UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

10-Q/A


(Mark One)

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

For the quarterly period endedMarch 31, June 30, 2007

OR

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

For the transition period from            to            

Commission file number: 001-32320


BUILD-A-BEAR WORKSHOP, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware 43-1883836
Delaware

(State or Other Jurisdiction of

Incorporation or
Organization)

 43-1883836

(I.R.S. Employer

Identification No.)

1954 Innerbelt Business Center Drive

St. Louis, Missouri

63114
(Address of Principal Executive Offices) 63114
(Zip Code)

(314) 423-8000

(Registrant’s Telephone Number, Including Area Code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþx    Noo¨

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

Large accelerated filer  ¨Accelerated Filerfiler  ox                Accelerated FilerNon-accelerated filer  þ¨          Non-Accelerated Filer

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yesþ¨    Noox

As of May 4,August 3, 2007, there were 20,607,64820,637,487 issued and outstanding shares of the registrant’s common stock.

 



EXPLANATORY NOTE


This Amendment No. 1 to the quarterly report on Form 10-Q/A (Form 10-Q/A) is being filed to amend our quarterly report on Form 10-Q for the thirteen weeks ended June 30, 2007, which was originally filed on August 9, 2007 (Original Form 10-Q).

The Items of the Company’s Form 10-Q/A for the thirteen weeks ended June 30, 2007 are amended and restated as follows: Part 1 Financial Information, Item 1 Financial Statements; Part 1 Financial Information, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Part 1 Financial Information, Item 4 Controls and Procedures.

During the 2007 third quarter, the Company determined that depreciation and amortization and purchases of property and equipment, net, were incorrectly reported in the Company’s consolidated statements of cash flows for the twenty-six weeks ended June 30, 2007. The net change in cash and cash equivalents was not impacted. Capital expenditures and depreciation and amortization for the retail segment and in total as presented in the segment footnote were also incorrectly reported. As a result, we have restated our consolidated statements of cash flows for the twenty-six weeks ended June 30, 2007.

The Company also determined that comprehensive income, as presented in the notes to consolidated financial statements, was misstated for the thirteen and twenty-six weeks ended June 30, 2007 and July 1, 2006. As a result, comprehensive income has been restated.

These restatements had no impact on the previously issued condensed consolidated balance sheets, consolidated statements of operations or the net decrease in cash and cash equivalents reported in the consolidated statements of cash flows.

This amendment does not reflect events occurring after the filing of the Original Form 10-Q, and does not modify or update the disclosures therein in any way other than as required to reflect the adjustments described above. Such events include, among others, the events described in our quarterly report on Form 10-Q for the thirteen and thirty-nine weeks ended September 29, 2007, and the events described in our current reports on Form 8-K filed after the filing of the Original Form 10-Q.

BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

10-Q/A

Page
3
3
4
5
6
       Page
Item 1.Financial Statements (Unaudited)4

Consolidated Balance Sheets

4

Consolidated Statements of Operations

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations  1416
  Item 3.  
  2429
  Item 4.  
  2429
  
  
Item 1A.  Risk Factors  31
  26Item 2.  
  2631
  27
4.  28
Submission of Matters to a Vote of Security Holders  32
  
Item 5.  29Other Information  
302 Certification of Chief Executive Officer32
Item 6.302 Certification of Chief Financial OfficerExhibits33
906 Certification of Chief Executive Officer
906 Certification of Chief Financial OfficerSignatures34

2


PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share data)

         
  March 31,  December 30, 
  2007  2006 
ASSETS
        
Current assets:        
Cash and cash equivalents $42,375  $53,109 
Inventories  48,013   50,905 
Receivables  6,028   7,389 
Prepaid expenses and other current assets  17,854   11,805 
Deferred tax assets  2,437   2,388 
       
Total current assets  116,707   125,596 
         
Property and equipment, net  129,455   130,347 
Goodwill  36,374   36,927 
Other intangible assets, net  2,984   2,873 
Other assets, net  4,972   4,027 
       
Total Assets $290,492  $299,770 
       
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:        
Accounts payable $44,167  $46,761 
Accrued expenses  12,378   16,301 
Gift cards and customer deposits  20,295   28,128 
Deferred revenue  6,613   6,454 
       
