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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 1934For the quarterly period ended April 30, 2005o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from __________ to __________
 Commission File Number: 000-50563 BAKERS FOOTWEAR GROUP, INC. (Exact name of registrant as specified in its charter)
 Missouri(State of other jurisdiction of
incorporation or organization)
    
    43-0577980(I.R.S. Employer Identification Number)
 2815 Scott Avenue,
St. Louis, Missouri(Address of principal executive offices)
    
    63103(Zip Code)
 (314)621-0699(Registrants telephone number, including area code) Bakers Footwear Group, Inc.s former fiscal year ended January 1, 2005. On March 10, 2005, Bakers
Footwear Group, Inc. changed its fiscal year end to the Saturday closest to January 31.
 (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. þ Yes o No. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). o Yes 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, $0.0001 par value, 6,102,481 shares issued and outstanding as of June 10, 2005




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BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q PagePart I Financial InformationItem 1. Financial Statements (Unaudited)Condensed Balance Sheets
    
    3Condensed Statements of Operations
    
    4Condensed Statement of Shareholders Equity
    
    5Condensed Statement of Cash Flows
    
    6Notes to Condensed Financial Statements
    
    7-10Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    11-17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    17-18Item 4. Controls and Procedures
    
    18Part II Other InformationItem 2. Changes in Securities and Use of Proceeds
    
    19Item 6. Exhibits
    
    20Signatures
    
    20Exhibit Index
    
    21-22Rule 13a-14(a)15d-14(a) Certification - CEORule 13a-14(a)15d-14(a) Certification - CFOSection 1350 Certification - CEOSection 1350 Certification - CFO
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS BAKERS FOOTWEAR GROUP, INC. 
 CONDENSED BALANCE SHEETS
 May 1, 2004
    
    
    January 1, 2005
    
    
    January 29, 2005
    
    
    April 30, 2005(Unaudited)
    
    
    
    
    
    
    (Unaudited)
    
    
    (Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,977,970
    
    
    $
    6,675,135
    
    
    $
    1,431,759
    
    
    $
    4,908,501Accounts receivable
    
    
    993,848
    
    
    
    1,237,450
    
    
    
    815,203
    
    
    
    1,374,380Other receivables
    
    
    50,003
    
    
    
    645,855
    
    
    
    527,406
    
    
    
    637,425Inventories
    
    
    16,861,079
    
    
    
    16,790,753
    
    
    
    17,802,355
    
    
    
    20,416,274Prepaid expenses and other current assets
    
    
    921,380
    
    
    
    1,048,347
    
    
    
    1,180,756
    
    
    
    1,421,958Deferred income taxes
    
    
    1,163,143
    
    
    
    1,904,963
    
    
    
    2,860,015
    
    
    
    1,651,694Total current assets
    
    
    26,967,423
    
    
    
    28,302,503
    
    
    
    24,617,494
    
    
    
    30,410,232Property and equipment, net
    
    
    14,061,949
    
    
    
    20,714,211
    
    
    
    21,727,909
    
    
    
    24,771,443Deferred income taxes
    
    
    131,150
    
    
    
    
    
    
    
    
    
    
    
    Other assets
    
    
    187,143
    
    
    
    353,994
    
    
    
    377,467
    
    
    
    499,381Total assets
    
    $
    41,347,665
    
    
    $
    49,370,708
    
    
    $
    46,722,870
    
    
    $
    55,681,056Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    4,932,298
    
    
    $
    6,662,044
    
    
    $
    8,503,660
    
    
    $
    7,095,032Accrued expenses
    
    
    3,518,792
    
    
    
    7,457,043
    
    
    
    5,829,254
    
    
    
    5,922,166Sales tax payable
    
    
    743,233
    
    
    
    1,422,716
    
    
    
    534,917
    
    
    
    928,094Deferred income
    
    
    821,490
    
    
    
    914,814
    
    
    
    868,342
    
    
    
    969,197Current maturities of capital lease obligations
    
    
    845,382
    
    
    
    667,698
    
    
    
    652,636
    
    
    
    582,883Total current liabilities
    
    
    10,861,195
    
    
    
    17,124,315
    
    
    
    16,388,809
    
    
    
    15,497,372Obligations under capital leases, less current maturities
    
    
    1,099,939
    
    
    
    679,414
    
    
    
    634,413
    
    
    
    517,057Accrued rent liabilities
    
    
    2,770,423
    
    
    
    3,686,119
    
    
    
    3,701,448
    
    
    
    4,514,358Deferred income taxes
    
    
    
    
    
    
    806,323
    
    
    
    789,462
    
    
    
    532,869Shareholders equity:Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares outstanding at April 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common Stock, $0.0001 par value; 40,000,000 shares
authorized, 5,102,481 shares outstanding at May 1,
2004, January 1, 2005 and January 29, 2005;
6,102,481 shares outstanding at April 30, 2005
    
    
    510
    
    
    
    510
    
    
    
    510
    
    
    
    610Additional paid-in capital
    
    
    25,590,557
    
    
    
    25,623,630
    
    
    
    25,623,630
    
    
    
    33,183,054Retained earnings (deficit)
    
    
    1,025,041
    
    
    
    1,450,397
    
    
    
    (415,402
    )
    
    
    1,435,736Total shareholders equity
    
    
    26,616,108
    
    
    
    27,074,537
    
    
    
    25,208,738
    
    
    
    34,619,400Total liabilities and shareholders equity
    
    $
    41,347,665
    
    
    $
    49,370,708
    
    
    $
    46,722,870
    
    
    $
    55,681,056
 See accompanying notes. 3




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##### Table of Contents



BAKERS FOOTWEAR GROUP, INC. 
 CONDENSED STATEMENTS OF OPERATIONS
 (Unaudited)
 Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Net sales
    
    $
    8,762,538
    
    
    $
    9,158,759
    
    
    $
    38,676,168
    
    
    $
    44,943,180Cost of merchandise sold, occupancy, and
buying expenses
    
    
    6,890,894
    
    
    
    8,550,212
    
    
    
    26,230,876
    
    
    
    29,536,561Gross profit
    
    
    1,871,644
    
    
    
    608,547
    
    
    
    12,445,292
    
    
    
    15,406,619Operating expenses:Selling
    
    
    2,206,379
    
    
    
    2,357,862
    
    
    
    7,677,418
    
    
    
    8,626,977General and administrative
    
    
    930,300
    
    
    
    1,143,899
    
    
    
    3,248,134
    
    
    
    3,557,231Loss on disposal of property and equipment
    
    
    75,448
    
    
    
    8,489
    
    
    
    26,618
    
    
    
    139,873Impairment of long-lived assets
    
    
    
    
    
    
    20,494
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (1,340,483
    )
    
    
    (2,922,197
    )
    
    
    1,493,122
    
    
    
    3,082,538Other income (expense):Interest expense
    
    
    (118,979
    )
    
    
    (30,360
    )
    
    
    (368,972
    )
    
    
    (126,390
    )Other, net
    
    
    7,652
    
    
    
    17,356
    
    
    
    89,231
    
    
    
    36,467Income (loss) before income taxes
    
    
    (1,451,810
    )
    
    
    (2,935,201
    )
    
    
    1,213,381
    
    
    
    2,992,615Provision for (benefit from) income taxes
    
    
    (1,709,249
    )
    
    
    (1,069,402
    )
    
    
    468,174
    
    
    
    1,141,477Net income (loss)
    
