolving Credit Facility

     We have a $30 million senior secured revolving credit facility with Bank of America, N.A. On May 28, 2010, we amended our revolving credit agreement to extend the maturity of the credit facility from the end of fiscal year 2010 to May 28, 2013, modify the calculation of the borrowing base, add a new minimum availability or adjusted EBITDA interest coverage ratio covenant, add an obligation for the Company to extend the maturity of its subordinated convertible debentures by May 2012, add an early termination fee, and make other changes to the agreement. The minimum availability or adjusted EBITDA interest coverage ratio covenant requires that either the Company maintain unused availability greater than 20% of the calculated borrowing base or maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily, and if not met the adjusted EBITDA covenant is tested monthly on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the calculation used previously in our subordinated secured term loan. We did not meet these covenants for the months of June and July 2010; however, this covenant violation was waived by the bank in connection with the issuance of the subordinated debenture issued in August 2010 discussed below.

     In connection with an amendment to our subordinated convertible debentures, in June 2011, we amended our revolving credit facility to allow us to make a required $1 million principal payment in respect of the subordinated convertible debentures on June 30, 2012, provided that certain conditions are met, including that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12 month period ending May 26, 2012, all as calculated pursuant to the senior credit facility.

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

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

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

     Amounts borrowed under the credit facility are secured by substantially all of our assets. If contingencies related to early termination of the revolving credit facility were to occur, or if we request and receive an accommodation from the lender in

connection with the facility, we may be required to pay additional fees. We may be required to pay an early termination fee of up to $150,000 in the event we terminate the facility before May 2012.

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

     We had balances under our revolving credit facility of $10.2 million, $10.4 million and $9.6 million as of July 30, 2011, January 29, 2011 and July 31, 2010, respectively. We had approximately $0.4 million, $3.1 million and $1.1 million in unused borrowing capacity calculated under the provisions of our revolving credit facility as of July 30, 2011, January 29, 2011, and July 31, 2010, respectively. During the first half of fiscal years 2011 and 2010, the highest outstanding balances on our revolving credit facility were $15.9 million and $15.4 million, respectively. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.

Subordinated Convertible Debentures

     On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated convertible debentures to seven accredited investors in a private placement generating net proceeds of approximately $3.6 million, which were used to repay amounts owed under our revolving credit facility. The subordinated convertible debentures are nonamortizing, originally bore interest at a rate of 9.5% per annum, payable semi-annually on each June 30 and December 31, and mature on June 30, 2012. The amendment to our revolving credit facility, discussed above, required that we amend the subordinated convertible debentures on or before May 1, 2012, to extend the maturity to a date beyond July 27, 2013. Investors included corporate director Scott C. Schnuck, former corporate director Andrew N. Baur and an entity affiliated with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison.

     In June 2011, we amended the debentures to defer payment of principal and to increase the interest rate. Under the amendments, principal will be repaid in four equal annual installments of $1 million beginning on June 30, 2012. The interest rate on the debentures was also increased from 9.5% to 12% per annum. The amendments were consented to by our senior lender pursuant to an amendment to our senior credit facility. The bank amendment removed the covenant to refinance our subordinated convertible debentures and allows us to make the $1 million required principal payment on June 30, 2012, provided that certain conditions are met. These conditions include a requirement that we maintain at least a 1.0 to 1.0 ratio of adjusted EBITDA to interest expense for the 12-month period ending May 26, 2012, all as calculated pursuant to the senior credit facility.

     The subordinated convertible debentures are convertible into shares of common stock at any time. The initial conversion price was $9.00 per share. The conversion price, and thus the number of shares into which the debentures are convertible, is subject to anti-dilution and other adjustments. If we distribute any assets (other than ordinary cash dividends), then generally each holder is entitled to receive a like amount of such distributed property. In the event of a merger, consolidation, sale of substantially all of our assets, or reclassification or compulsory share exchange, then upon any subsequent conversion each holder will have the right to either the same property as it would have otherwise been entitled or cash in an amount equal to 100% principal amount of the debenture, plus interest and any other amounts owed. The subordinated convertible debentures also contain a weighted average conversion price adjustment generally for future issuances, at prices less than the then current conversion price, of common stock or securities convertible into, or options to purchase, shares of common stock, excluding generally currently outstanding options, warrants or performance shares and any future issuances or deemed issuances pursuant to any properly authorized equity compensation plans. The subordinated convertible debentures contain limitations on the number of shares issuable pursuant to the subordinated convertible debentures regardless of how low the conversion price may be, including limitations generally requiring that the conversion price not be less than $8.10 per share for subordinated convertible debentures issued to advisory directors, corporate directors or the entity that was affiliated with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock in the transaction or such that following conversion, the total number of shares beneficially owned by each holder does not exceed 19.999% of our common stock. These limitations may be removed with shareholder approval.