Total current liabilities  83,453   97,644 
       
Deferred franchise revenue  2,418   2,297 
Deferred rent  36,466   34,754 
Other liabilities  308   352 
Deferred tax liabilities  460   459 
         
Stockholders’ equity:        
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at March 31, 2007 and December 30, 2006      
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 20,594,729 and 20,537,421 shares, respectively  206   205 
Additional paid-in capital  84,796   88,866 
Other comprehensive income  (1,868)  (997)
Retained earnings  84,253   76,190 
       
Total stockholders’ equity  167,387   164,264 
       
Total Liabilities and Stockholders’ Equity $         290,492  $299,770 
       

   June 30,
2007
  December 30,
2006
      (Revised)

ASSETS

    

Current assets:

    

Cash and cash equivalents

  $17,205  $53,109

Inventories

   55,665   50,905

Receivables

   7,101   7,389

Prepaid expenses and other current assets

   21,541   11,805

Deferred tax assets

   2,529   2,388
        

Total current assets

   104,041   125,596

Property and equipment, net

   133,002   130,347

Goodwill

   42,500   41,827

Other intangible assets, net

   2,863   2,873

Other assets, net

   10,254   4,027
        

Total Assets

  $292,660  $304,670
        

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

  $40,491  $45,561

Accrued expenses

   5,932   16,301

Gift cards and customer deposits

   18,636   28,128

Deferred revenue

   6,686   6,454
        

Total current liabilities

   71,745   96,444
        

Deferred franchise revenue

   2,645   2,297

Deferred rent

   38,004   34,754

Other liabilities

   1,363   352

Deferred tax liabilities

   470   459

Stockholders’ equity:

    

Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at June 30, 2007 and December 30, 2006

   —     —  

Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 20,632,606 and 20,537,421 shares, respectively

   206   205

Additional paid-in capital

   86,016   88,866

Accumulated other comprehensive income

   6,364   5,103

Retained earnings

   85,847   76,190
        

Total stockholders’ equity

   178,433   170,364
        

Total Liabilities and Stockholders’ Equity

  $292,660  $304,670
        

See accompanying notes to condensed consolidated financial statements.

3


BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share and per share data)

         
  Thirteen weeks ended 
  March 31, 2007  April 1, 2006 
Revenues:        
Net retail sales $115,883  $97,730 
Franchise fees  695   690 
Licensing revenue  236   211 
       
Total revenues  116,814   98,631 
       
         
Costs and expenses:        
Cost of merchandise sold  62,140   49,860 
Selling, general and administrative  41,544   35,451 
Store preopening  688   615 
Interest expense (income), net  (545)  (866)
       
Total costs and expenses  103,827   85,060 
       
 
Income before income taxes  12,987   13,571 
Income tax expense  4,922   5,225 
       
Net income $8,065  $8,346 
       
         
Earnings per common share:        
Basic $0.40  $0.42 
       
Diluted $0.39  $0.41 
       
         
Shares used in computing common per share amounts:        
Basic  20,281,820   20,078,876 
Diluted  20,525,347   20,401,378 

   Thirteen weeks ended  Twenty-six weeks ended 
   June 30, 2007  July 1, 2006  June 30, 2007  July 1, 2006 

Revenues:

     

Net retail sales

  $99,102  $92,962  $214,985  $190,692 

Franchise fees

   677   636   1,372   1,326 

Licensing revenue

   604   59   840   270 
                 

Total revenues

   100,383   93,657   217,197   192,288 
                 

Costs and expenses:

     

Cost of merchandise sold

   57,649   52,190   119,789   102,050 

Selling, general and administrative

   39,283   34,783   80,827   70,234 

Store preopening

   1,369   1,582   2,057   2,197 

Interest expense (income), net

   (356)  (299)  (901)  (1,165)
                 

Total costs and expenses

   97,945   88,256   201,772   173,316 
                 

Income before income taxes

   2,438   5,401   15,425   18,972 

Income tax expense

   846   2,402   5,768   7,627 
                 

Net income

  $1,592  $2,999  $9,657  $11,345 
                 

Earnings per common share:

     

Basic

  $0.08  $0.15  $0.48  $0.56 
                 

Diluted

  $0.08  $0.15  $0.47  $0.56 
                 

Shares used in computing common per share amounts:

     

Basic

   20,222,624   20,152,761   20,252,222   20,115,818 

Diluted

   20,427,858   20,447,945   20,476,603   20,424,661 

See accompanying notes to condensed consolidated financial statements.