    $
    257,439
    
    
    $
    (1,865,799
    )
    
    $
    745,207
    
    
    $
    1,851,138Basic earnings (loss) per share
    
    $
    0.20
    
    
    $
    (0.37
    )
    
    $
    0.16
    
    
    $
    0.35Diluted earnings (loss) per share
    
    $
    0.10
    
    
    $
    (0.37
    )
    
    $
    0.15
    
    
    $
    0.33
 See accompanying notes. 4




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##### Table of Contents



BAKERS FOOTWEAR GROUP, INC. 
 CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
 (Unaudited)
 Common StockShares
    
    
    
    
    
    
    Additional
    
    
    RetainedIssued and
    
    
    
    
    
    
    Paid-In
    
    
    EarningsOutstanding
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    TotalBalance at January 1, 2005
    
    
    5,102,481
    
    
    $
    510
    
    
    $
    25,623,630
    
    
    $
    1,450,397
    
    
    $
    27,074,537Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,865,799
    )
    
    
    (1,865,799
    )Balance at January 29, 2005
    
    
    5,102,481
    
    
    $
    510
    
    
    $
    25,623,630
    
    
    $
    (415,402
    )
    
    $
    25,208,738Shares issued in connection with private
placement of common stock and warrants
    
    
    1,000,000
    
    
    
    100
    
    
    
    7,559,424
    
    
    
    
    
    
    
    7,559,524Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,851,138
    
    
    
    1,851,138Balance at April 30, 2005
    
    
    6,102,481
    
    
    $
    610
    
    
    $
    33,183,054
    
    
    $
    1,435,736
    
    
    $
    34,619,400
 See accompanying notes. 5




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##### Table of Contents



BAKERS FOOTWEAR GROUP, INC. 
 CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Operating activitiesNet income (loss)
    
    $
    257,439
    
    
    $
    (1,865,799
    )
    
    $
    745,207
    
    
    $
    1,851,138Adjustments to reconcile net income (loss) to
net cash used in operating activities:Depreciation and amortization
    
    
    245,511
    
    
    
    340,580
    
    
    
    784,001
    
    
    
    1,094,215Deferred income taxes
    
    
    (1,585,370
    )
    
    
    (971,913
    )
    
    
    291,077
    
    
    
    951,728Beneficial conversion of subordinated debentures
    
    
    
    
    
    
    
    
    
    
    163,333
    
    
    
    Impairment of long-lived assets
    
    
    
    
    
    
    20,494
    
    
    
    
    
    
    
    Amortization of debt discount
    
    
    9,820
    
    
    
    
    
    
    
    
    
    
    
    Accretion of stock warrants
    
    
    12,500
    
    
    
    
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    75,448
    
    
    
    8,489
    
    
    
    26,618
    
    
    
    139,873Changes in operating assets and liabilities:Accounts receivable and other receivables
    
    
    389,192
    
    
    
    540,696
    
    
    
    (195,178
    )
    
    
    (669,196
    )Inventories
    
    
    (389,824
    )
    
    
    (1,011,602
    )
    
    
    (3,690,999
    )
    
    
    (2,613,919
    )Prepaid expenses and other current assets
    
    
    166,038
    
    
    
    (132,409
    )
    
    
    (57,510
    )
    
    
    (241,202
    )Other assets
    
    
    (160,166
    )
    
    
    (23,473
    )
    
    
    837,386
    
    
    
    (121,914
    )Accounts payable
    
    
    (337,778
    )
    
    
    1,841,616
    
    
    
    1,740,424
    
    
    
    (1,408,628
    )Accrued expenses and deferred income
    
    
    (1,391,938
    )
    
    
    (2,562,060
    )
    
    
    (1,237,726
    )
    
    
    586,944Accrued rent liabilities
    
    
    33,509
    
    
    
    15,329
    
    
    
    139,144
    
    
    
    812,910Net cash provided (used) in operating activities
    
    
    (2,675,619
    )
    
    
    (3,800,052
    )
    
    
    (454,223
    )
    
    
    381,949Investing activitiesPurchase of property and equipment
    
    
    (247,851
    )
    
    
    (1,385,436
    )
    
    
    (1,592,512
    )
    
    
    (4,278,136
    )Proceeds from sale of property and equipment
    
    
    157
    
    
    
    2,175
    
    
    
    42,516
    
    
    
    514Net cash used in investing activities
    
    
    (247,694
    )
    
    
    (1,383,261
    )
    
    
    (1,549,996
    )
    
    
    (4,277,622
    )Financing activitiesNet advances (repayments) under revolving notes
payable
    
    
    2,765,468
    
    
    
    
    
    
    
    (4,934,942
    )
    
    
    Proceeds from sale of common stock and warrants
    
    
    
    
    
    
    
    
    
    
    15,559,534
    
    
    
    7,559,524Principal payments under capital lease obligations
    
    
    (106,831
    )
    
    
    (60,063
    )
    
    
    (242,292
    )
    
    
    (187,109
    )Principal payments of subordinated debt
    
    
    
    
    
    
    
    
    
    
    (859,910
    )
    
    
    Payment to retire stock warrants
    
    
    
    
    
    
    
    
    
    
    (850,000
    )
    
    
    Net cash provided (used) by financing activities
    
    
    2,658,637
    
    
    
    (60,063
    )
    
    
    8,672,390
    
    
    
    7,372,415Net increase (decrease) in cash and cash equivalents
    
    
    (264,676
    )
    
    
    (5,243,376
    )
    
    
    6,668,171
    
    
    
    3,476,742Cash and cash equivalents at beginning of period
    
    
    574,475
    
    
    
    6,675,135
    
    
    
    309,799
    
    
    
    1,431,759Cash and cash equivalents at end of period
    
    $
    309,799
    
    
    $
    1,431,759
    
    
    $
    6,977,970
    
    
    $
    4,908,501Supplemental disclosures of cash flow informationCash paid for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    106,559
    