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

     The subordinated convertible debentures generally provide for customary events of default, which could result in acceleration of all amounts owed, including default in required payments, failure to pay when due, or the acceleration of other monetary obligations for indebtedness (broadly defined) in excess of $1 million (subject to certain exceptions), failure to observe or perform covenants or agreements contained in the transaction documents, including covenants relating to using the net proceeds, maintaining legal existence, prohibiting the sale of material assets outside of the ordinary course, prohibiting cash dividends and distributions, share repurchases, and certain payments to our officers and directors. We generally have the right, but not the obligation, to redeem the unpaid principal balance of the subordinated convertible debentures at any time prior to conversion if the closing price of our common stock (as adjusted for stock dividends, subdivisions or combinations) is equal to or above $16.00 per share for each of 20 consecutive trading days and certain other conditions are met. We have also agreed to provide certain piggyback and demand registration rights, until two years after the subordinated convertible debentures cease to be outstanding, to the holders under the Securities Act of 1933 relating to the shares of common stock issuable upon conversion of the subordinated convertible debentures.

Subordinated Debenture

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

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

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

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

Off-Balance Sheet Arrangements

     At July 29, 2011, January 29, 2011, and July 31, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could otherwise have arisen if we had engaged in such relationships.

Contractual Obligations

     The following table summarizes our contractual obligations as of July 30, 2011:

		Payments due by Period
						Less than
Contractual Obligations		Total				1 Year				1 - 3 Years				3 -5 Years				More than 5 Years
Long-term debt obligations (1)		$	14,434,667			$	2,038,000			$	3,708,334			$	2,221,666			$	6,466,667
Operating lease obligations (2)			104,864,744				24,434,310				40,613,109				26,944,966				12,872,359
Purchase obligations (3)			28,204,701				22,954,701				3,000,000				2,250,000				—
Total		$	147,504,112			$	49,427,011			$	47,321,443			$	31,416,632			$	19,339,026

Recent Accounting Pronouncements

     None.

Impact of Inflation

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not required.

ITEM 4. CONTROLS AND PROCEDURES

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

     Internal Control Over Financial Reporting. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s second fiscal quarter ended July 30, 2011 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 second quarter of fiscal year 2011.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 6. EXHIBITS

     See Exhibit Index herein

SIGNATURES

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

Date: September 13, 2011

EXHIBIT INDEX

Exhibit No.		Description
3.1		Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
3.2		Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).
4.1		Second Amendment to Subordinated Convertible Debentures and Subordinated Convertible Debenture Purchase Agreement dated June 30, 2011. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 5, 2011 (File No. 000-50563)).
4.2		Amended and Restated Subordination Agreement dated June 30, 2011 by and among the Company, the Investors named therein and Bank of America, N.A. (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 5, 2011 (File No. 000-50563)).
10.1		Sixth Amendment to Second Amended and Restated Loan and Security Agreement dated June 30, 2011 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 5, 2011 (File No. 000-50563)).
11.1		Statement regarding computation of per share earnings (incorporated by reference from Note 9 to the unaudited interim financial statements included herein).
31.1		Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer).
31.2		Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer).
32.1		Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer and the Chief Financial Officer).
101		Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Balance Sheets at July 31, 2010, January 29, 2011, and July 30, 2011; (ii) Condensed Statements of Operations for the thirteen and twenty-six weeks ended July 31, 2010 and July 30, 2011;(iii) Condensed Statement of Shareholders’ Deficit; (iv)Condensed Statements of Cash Flows for the twenty-six weeks ended July 31, 2010 and July 30, 2011; and (v) Notes to Condensed Financial Statements for the thirteen and twenty-six weeks ended July 30, 2011. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act or the Exchange Act, or otherwise subject to liability under those sections, except as shall be expressly set forth by specific reference in such filing.