4


BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

         
  Thirteen weeks ended 
  March 31, 2007  April 1, 2006 
Cash flows from operating activities:        
Net income $8,065  $8,346 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation and amortization  6,260   4,782 
Deferred taxes  39   (847)
Tax benefit from stock option exercises  (159)  (405)
Loss (gain) on disposal of property and equipment  10   (13)
Stock-based compensation  587   493 
Change in assets and liabilities:        
Inventories  4,057   (3,435)
Receivables  1,358   (667)
Prepaid expenses and other assets  (6,952)  (504)
Accounts payable  (4,424)  (2,731)
Accrued expenses and other liabilities  (9,808)  (6,772)
       
Net cash used in operating activities  (967)  (1,753)
       
Cash flows from investing activities:        
Purchases of property and equipment  (4,944)  (9,662)
Purchases of other assets and other intangible assets  (644)  (301)
Escrow Deposit     (36,893)
       
Net cash used in investing activities  (5,588)  (46,856)
       
Cash flows from financing activities:        
Exercise of employee stock options and employee stock purchases  347   652 
Purchases of Company’s common stock  (4,670)   
Tax benefit from stock option exercises  159   405 
       
Net cash (used in) provided by financing activities  (4,164)  1,057 
       
Effect of exchange rates on cash  (15)   
       
Net decrease in cash and cash equivalents  (10,734)  (47,552)
Cash and cash equivalents, beginning of period  53,109   90,950 
       
Cash and cash equivalents, end of period $42,375  $43,398 
       
Supplemental disclsoure of cash flow information:        
Cash paid during the period for:        
Income taxes $8,106  $7,326 
Noncash Transactions:        
Return of common stock in lieu of tax witholdings and option exercises $494  $211 

   Twenty-six weeks ended 
   June 30,
2007
  July 1,
2006
 
   (As restated)    

Cash flows from operating activities:

   

Net income

  $9,657  $11,345 

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

   

Depreciation and amortization

   12,625   10,869 

Deferred taxes

   (530)  (2,009)

Tax benefit from stock option exercises

   (225)  (685)

Loss on disposal of property and equipment

   230   65 

Stock-based compensation

   1,381   1,262 

Change in assets and liabilities:

   

Inventories

   (4,750)  (4,566)

Receivables

   287   (3,466)

Prepaid expenses and other assets

   (9,737)  (3,928)

Accounts payable

   (5,857)  (5,772)

Accrued expenses and other liabilities

   (15,020)  (14,286)
         

Net cash used in operating activities

   (11,939)  (11,171)
         

Cash flows from investing activities:

   

Purchases of property and equipment, net

   (14,410)  (31,353)

Purchases of other assets and other intangible assets

   (5,833)  (1,466)

Purchases of business, net of cash acquired

   —     (38,320)
         

Cash flow used in investing activities

   (20,243)  (71,139)
         

Cash flows from financing activities:

   

Exercise of employee stock options and employee stock purchases

   683   1,162 

Purchases of Company’s common stock

   (4,670)  —   

Tax benefit from stock option exercises

   225   685 
         

Cash flow (used in) from financing activities

   (3,762)  1,847 
         

Effect of exchange rates on cash

   40   67 
         

Net decrease in cash and cash equivalents

   (35,904)  (80,396)

Cash and cash equivalents, beginning of period

   53,109   90,950 
         

Cash and cash equivalents, end of period

  $17,205  $10,554 
         

Supplemental disclosure of cash flow information:

   

Cash paid during the period for:

   

Income taxes

  $15,633  $15,211 

Noncash Transactions:

   

Return of common stock in lieu of tax withholdings and option exercises

  $501  $211 

See accompanying notes to condensed consolidated financial statements.

5


Notes to Consolidated Financial Statements

1. Basis of Presentation

The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (collectively, the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet of the Company as of December 30, 2006 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 30, 2006 included in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2007.