    
    $
    69,825Cash paid for interest
    
    $
    61,551
    
    
    $
    39,619
    
    
    $
    259,650
    
    
    $
    114,156
 See accompanying notes. 6




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##### Table of Contents



BAKERS FOOTWEAR GROUP, INC. 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 Unaudited
 1. Basis of Presentation The accompanying unaudited condensed financial statements contain all adjustments that
management believes are necessary to present fairly Bakers Footwear Group, Inc.s (the Companys)
financial position, results of operations and cash flows for the periods presented. Such
adjustments consist of normal recurring accruals. Certain information and disclosures normally
included in notes to financial statements have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. The Companys operations are
subject to seasonal fluctuations and, consequently, operating results for interim periods are not
necessarily indicative of the results that may be expected for other interim periods or for the
full year. The condensed financial statements should be read in conjunction with the audited
financial statements and the notes thereto contained in our Annual Report on Form 10-K for fiscal
year ended January 1, 2005. 2. Change in Fiscal Year On March 10, 2005, by a vote of its board of directors, the Company changed its fiscal year
end to the Saturday closest to January 31. Previously the Companys fiscal year ended four weeks
earlier. As a result of this change, the Company had a four week transition period ended January
29, 2005. The unaudited results of operations and changes in shareholders equity and cash flows
for this four week transition period are presented in the condensed financial statements. The
audited results of operations and changes in shareholders equity and cash flows for the four week
transition period will be included in the Companys Annual Report on Form 10-K for the year ended
January 28, 2006. For comparison purposes, we have presented the thirteen weeks ended May 1, 2004
as the first quarter of 2004. 3. Private Placement of Common Stock and Warrants Effective April 8, 2005, for $8,750,000 the Company sold to certain qualified investors
1,000,000 shares of common stock and warrants to purchase 250,000 shares of common stock at an
exercise price of $10.18 per share through April 8, 2010. As of April 30, 2005, the net proceeds
to the Company after placement fees and expenses were $7,559,524. The Company also issued warrants
to purchase 125,000 shares of common stock at an exercise price of $10.18 through April 8, 2010 to
the placement agent. In connection with this transaction, the Company entered into a registration rights agreement
wherein the Company agreed to make the requisite SEC filings to register, achieve and subsequently
maintain the effectiveness of the registration of the common stock sold and the common stock
issuable upon exercise of the warrants sold in the private placement. The registration rights
agreement is effective through April 8, 2008. Failure to register, achieve and maintain
effectiveness of the registration through the term of the registration rights agreement will
subject the Company to liquidated damages in the amount of 1% per month of the $8,750,000 gross
proceeds of the private placement. On May 5, 2005, the Company filed Form S-3 registering for
resale the common stock sold and the common stock underlying the warrants and placement agent
warrants. The SEC declared the registration effective on May 25, 2005. The Company is now required
to maintain the effectiveness of the registration, subject to certain exceptions, through April 8,
2008 in order to avoid paying liquidated damages. As of April 30, 2005, the maximum amount of
liquidated damages that the Company could be required to pay was $2,887,500, which represents 33
potential monthly payments of $87,500. The Company has estimated the fair value of the 375,000 stock purchase warrants, including the
placement agent warrants, issued in connection with the private placement using the Black-Scholes
formula to be $2,160,000. Because the Company has no obligation to settle the warrants by any
means other than through the issuance of shares of its common stock, the Company has included the
fair value of the warrants as a component of shareholders equity. 4. Initial Public Offering On February 10, 2004, the Company completed its Initial Public Offering (IPO) and sold
2,160,000 shares of common stock at $7.75 per share. On March 12, 2004, the Company sold an
additional 324,000 shares of common stock at $7.75 per share when the underwriters exercised their
over-allotment option. The net proceeds to the Company were approximately $15,531,000 after
deducting the underwriting discount and other expenses incurred in connection with the IPO. 7




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##### Table of Contents



The Company used the proceeds from the IPO to repay the $5.7 million balance on its revolving
credit agreement, repay $859,910 of subordinated debt, and repurchase stock warrants for $850,000.
The Company used the remaining proceeds for capital expenditures
during 2004. Effective with the IPO, all shares of the Companys existing Class A, Class B, and Class C
common stock were exchanged for shares of new common stock on a one to one basis, excluding
fractional shares, and the Companys related repurchase obligations were terminated. The Company issued stock purchase warrants covering 216,000 shares of common stock with an
exercise price of $12.7875 per share, subject to antidilution adjustments, to representatives of
the underwriters. The warrants became exercisable on February 10, 2005 and expire on February 10,
2009. The subordinated convertible debentures were converted into 653,331 shares of common stock at
a conversion rate of $7.50 per share. The Company recognized a beneficial conversion expense of
$163,333 for the difference between the $7.75 IPO price and the $7.50 conversion price. 5. Income Taxes Significant components of the provision for income tax expense (benefit) are as follows: Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Current:Federal
    
    $
    (104,319
    )
    
    $
    (82,096
    )
    
    $
    149,134
    
    
    $
    159,789State and local
    
    
    (19,560
    )
    
    
    (15,393
    )
    
    
    27,963
    
    
    
    29,960Total current
    
    
    (123,879
    )
    
    
    (97,489
    )
    
    
    177,097
    
    
    
    189,749Deferred:Federal
    
    
    (1,409,086
    )
    
    
    (818,453
    )
    
    
    245,117
    
    
    
    801,454State and local
    
    
    (176,284
    )
    
    
    (153,460
    )
    
    
    45,960
    
    
    
    150,274Total deferred
    
    
    (1,585,370
    )
    
    
    (971,913
    )
    
    
    291,077
    
    
    
    951,728Total income tax expense (benefit)
    
    $
    (1,709,249
    )
    
    $
    (1,069,402
    )
    
    $
    468,174
    
    
    $
    1,141,477
 The differences between income tax expense (benefit) calculated at the statutory U.S. federal
income tax rate of 34% and the amount reported in the statement of operations are as follows: Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Federal income tax at the
34% statutory rate
    
    $
    (493,615
    )
    
    $
    (997,968
    )
    
    $
    412,550
    
    
    $
    1,017,489State and local taxes, net of
federal income taxes
    
    
    (58,059
    )
    
    
    (72,564
    )
    
    
    49,832
    
    
    
    119,705Permanent differences
    
    
    468
    
    
    
    1,130
    
    
    
    5,792
    
    
    
    4,283Conversion from S Corporation to
C Corporation status
    
    
    (1,158,043
    )
    
    
    
    
    
    
    
    
    
    
    Total income tax expense (benefit)
    
    $
    (1,709,249
    )
    
    $
    (1,069,402
    )
    
    $
    468,174
    
    
    $
    1,141,477
 Deferred income taxes arise from temporary differences in the recognition of income and
expense for income tax purposes. Deferred income taxes were computed using the liability method and
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax purposes. 8




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##### Table of Contents



Components of the Companys deferred tax assets and liabilities are as follows: January 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Deferred tax assets:Net operating loss carryforward
    
    $
    482,589
    
    
    $
    1,676,705
    
    
    $
    
    
    
    $
    386,430Vacation accrual
    
    
    240,268
    
    
    
    364,210
    
    
    
    268,768
    
    
    
    384,730Inventory
    
    
    722,000
    
    
    
    965,564
    
    
    
    950,799
    
    
    
    1,026,998Stock-based and accrued bonus
compensation
    
    
    536,834
    
    
    
    426,634
    
    
    
    426,634
    
    
    
    426,634Accrued rent
    
    
    999,886
    
    
    
    1,406,550
    
    
    
    1,052,761
    
    
    
    1,677,456Total deferred tax assets
    
    
    2,981,577
    
    
    
    4,839,663
    
    
    
    2,698,962
    
    
    
    3,902,248Deferred tax liabilities:Property and equipment
    
    
    1,396,207
    
    
    
    2,769,110
    
    
    
    1,404,669
    
    
    
    2,783,423Total deferred tax liabilities
    
    
    1,396,207
    
    
    
    2,769,110
    
    
    
    1,404,669
    
    
    
    2,783,423Net deferred tax assets
    
    $
    1,585,370
    
    
    $
    2,070,553
    
    
    $
    1,294,293
    
    
    $
    1,118,825
 6. Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, establishes the use of the fair
value-based method of accounting for all stock-based compensation arrangements. SFAS No. 123
permits companies to use the intrinsic value accounting method specified in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations
to account for stock-based employee compensation arrangements. The Company uses the intrinsic
value-based method to account for stock-based employee compensation arrangements and complies with
the disclosure provisions of SFAS No. 123. Effective with the IPO, the Company issued options to purchase 304,500 shares of common stock
with an exercise price of $7.75 per share to certain employees and directors. In the first quarter
of 2005, the Company issued options to purchase 198,700 shares of common stock with a
weighted-average exercise price of $11.30 per share. These options generally vest over five years
and expire after ten years. Had compensation cost for all options been determined based on the
grant date fair values of the options in accordance with SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated below: Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Net income (loss) as reported
    