2. Restatement

During the third quarter of 2007, the Company determined that it had incorrectly reported depreciation and amortization and purchases of property and equipment, net, in the consolidated statements of cash flows for the twenty-six weeks ended June 30, 2007. The net change in cash and cash equivalents was not impacted. This also resulted in an overstatement of capital expenditures and depreciation and amortization for the retail segment as presented in the segment footnote. Additionally, in November 2007, the Company determined that comprehensive income was materially misstated for the thirteen and twenty-six weeks ended June 30, 2007 and July 1, 2006, respectively, as a result of including in comprehensive income for the June 30, 2007 period the foreign currency translation effects of the Company’s incorrect accounting for the note receivable and related interest due from Amsbra Limited, the Company’s former United Kingdom franchisee acquired by the Company during 2006. The translation effects should have been included in comprehensive income for the thirteen and twenty-six week periods ended July 1, 2006 and the year ending December 30, 2006, respectively. The errors were immaterial to the December 30, 2006 balance sheet which has been revised, resulting in an increase in goodwill of $4.9 million, an increase in other comprehensive income and comprehensive income of $6.1 million and a reduction in accounts payable of $1.2 million. The errors had no impact to the consolidated balance sheet as of June 30, 2007, the consolidated statement of operations (including earnings per share) for the thirteen and twenty-six weeks ended June 30, 2007, or the net decrease in cash and cash equivalents reported in the consolidated statement of cash flows as of June 30, 2007.

The effect of the restatement on specific items in the consolidated statement of cash flows is as follows (in thousands):

   Twenty-six weeks ended
June 30, 2007
 
   As previously
reported
  As restated 

Cash flows from operating activities:

   

Depreciation and amortization

  $13,965  $12,625 

Net cash used in operating activities

   (10,599)  (11,939)

Cash flows from investing activities:

   

Purchases of property and equipment, net

   (15,750)  (14,410)

Net cash used in investing activities

   (21,583)  (20,243)

Net decrease in cash and cash equivalents

   (35,904)  (35,904)

The effect of the restatement on the segment information disclosed in Note 11 to the consolidated financial statements is as follows (in thousands):

   Thirteen weeks ended
June 30, 2007
  Twenty-six weeks ended
June 30, 2007
   As previously
reported
  As restated  As previously
reported
  As restated

Retail

        

Capital expenditures

  $10,270  $11,609  $15,212  $16,551

Depreciation and amortization

   7,582   6,243   13,709   12,369

Total

        

Capital expenditures

   10,270   11,609   15,215   16,554

Depreciation and amortization

   7,704   6,365   13,965   12,625

The effect of the restatement on comprehensive income as disclosed in Note 8 to the consolidated financial statements is as follows (in thousands):

   As previously
reported
  As restated

Thirteen weeks ended:

    

June 30, 2007

  $9,800  $2,700

July 1, 2006

   3,000   5,300

Twenty-six weeks ended:

    

June 30, 2007

  $17,000  $10,900

July 1, 2006

   7,600   13,600

3. Business Acquisition

On April 2, 2006, the Company acquired all of the outstanding shares of The Bear Factory Limited (Bear Factory), a stuffed animal retailer in the United Kingdom, and Amsbra Limited (Amsbra), the Company’s former U.K. franchisee (collectively, the U.K. Acquisition). The results of the U.K. Acquisition operations have been included in the consolidated financial statements since that date. In conjunction with those transactions, we obtained 40 retail locations in the United Kingdom and Ireland. The aggregate cash purchase price for the U.K. Acquisition was $39.4$39.6 million, excluding cash acquired of $0.3 million. In addition to the cash purchase price, the Company had previously advanced $4.5 million to Amsbra as a note receivable. The amount of this note receivable and the related accrued interest is a component of the purchase price.

     The company has not completed its assessment of the U.K. Acquisition assets and liabilities. Until that assessment is complete, the allocation of the purchase price is preliminary and may be subject to revisions.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of U.K. Acquisition (in thousands):

     
Current assets $7,670 
Property and equipment  6,192 
Goodwill  31,162 
Intangibles  1,824 
    
Total assets acquired  46,848 
     
Current liabilites assumed  (9,215)
Loan previously advanced  4,517 
    
     
Total purchase price $42,150 
    

6


Current assets

  $7,750 

Property and equipment

   6,192 

Goodwill

   35,641 

Intangibles

   1,824 
     

Total assets acquired

   51,407 

Current liabilities assumed

   (9,357)
     

Total purchase price

  $42,050 
     

The following unaudited pro forma summary presents the Company’s revenue, net income, basic earnings per share and diluted earnings per share as if the U.K. Acquisition had occurred on January 1, 2006 (in thousands, except per share data):
         
  Thirteen Weeks Ended
  March 31, 2007 April 1, 2006
   
Revenue $116,814  $107,764 
Net Income  8,065   6,060 
         
Basic earnings per common share: $0.40  $0.30 
Diluted earnings per common share: $0.39  $0.30 

   Thirteen Weeks Ended  Twenty-Six Weeks Ended
   June 30,
2007
  July 1,
2006
  June 30,
2007
  July 1,
2006

Revenue

  $100,383  $93,657  $217,197  $201,421

Net Income

   1,592   2,999   9,657   9,059

Basic earnings per common share:

  $0.08  $0.15  $0.48  $0.45

Diluted earnings per common share:

  $0.08  $0.15  $0.47  $0.44

Pro forma adjustments have been made to reflect depreciation and amortization using estimated asset values recognized after applying purchase accounting adjustments.

This pro forma information is presented for informational purposes only and is not necessarily indicative of actual results had the acquisition been effected at the beginning of the respective periods presented, and is not necessarily indicative of future results.

3.

4. Goodwill

In connection with our U.K. Acquisition, we acquired goodwill. This asset was recorded in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and is reported as a component of the Company’s retail segment. The following table summarizes the Company’schanges in goodwill for the twenty-six weeks ended June 30, 2007 (in thousands):

     
U.K. Acquisition $31,162 
Acquisition costs  1,005 
Severance costs  785 
    
   32,952 
     
Effect of foreign currency translation  3,422 
    
     
Goodwill, as of March 31, 2007 $36,374 
    
4.

Balance as of December 30, 2006 (revised)

  $41,827 

Purchase price adjustments

   (245)

Effect of foreign currency translation

   918 
     

Goodwill, as of June 30, 2007

  $42,500 
     

Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This testing requires comparison of carrying values to fair values, and when appropriate, the carrying values of impaired assets is reduced to fair value. Goodwill will be reviewed as of December 29, 2007.

5. Stock-based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004),Share-Based Payment(SFAS (SFAS 123R). SFAS 123R requires companies to recognize the cost of awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees(APB (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method.

7


Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods. Prior to January 1, 2006, the fair value of restricted stock awards was expensed by the Company over the vesting period, while compensation expense for stock options was recognized over the vesting period only to the extent that the grant date market price of the stock exceeded the exercise price of the options.

For the thirteen weeks ended March 31,June 30, 2007, selling, general and administrative expense includes $0.6$0.8 million ($0.40.5 million after tax) of stock-based compensation expense. For the thirteen weeks ended AprilJuly 1, 2006, selling, general and administrative expenses includes $0.5$0.8 million ($0.30.4 million after tax) of stock-based compensation expense.

As of March 31,June 30, 2007, there was $8.9$8.3 million of total unrecognized compensation expense related to nonvested restricted stock awards and options which is expected to be recognized over a weighted-average period of 3.373.22 years.

Upon adoption of SFAS 123R, the Company made a policy decision that the straight-line expense attribution method would be utilized for all future stock-based compensation awards with graded vesting.

5.

6. Stock Incentive Plans

In 2000, the Company adopted the Build-A-Bear Workshop, Inc. 2000 Stock Option Plan. In 2003, the Company adopted the Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan, and, in 2004, the Company adopted the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (collectively, the Plans).

Under the Plans, as amended, up to 3,700,000 shares of common stock were reserved and may be granted to employees and nonemployees of the Company. The Plans allow for the grant of incentive stock options, nonqualified stock options, and restricted stock. Options granted under the Plans expire no later than 10 years from the date of the grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock subject to the option on the date the option is granted. The exercise price of the nonqualified options shall be determined from time to time by the compensation committee of the board of directors (the Committee). The vesting provision of individual awards is at the discretion of the Committee and generally ranges from one to four years.