    $
    257,439
    
    
    $
    (1,865,799
    )
    
    $
    745,207
    
    
    $
    1,851,138Add: Stock based compensation
expense included in net income as
reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock based compensation
expense determined under fair value method, net of related income tax effect
    
    
    
    
    
    
    (33,275
    )
    
    
    (99,826
    )
    
    
    (103,543
    )Pro forma net income (loss)
    
    $
    257,439
    
    
    $
    (1,899,074
    )
    
    $
    645,381
    
    
    $
    1,747,595
 Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Basic earnings (loss) per share:As reported
    
    $
    0.20
    
    
    $
    (0.37
    )
    
    $
    0.16
    
    
    $
    0.35Pro forma
    
    $
    0.20
    
    
    $
    (0.37
    )
    
    $
    0.14
    
    
    $
    0.33Diluted earnings (loss) per share:As reported
    
    $
    0.10
    
    
    $
    (0.37
    )
    
    $
    0.15
    
    
    $
    0.33Pro forma
    
    $
    0.10
    
    
    $
    (0.37
    )
    
    $
    0.13
    
    
    $
    0.31
 The weighted-average fair value of options granted during the thirteen weeks ended April 30,
2005 and May 1, 2004 was $6.92 and $4.68, respectively. The fair value of these options was
estimated at grant date using the Black-Scholes option pricing model assuming no dividends,
risk-free interest rates of 3.0% to 3.5%, expected volatility of 64%, and expected option life of 6
years. 7. Earnings (Loss) Per Share Basic earnings (loss) per common share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per common share are computed
using the weighted average number of common shares and 9




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##### Table of Contents



potential dilutive securities that were outstanding during the period. Potential dilutive
securities consist of outstanding stock options, warrants, and, through the effective date of the
IPO, convertible debentures, and redeemable Class A and Class B stock. The following table presents a reconciliation of our basic and diluted weighted average common
shares outstanding for the periods presented. Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Numerator:Net Income (loss)
    
    $
    257,439
    
    
    $
    (1,865,799
    )
    
    $
    745,207
    
    
    $
    1,851,138Accretion on redeemable stock
    
    
    22,396
    
    
    
    
    
    
    
    
    
    
    
    Numerator for basic earnings per share
    
    
    279,835
    
    
    
    (1,865,799
    )
    
    
    745,207
    
    
    
    1,851,138Reverse accretion on redeemable stock
    
    
    (22,396
    )
    
    
    
    
    
    
    
    
    
    
    Interest expense related to
convertible debentures
    
    
    20,634
    
    
    
    
    
    
    
    5,754
    
    
    
    Interest expense related to warrants
    
    
    7,750
    
    
    
    
    
    
    
    
    
    
    
    Numerator for diluted earnings per share
    
    $
    285,823
    
    
    $
    (1,865,799
    )
    
    $
    750,961
    
    
    $
    1,851,138Denominator for basic earnings per
share  weighted average shares
    
    
    1,420,713
    
    
    
    5,102,481
    
    
    
    4,587,517
    
    
    
    5,344,239Effect of dilutive securitiesStock options
    
    
    221,609
    
    
    
    
    
    
    
    253,263
    
    
    
    253,833Stock purchase warrants
    
    
    76,907
    
    
    
    
    
    
    
    25,354
    
    
    
    843Redeemable securities
    
    
    1,197,768
    
    
    
    
    
    
    
    131,623
    
    
    
    Denominator for diluted earnings per
share  adjusted weighted average
shares and assumed conversions
    
    
    2,916,997
    
    
    
    5,102,481
    
    
    
    4,997,757
    
    
    
    5,598,915
 The following securities were excluded from the computation of diluted earnings per share because
they were anti-dilutive: Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Stock options
    
    
    
    
    
    
    299,906
    
    
    
    
    
    
    
    Stock purchase warrants
    
    
    
    
    
    
    216,000
    
    
    
    216,000
    
    
    
    216,000Redeemable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 10




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Companys unaudited condensed
financial statements and notes thereto provided herein and the Companys audited financial
statements and notes thereto in our annual report on Form 10-K. 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 Statements Regarding Forward-Looking Statements and Certain Risks. Overview We are a national, mall-based, specialty retailer of distinctive footwear and accessories
targeting young women who demand quality fashion products. We feature private label and national
brand dress, casual and sport shoes, boots, sandals and accessories. As of April 30, 2005, we
operated 193 Bakers stores and 28 Wild Pair stores located in 36 states. On March 10, 2005, we changed our fiscal year end to the Saturday closest to January 31.
Previously our fiscal year ended four weeks earlier. This change moves us to the standard retail
calendar and matches our financial year to our merchandising year. As a result of this change, we
had a four week transition period ended January 29, 2005, and our first quarter covers the thirteen
weeks ended April 30, 2005. For comparison purposes, we refer to the thirteen weeks ended May 1,
2004 as the first quarter of 2004. During the first quarter of 2005, our sales increased 16.2% compared to the first quarter of
2004, and our comparable store sales increased 7.8%. Customer demand was strong, especially for
embellished and casual flats, wedges and espadrilles, contributing to the sales increase and to an
improvement in gross profit percentage to 34.3% of sales from 32.2%. The sales and margin gains
contributed to net income of $1.9 million, up from $0.7 million in the first quarter of 2004. During our four week transition period ended January 29, 2005, our sales increased 4.5% to
$9.2 million from $8.8 million for the four weeks ended January 31, 2004 while comparable store
sales decreased by 0.8%. January typically has the lowest net sales and gross profit of any month
in our fiscal year. We had a net loss of $1.9 million in January 2005 compared to net income of
$0.3 million in January 2004. Results for January 2004 include a one time gain of $1.2 million
from the recognition of deferred tax assets resulting from our conversion to a C corporation from
an S corporation in that month. During the first quarter of 2005, we completed a private placement of 1,000,000 shares of
common stock and warrants to purchase 375,000 shares of common stock, generating net proceeds of
approximately $7.5 million. This improved our financial position and will enable us to accelerate
our plans to open new stores and remodel existing stores into our new format. Our new format stores
are generating higher average net sales and higher comparable store sales growth than our company average. We opened seven new stores, completed remodeling at six stores, and closed four stores during
the first quarter of 2005. We closed two stores during our transition period. At April 30, 2005
we operated 86 stores in our new format and expect to operate the majority of our Bakers stores in
the new format by the end of our fiscal year. For comparison purposes, we classify our stores, including our internet store, 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. 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. 11




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##### Table of Contents



Merchandise inventories Merchandise inventories are valued at the lower of cost or market using the first-in first-out
retail inventory method. Permanent markdowns are recorded to reflect expected adjustments to retail
prices in accordance with the retail inventory method. The process of determining our expected
adjustments to retail prices requires significant judgment by management. Among other factors,
management utilizes performance metrics to evaluate the quality and freshness of inventory,
including the number of weeks of supply on hand, sell-through percentages and aging categories of
inventory by selling season, to make its best estimate of the appropriate inventory markdowns. If
market conditions are less favorable than those projected by management, additional inventory
markdowns may be required. Store closing and impairment charges Based on the criteria in SFAS No. 144, Accounting for the Disposal of Long-Lived Assets,
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. Deferred income taxes We calculate income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which
requires the use of the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized based on the difference between their carrying amounts for financial
reporting purposes and income tax reporting purposes. Deferred tax assets and liabilities are
measured using the tax rates in effect in the years when those temporary differences are expected
to reverse. Inherent in the measurement of deferred taxes are certain judgments and interpretations
of existing tax law and other published guidance as applied to our operations. No valuation
allowance has been provided for the deferred tax assets because we generated taxable income in
prior periods and we anticipate that future taxable income will be sufficient to allow us to fully
recover the amount of net deferred tax assets. Stock Purchase Warrants In connection with our initial public offering in 2004 and our private placement in 2005, we
issued stock purchase warrants. The warrants issued in our private placement are subject to a
registration rights agreement that includes a liquidated damages clause. We have considered the
guidance of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activitiesand Emerging
Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock,and have determined that it is appropriate
to include the fair value of the warrants issued as a component of additional paid-in capital.
However, we are aware that the EITF has included in the agenda for its June 2005 meeting EITF Issue
No. 05-4, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock,and understand that it is possible that the EITF
may reach a consensus which may require that the fair value of the warrants be classified as a
liability and may also reach a consensus that the fair value of the
warrants be remeasured at each
balance sheet date. This consensus could impact how we disclose our financial position and results
of operations. In such an event, we would follow transition guidance provided by EITF on this
issue. 12




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##### Table of Contents



Results of Operations The following table sets forth our operating results, expressed as a percentage of sales, for
the periods indicated. Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of merchandise sold, occupancy and
buying expense
    
    
    78.6
    
    
    
    93.4
    
    
    
    67.8
    
    
    
    65.7Gross profit
    
    
    21.4
    
    
    
    6.6
    
    
    
    32.2
    
    
    
    34.3Selling expense
    
    
    25.2
    
    
    
    25.7
    
    
    
    19.8
    
    
    
    19.2General and administrative expense
    
    
    10.6
    
    
    
    12.5
    
    
    
    8.4
    
    
    
    7.9Loss on disposal of property and equipment
    
    
    0.9
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3Impairment of long-lived assets
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (15.3
    )
    
    
    (31.9
    )
    
    
    3.9
    
    
    
    6.9Other income (expense)
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Interest expense
    
    
    (1.4
    )
    
    
    (0.3
    )
    
    
    (1.0
    )
    
    
    (0.3
    )Income (loss) before income taxes
    
    
    (16.6
    )
    
    
    (32.1
    )
    
    
    3.1
    
    
    
    6.7Provision for (benefit from) income taxes
    
    
    (19.5
    )
    
    
    (11.7
    )
    
    
    1.2
    
    
    
    2.5Net income (loss)
    
    
    2.9
    %
    
    
    (20.4
    )%
    
    
    1.9
    %
    
    
    4.2
    %
 The following table sets forth our number of stores at the beginning and end of each period
indicated and the number of stores opened, acquired and closed during each period indicated. Four
    
    
    Four
    
    
    Thirteen
    
    
    ThirteenWeeks Ended
    
    
    Weeks Ended
    
    
    Weeks Ended
    
    
    Weeks EndedJanuary 31, 2004
    
    
    January 29, 2005
    
    
    May 1, 2004
    
    
    April 30, 2005Number of stores at beginning of period
    
    
    215
    
    
    
    220
    
    
    
    208
    
    
    
    218Stores opened or acquired during period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Stores closed during period
    
    
    (7
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (4
    )Number of stores at end of period
    
    
    208
    
    
    
    218
    
    
    
    206
    
    
    
    221
 Thirteen Weeks Ended April 30, 2005 Compared to Thirteen Weeks Ended May 1, 2004 Net sales.Net sales increased to $44.9 million for the thirteen weeks ended April 30, 2005
(first quarter 2005) from $38.7 million for the thirteen weeks ended May 1, 2004 (first quarter
2004), an increase of $6.2 million. This increase resulted principally from higher average unit
sales at lower average unit prices compared to the first quarter of 2004. The lower average unit
prices reflect stronger sales of accessories which have lower unit prices but higher markups. Net
sales for the first quarter of 2005 reflect strong consumer demand for embellished casuals. Our
comparable store sales for the first quarter of 2005 increased by 7.8% compared to a 10.2% increase
in comparable store sales in the first quarter of 2004. Gross profit.Gross profit increased to $15.4 million in the first quarter of 2005 from $12.5
million in the first quarter of 2004. As a percentage of sales, gross profit increased to 34.3% in
the first quarter of 2005 from 32.2% in the first quarter of 2004. This reflects favorable markdown
experience resulting from the strong demand for our spring product offering. Selling expense.Selling expense increased to $8.6 million in the first quarter of 2005 from
$7.7 million in the first quarter of 2004, an increase of $0.9 million, but decreased as a
percentage of sales to 19.2% from 19.8%. This increase was due primarily to higher salaries and
commissions and higher depreciation expense. General and administrative expense.General and administrative expense increased to $3.6
million in the first quarter of 2005 from $3.2 million in the first quarter of 2004, an increase of
$0.4 million, but decreased as a percentage of sales to 7.9% from 8.4%. The increase was due
primarily to increased public company costs and depreciation expense compared to the first quarter
of 2004. Income tax expense.We recognized income tax expense of $1.1 million for the first quarter of
2005 compared to income tax expense of $0.5 million for the first quarter of 2004. The increase
resulted from higher pre-tax income in the current period. As of April 30, 2005, we had recorded
$1.1 million in net deferred income tax assets. No valuation allowance has been provided for these 13




---



##### Table of Contents



tax assets because we generated taxable income in prior years and we anticipate that future
taxable income will be sufficient to allow us to fully realize these tax assets. Net income. We had net income of $1.9 million, 4.2% of net sales, in the first quarter of 2005
compared to net income of $0.8 million, 1.9% of net sales, in the first quarter of 2004. Four Week Transition Period Ended January 29, 2005 Compared to Four Weeks Ended January 31, 2004 Net sales.Net sales increased to $9.2 million for the four week transition period ended
January 29, 2005 from $8.8 million for the four weeks ended January 31, 2004, an increase of $0.4
million. January typically is the lowest sales volume month of our year. Our comparable store
sales for January 2005 decreased by 0.8% compared to a 8.7% increase in comparable store sales in
January 2004. Gross profit.Gross profit decreased to $0.6 million in January 2005 from $1.9 million in
January 2004. As a percentage of sales, gross profit decreased to 6.6% in January 2005 from 21.4%
in January 2004. This reflects unfavorable markdown experience resulting from the tepid demand in
January 2005 compared to continued strong demand in January 2004. January 2005 margins also
reflect increased occupancy costs and the impact of planned post-Easter clearance sales on end of
January inventory valuations. Selling expense.Selling expense increased to $2.4 million in January 2005 from $2.2 million
in January 2004, an increase of $0.2 million, but were unchanged as a percentage of sales. General and administrative expense.General and administrative expense increased to $1.1
million January 2005 from $0.9 million in January 2004, an increase of $0.2 million. The increase
was due primarily to public company costs as we were still a private company in January 2004. Income tax benefit.We recognized an income tax benefit of $1.1 million in January 2005, down
from an income tax benefit of $1.7 million in January 2004. The income tax benefit in January 2004
includes the recognition of a nonrecurring income tax benefit of $1.2 million resulting from our
conversion to a C corporation in that month. As of January 29, 2005, we had recorded $2.1 million
in net deferred income tax assets. No valuation allowance has been provided for these tax assets
because we generated taxable income in prior years and we anticipate that future taxable income
will be sufficient to allow us to fully realize these tax assets. Net income (loss). We incurred a net loss of $1.9 million in January 2005 compared to net
income of $0.3 million in January 2004. 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. With our new
fiscal year, sales and net income in our first and fourth quarters are typically much stronger than
in our second and third quarters. In addition to our normal seasonal fluctuation, some events shift between fiscal quarters in
some years due to the nature of our fiscal year. This shift will influence our quarterly comparable
results. However, with the change in our fiscal year, the Easter holiday will now always occur in
the first quarter of our fiscal year. 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 During the first quarter of 2005, we completed a private placement of common stock and
warrants which generated net proceeds of approximately $7.5 million. During the first quarter of
2004, we completed our initial public offering which generated net proceeds of $15.5 million. The
improvement in our liquidity and overall financial position, as illustrated in the table below, is
a result of these equity placements as well as from the profitable results of our operations. Our
cash requirements are primarily for working capital, capital expenditures and principal payments on
our capital lease obligations. Historically, these needs for cash have been met by cash flows from
operations, borrowings under our revolving credit facility and sales of equity and subordinated
debt. The following table summarizes certain key liquidity measurements: 14




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##### Table of Contents



January 31, 2004
    
    
    May 1, 2004
    
    
    January 1, 2005
    
    
    January 29, 2005
    
    
    April 30, 2005Total current assets
    
    $
    16,571,620
    
    
    $
    26,967,423
    
    
    $
    28,302,503
    
    
    $
    24,617,494
    
    
    $
    30,410,232Total current liabilities
    
    
    17,456,177
    
    
    
    10,861,195
    
    
    
    17,124,315
    
    
    
    16,388,809
    
    
    
    15,497,372Net working capital
    
    
    (884,557
    )
    
    
    16,106,228
    
    
    
    11,178,188
    
    
    
    8,228,685
    
    
    
    14,912,860Total assets
    
    
    31,183,356
    
    
    
    41,347,665
    
    
    
    49,370,708
    
    
    
    46,722,870
    
    
    
    55,681,056Total shareholders equity
    
    
    3,534,321
    
    
    
    26,616,108
    
    
    
    27,074,537
    
    
    
    25,208,738
    
    
    
    34,619,400Unused borrowing capacity*
    
    
    2,766,087
    
    
    
    10,874,446
    
    
    
    12,354,131
    
    
    
    14,044,042
    
    
    
    15,137,998
   *
    
    as calculated under the terms of our revolving credit facility We anticipate that our cash flows from operations, borrowings under our revolving credit
facility, and proceeds from our private placement of common stock and warrants will be sufficient
for our operating cash requirements for at least the next 12 months and will allow us to further
execute our business plan, including our planned expansion. Operating activities For the first quarter of 2005, our net cash generated by operating activities was $0.4 million
compared to net cash used by operating activities of $0.5 million in the first quarter of 2004, an
improvement of $0.9 million. The primary cause of this improvement was increased operating income
in 2005. The primary use of cash for operating activities during the first quarter of 2005 and 2004
is the seasonal change in inventory which increased $2.6 million in the first quarter of 2005 and
$3.7 million in the first quarter of 2004. As a result of the increase in our total stores
operated and the increase in our comparable store sales, we have increased our inventory to $20.4
million at April 30, 2005, up $3.5 million from $16.9 million at May 1, 2004.
Although we believe that at April 30, 2005, 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. Substantially all of our products are currently manufactured in China. The significant growth
in the Chinese economy has resulted in periodic energy and labor shortages, as well as
transportation and shipping bottlenecks. In prior years there have been delays at ports on the
west coast of the United States resulting from the volume of Chinese imports We actively monitor
these matters and adjust the timing of our product sourcing in order to lessen the impact of any
production or transportation delays. Investing activities Cash used in investing activities was $4.3 million in the first quarter of 2005 compared to
$1.5 million for the first quarter of 2004. The increase relates to the continuation of the store
expansion and remodeling plan that commenced subsequent to our initial public offering in February
2004. During each quarter, cash used in investing activities consisted of capital expenditures for
furniture, fixtures and leasehold improvements for both new and remodeled stores. We anticipate that our capital expenditures in fiscal year 2005, primarily related to new
stores, store remodelings, distribution and general corporate activities, will be approximately
$15.0 million. We plan to open approximately 30 to 35 new stores in fiscal year 2005. Capital expenditures
for a new store are expected to average approximately $225,000 to $300,000. We generally receive
landlord allowances in connection with new stores averaging approximately $25,000 to $75,000. We
expect to receive approximately $1.5 million of landlord allowances in fiscal year 2005. The
average cash investment in inventory for a new store is expected to range from approximately
$45,000 to $75,000, depending on the size and sales expectation of the store and the timing of the
new store opening. Pre-opening expenses, such as marketing, salaries, supplies, rent and utilities
are expensed as incurred. We plan to remodel approximately 20 to 25 stores in our new format in fiscal year 2005.
Remodeling the average existing store into the new format is estimated to cost approximately
$225,000 to $300,000. 15




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Financing activities Effective April 8, 2005, we closed on a private placement in which we sold for gross proceeds
of $8,750,000 to certain qualified investors 1,000,000 shares of common stock and warrants to
purchase 250,000 shares of common stock at an exercise price of $10.18 per share through April 8,
2010. As of April 30, 2005, the net proceeds after placement fees and expenses were $7,559,524.
We also issued warrants to purchase 125,000 shares of common stock at an exercise price of $10.18
through April 8, 2010 to the placement agent. In connection with this transaction, we entered into a registration rights agreement wherein
we agreed to make the requisite SEC filings to register, achieve and subsequently maintain the
effectiveness of the registration of the common stock sold and the common stock issuable upon
exercise of the warrants sold in the private placement. The registration rights agreement is
effective through April 8, 2008. Failure to register, achieve and maintain effectiveness of the
registration through the term of the registration rights agreement will subject us to liquidated
damages in the amount of 1% per month of the $8,750,000 gross proceeds of the private placement.
On May 5, 2005, we filed Form S-3 registering for resale the common stock sold and the common stock
underlying the warrants and placement agent warrants. The SEC declared the registration effective
on May 25, 2005. We are now required to maintain the effectiveness of the registration, subject to
certain exceptions, through April 8, 2008 in order to avoid paying liquidated damages. As of April
30, 2005, the maximum amount of liquidated damages that we could be required to pay was $2,887,500,
which represents 33 potential monthly payments of $87,500. We have estimated the fair value of the 375,000 stock purchase warrants, including the
placement agent warrants, issued in connection with the private placement using the Black-Scholes
formula to be $2,160,000. Because we have no obligation to settle the warrants by any means other
than through the issuance of shares of its common stock, among other considerations, we have
included the fair value of the warrants as a component of shareholders equity. On February 10, 2004, we consummated our initial public offering with the sale of 2,160,000
shares of common stock. On March 12, 2004, we sold an additional 324,000 shares of common stock in
connection with the exercise, by the underwriters, of the full over-allotment option. All of the
shares of common stock sold to the public were sold at a price of $7.75 per share. The aggregate
gross proceeds from the shares of common stock and the warrants sold was approximately $19.3
million. The net proceeds to us from the offering were approximately $15.5 million. We used the net
proceeds received from the initial public offering to repay $5.7 million on our revolving credit
agreement, $0.9 million to redeem outstanding warrants, $0.9 million to repay subordinated debt,
and $8.0 million for capital expenditures. In connection with our IPO, $4.5 million of subordinated convertible debentures automatically
converted into 653,331 shares of common stock at a fixed exercise price of $7.50 per share. Our
Class A and Class B common stock was converted into shares of our new common stock on a one to one
basis, excluding fractional shares, and $1.9 million of related redemption obligations were
terminated. At April 30, 2005, we had 6,102,481 shares of common stock outstanding. We have a $25.0 million secured revolving credit facility with Fleet Retail Group, Inc. that
was amended effective September 1, 2004. Among other things, the amendment reduced the margin on
our base rate loans from 0.75% per annum to 0% per annum and reduced the monthly facility fee paid
by us to Fleet. In addition, the amendment eliminates the financial covenant relating to capital
expenditures and extends the maturity date of the credit facility to August 31, 2008. As part of
the amendment, Fleet released Mr. Peter Edisons $500,000 limited guaranty of collection under the
facility. The credit agreement also provides that the Company can fix the interest rate on a
designated portion of the outstanding balance for periods of at least 30 days based on the LIBOR (
London Interbank Offered Rate) plus 1.75% to 2.50% by entering into a basis swap, such swaps do not
meet the criteria for hedge accounting. Prior to this amendment, amounts borrowed under the
facility bore interest at a rate equal to the base rate (as defined in the agreement) plus 0.75%
per annum, which was equal to 4.75% per annum at January 3, 2004. The aggregate amount that we may
borrow under the agreement at any time is established by a formula, which is based on our inventory
level but cannot be greater than $25.0 million. The agreement is secured by substantially all of
our assets. At January 3, 2004, we had a balance of $2.2 million on our credit facility. This balance
increased to $5.7 million prior to our IPO. We repaid this outstanding balance from the proceeds
of our IPO during the first quarter of 2004. On October 25, 2004 we made our first draw on the
credit facility since the IPO, ultimately increasing our draw to $2.7 million in the fourth quarter
of 2004 before repaying the entire balance from our December operating cash flow such that there
was no outstanding balance as of January 1, 2005 or January 29, 2005. On February 17, 2005, we
made our first draw on our revolving credit agreement in fiscal 2005. The highest outstanding
balance on our facility from February 17, 2005 through April 10, 2005 was $5.1 million, and on
April 11, 2005 16




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##### Table of Contents



the outstanding balance was repaid with part of the proceeds from our private placement. We used the
borrowings on our revolving credit facility for working capital purposes. In connection with our IPO, we sold to the representatives of the underwriters and their
designees warrants to purchase up to an aggregate of 216,000 shares of common stock at an exercise
price equal to $12.7875 per share, subject to antidilution adjustments, for a purchase price of
$0.0001 per warrant for the warrants. The warrant holders may exercise the warrants as to all or
any lesser number of the underlying shares of common stock at any time during the four-year period
commencing on February 10, 2005. Our ability to meet our current and anticipated operating requirements will depend on our
future performance, which, in turn, will be subject to general economic conditions and financial,
business and other factors, including factors beyond our control. Off-Balance Sheet Arrangements At April 30, 2005, January 29, 2005, January 1, 2005, and May 1, 2004, we did not have any
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities or variable interest entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. We are, therefore, not materially exposed to any
financing, liquidity, market or credit risk that could otherwise have arisen if we had engaged in
such relationships. Contractual Obligations The following table summarizes our contractual obligations as of April 30, 2005: Payments due in PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1 - 3 Years
    
    
    3 -5 Years
    
    
    5 YearsCapital lease obligations (1)
    
    $
    1,491,196
    
    
    $
    802,203
    
    
    $
    638,978
    
    
    $
    50,015
    
    
    $
    Operating lease obligations (2)
    
    
    150,097,493
    
    
    
    19,666,046
    
    
    
    37,332,794
    
    
    
    33,093,428
    
    
    
    60,005,225Purchase obligations (3)
    
    
    21,483,889
    
    
    
    21,475,526
    
    
    
    8,363
    
    
    
    
    
    
    
    Total
    
    $
    173,072,578
    
    
    $
    41,943,775
    
    
    $
    37,980,135
    
    
    $
    33,143,443
    
    
    $
    60,005,225
   (1)
    
    Includes payment obligations relating to our point of sale hardware and software leases.(2)
    
    Includes minimum payment obligations related to our store leases.(3)
    
    Includes merchandise on order and payment obligations relating to miscellaneous service
contracts. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment(SFAS 123R), a revision
of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R will require the Company to,
among other things, measure employee stock-based compensation awards where applicable using a fair
value method and record related expense in the Companys consolidated financial statements. The
provisions of SFAS 123R are effective for the first annual reporting period that begins after June
15, 2005; therefore, the Company will adopt the new requirements beginning in its first quarter of
fiscal 2006. Adoption of the expensing requirements will reduce the Companys reported earnings.
Management is currently evaluating the specific impacts of adoption, which include whether the
Company should adopt the requirements on a retrospective basis and which valuation model is most
appropriate. Effect 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 Our earnings and cash flows may be subject to fluctuations due to changes in interest rates.
Our financing arrangements include both fixed and variable rate debt in which changes in interest
rates will impact the fixed and variable rate debt differently. A change in 17




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##### Table of Contents



the interest rate of fixed rate debt will impact the fair value of the debt, whereas a change
in the interest rate on the variable rate debt will impact interest expense and cash flows.
Management does not believe that the risk associated with changing interest rates would have a
material effect on our results of operations or financial condition. 
 ITEM 4. CONTROLS AND PROCEDURES The companys management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the Companys internal control over financial
reporting to determine whether any changes occurred during the Companys four week transition
period ended January 29, 2005 and first fiscal quarter ended April 30, 2005 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting. Based on that evaluation, except as discussed below, there has been no such
change during the Companys four week transition period ended January 29, 2005 or first quarter of
fiscal year 2005. 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 periods covered by this report.
Any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In February 2005, the Company, in consultation with its Audit Committee and its independent
registered public accounting firm, concluded that it must correct its previously issued financial
statements to properly account for landlord allowances and the commencement of lease terms. This
correction resulted in the restatement of operating results and financial position for the fiscal
years 1999 through 2003, which was reflected in the Companys amended fiscal year 2003 Annual
Report on Form 10-K/A, and for the first thirty-nine weeks of 2004, which was reflected in amended
Quarterly Reports on Form 10-Q/A for the relevant periods. The Public Company Accounting Oversight Boards Auditing Standard No. 2, An Audit of Internal
Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements,
states that a restatement of financial statements in prior filings with the SEC is a strong
indicator of the existence of a material weakness in the design or operation of internal control
over financial reporting. Based on that definition, the Companys Chief Executive Officer and Chief
Financial Officer concluded that a material weakness existed in the Companys internal control over
financial reporting, and disclosed this to the Audit Committee and to the independent registered
public accounting firm. The Companys Chief Executive Officer and Chief Financial Officer also concluded that this
matter constituted ineffectiveness of its disclosure controls and procedures as of the end of the
four week transition period covered by this Quarterly Report on Form 10-Q, in ensuring that
material information relating to the Company, required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. The Company has remediated the material weakness in internal control over financial reporting
and the ineffectiveness of its disclosure controls and procedures by conducting a review of its
accounting related to leases, and correcting its method of accounting for landlord allowances and
the commencement of lease terms. The Company has established procedures designed to ensure that
landlord allowances will be properly classified and that rent expense will be recognized in the
appropriate periods in the Companys financial statements. As a result of the remediation discussed above, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of first quarter of fiscal year 2005,
the Companys disclosure controls and procedures provided reasonable assurance that the disclosure
controls and procedures are effective in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the Company in the report that it files or
submits under the Exchange Act. 18




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##### Table of Contents



BAKERS FOOTWEAR GROUP, INC. 
 PART II  OTHER INFORMATION
 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Purchase of Equity Securities by the Issuer and Affiliated Purchasers The Company does not have any programs to repurchase shares of its common stock and no such
repurchases were made during the four weeks ended January 29, 2005 and the thirteen weeks ended
April 30, 2005. Issuer Purchases of Equity Securities (c) Total Number of(b)
    
    
    Shares Purchased as
    
    
    (d) Maximum Number of(a) Total Number
    
    
    Average
    
    
    Part of Publicly
    
    
    Shares that May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased (000s)
    
    
    per Share
    
    
    Programs (000s)
    
    
    Plans or Programs (000s)January 2, 2005 January 29, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    January 30, 2005 February 26, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 27, 2005  April 2, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    April 3, 2005  April 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 19




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##### Table of Contents



ITEM 6. EXHIBITS (a) 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: June 14, 2005 BAKERS FOOTWEAR GROUP, INC.(Registrant)By:
    /s/ Peter A. EdisonPeter A. EdisonChairman of the Board and
Chief Executive Officer
Bakers Footwear Group, Inc.
(On behalf of the Registrant) By:
    /s/ Lawrence L. Spanley, Jr.Lawrence L. Spanley, Jr.Executive Vice President, Chief Financial Officer,
Treasurer, and Secretary
(As principal financial officer) 20




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EXHIBIT INDEX ExhibitNumber
    
    Description3.1
    
    Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the
Companys Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004
(File No. 000-50563)).3.2
    
    Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Companys Annual
Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No.
000-50563)).4.1
    
    Debenture Purchase Agreement dated April 4, 2002 by and among the Company and the persons on the
attached signature pages (incorporated by reference to Exhibit 4.1 of the Companys Registration
Statement on Form S-1 (File No. 333-86332), filed April 16, 2002).4.1.1
    
    Convertible Debenture Exchange Agreement dated January 2, 2004 by and among the Company, Special
Situations Private Equity Fund, L.P., Special Situations Cayman Fund, L.P., Special Situations Fund
III, L.P., Julian Edison, The Crown Advisors, LLC, Crown Investment Partners, L.P. and SWB Holdings,
Inc. (incorporated by reference to Exhibit 4.1.1 of Amendment No. 3 to the Companys Registration
Statement on Form S-1 (File No. 333-86332), filed January 8, 2004).4.1.2
    
    Form of Subordinated Convertible Debenture dated January 2004 (included as Exhibit A to Exhibit 4.1.1).4.2.1
    
    Second Registration Rights Agreement dated January 2, 2004 by and among the Company, Special
Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity
Fund, L.P., The Crown Advisors LLC, Crown Investment Partners, LP, SWB Holdings, Inc. and Julian
Edison (incorporated by reference to Exhibit 4.2.1 of Amendment No. 3 to the Companys Registration
Statement on Form S-1 (File No. 333-86332), filed January 8, 2004).4.2.2
    
    Letter to Ryan Beck & Co., Inc. and BB&T Capital Markets, as representatives of the underwriters,
relating to restrictions on transferability of common stock underlying convertible debentures,
executed by all holders of subordinated convertible debentures (incorporated by reference to Exhibit
4.2.2 to the Companys Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on
April 2, 2004 (File No. 000-50563)).4.3
    
    Representatives Warrant Agreement, dated February 10, 2004 by and among the Company, Ryan Beck & Co.,
Inc. and BB&T Capital Markets, a Division of Scott & Stringfellow, Inc. (incorporated by reference to
Exhibit 4.3 to the Companys Annual Report on Form 10-K for the fiscal year ended January 3, 2004
filed on April 2, 2004 (File No. 000-50563)).4.4
    
    Amended and Restated Intercreditor and Subordination Agreement dated January 2, 2004 by and among
Fleet Retail Group, Inc., Special Situations Private Equity Fund, L.P., Special Situations Cayman
Fund, L.P., Special Situations Fund III, L.P., Julian Edison, The Crown Advisors, LLC, Crown
Investment Partners, L.P., SWB Holdings, Inc. and the Company (incorporated by reference to Exhibit
4.4 of Amendment No. 3 to the Companys Registration Statement on Form S-1 (File No. 333-86332), filed
January 8, 2004).4.5
    
    Letter to Ryan Beck & Co., Inc. and BB&T Capital Markets, as representatives of the underwriters,
relating to restrictions on transferability of common stock, executed by all directors, officers and
shareholders prior to the initial public offering (incorporated by reference to Exhibit 4.5 to the
Companys Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004
(File No. 000-50563)).4.6
    
    Purchase Agreement dated March 31, 2005 by and among the Company and the Investors named therein
(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K (File No.
000-50563), filed on April 13, 2005).4.6.1
    
    Registration Rights Agreement dated
April 8, 2005 by and among the Company, the Investors named
therein and Ryan Beck & Co., Inc. (incorporated by reference to Exhibit 4.2 to the Companys Current
Report on Form 8-K (File No. 000-50563), filed on April 13, 2005).4.6.2
    
    Form of Warrants issued by the Company to the Investors on April 8, 2005 (incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K (File No. 000-50563), filed on April 13,
2005).4.6.3
    
    Form of Warrants issued by the Company to Ryan Beck & Co., Inc. or its designees on April 8, 2005
(incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form 8-K (File No.
000-50563), filed on April 13, 2005).
 21




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##### Table of Contents



ExhibitNumber
    
    Description4.6.4
    
    Form of Lock-Up Letter Agreement relating to the transferability of common stock, executed by Bernard
Edison and Peter A. Edison in April 2005 (incorporated by reference to Exhibit 4.5 to the Companys
Current Report on Form 8-K (File No. 000-50563), filed on April 13, 2005).4.7
    
    Form of common stock certificate (incorporated by reference to Exhibit 4.6 to the Companys Annual
Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No.
000-50563)).4.8
    
    Warrants issued by the Company to representatives of the underwriters, or their designees
(incorporated by reference to Exhibit 4.7 to the Companys Annual Report on Form 10-K for the fiscal
year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)).10.1
    
    Fifth Amendment to Amended and Restated Loan and Security Agreement dated as of September 1, 2004 by
and between Fleet Retail Group, Inc. (f/k/a Fleet Retail Finance Inc.) and the Company (incorporated
by reference to Exhibit 10.17.10 of the Companys Current Report on Form 8-K filed on September 10,
2004).10.2
    
    Termination of Guaranty between Peter A. Edison and Fleet Retail Group, Inc. (f/k/a Fleet Retail
Finance Inc.) (incorporated by reference to Exhibit 10.17.11 of the Companys Current Report on Form
8-K filed on September 10, 2004).10.3
    
    Summary of 2005 base salaries and April 8, 2005 stock option grants for executive officers of the
Company (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K (File
No. 000-50563), filed on April 14, 2005).11.1
    
    Statement regarding computation of per share earnings (incorporated by reference from Note 6 of the
Companys 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 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by
Chief Executive Officer).32.2
    
    Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by
Chief Financial Officer)
 22