(a) Stock Options

The following table is a summary of the balances and activity for the Plans related to stock options for the thirteentwenty-six weeks ended March 31,June 30, 2007:

                 
          Weighted  Aggregate 
      Weighted  Average  Intrinsic 
  Number of  Average  Remaining  Value 
  Shares  Exercise Price  Contractual Term  (in thousands) 
Outstanding, December 30, 2006  529,200  $16.10         
Granted              
Exercised  30,505   6.88         
Forfeited  15,000   34.65         
                
Outstanding, March 31, 2007  483,695  $16.10   5.7  $5,498 
             
                 
Options Exercisable As Of:
                
March 31, 2007  479,945  $16.05   5.6  $5,482 
             

8


   Number of
Shares
  Weighted
Average
Exercise Price
  Weighted
Average
Remaining
Contractual Term
  Aggregate
Intrinsic
Value
(in thousands)

Outstanding, December 30, 2006

  529,200  $16.10    

Granted

  —     —      

Exercised

  56,761   7.06    

Forfeited

  24,639   32.74    
           

Outstanding, June 30, 2007

  447,800  $16.33  5.4  $4,395
              

Options Exercisable As Of:

        

June 30, 2007

  447,800  $16.33  5.4  $4,395
              

The total intrinsic value of options exercised in the thirteentwenty-six weeks ended March 31,June 30, 2007 and AprilJuly 1, 2006 was approximately $0.7$1.2 million and $1.8$2.8 million, respectively. The Company generally issues new shares to satisfy option exercises.

(b) Restricted Stock

The following table is a summary of the balances and activity for the Plans related to restricted stock granted as compensation to employees and directors for the thirteentwenty-six weeks ended March 31,June 30, 2007:

         
      Weighted 
      Average Grant 
  Number of  Date Fair Value 
  Shares  per Award 
Outstanding, December 30, 2006  227,453  $30.06 
Granted  215,428   27.48 
Vested  51,889   29.23 
Canceled or expired  400   27.82 
        
Outstanding, March 31, 2007  390,592  $28.75 
       

   Number of
Shares
  

Weighted
Average Grant

Date Fair Value
per Award

Outstanding, December 30, 2006

  228,831  $30.06

Granted

  229,428   27.55

Vested

  52,489   29.24

Canceled or expired

  9,218   27.83
       

Outstanding, June 30, 2007

  396,552  $28.77
       

The total fair value of restricted shares vested during the thirteentwenty-six weeks ended March 31,June 30, 2007 and AprilJuly 1, 2006 was $1.4 million and $0.4 million, respectively.

(c) Associate Stock Purchase Plan

In October 2004, the Company adopted an Associate Stock Purchase Plan (ASPP). Under the ASPP, substantially all full-time employees are given the right to purchase shares of the Company’s common stock, subject to certain limitations, at 85% of the lesser of the fair market value on the purchase date or the beginning of each purchase period. Up to 1,000,000 shares of the Company’s common stock are available for issuance under the ASPP. The employees of the Company purchased 5,8686,646 shares at $23.35$21.85 per share through the ASPP during the thirteen weeks ended March 31,June 30, 2007. The employees purchased 12,515 shares at $22.55 per share through the ASPP during the twenty-six weeks ended June 30, 2007. The expense recorded related to the ASPP during the thirteen and twenty-six weeks ended March 31,June 30, 2007 was determined using the Black-Scholes option pricing model and the provisions of FASB Technical Bulletin 97-1,Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option(FTB (FTB 97-1), as amended by SFAS 123R. The assumptions used in the option pricing model for the thirteen and twenty-six weeks ended March 31, 2007July 1, 2006 were: (a) dividend yield of 0%; (b) volatility of 20%; (c) risk-free interest rate of 6.0%; and (d) an expected life of 0.25 years.

9 Prior to the adoption of SFAS 123R, the ASPP was considered noncompensatory and no expense was recorded in the consolidated statement of operations.


6.7. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):

         
  Thirteen weeks ended 
  March 31, 2007  April 1, 2006 
Net income allocated to common stockholders $8,065  $8,346 
       
Weighted average number of common shares outstanding  20,281,820   20,078,876 
       
Effect of dilutive securities:        
Stock options  177,347   283,843 
Restricted stock  66,180   38,659 
       
Weighted average number        
of common shares — dilutive  20,525,347   20,401,378 
       
         
Earnings per share:        
Basic: $0.40  $0.42 
       
Diluted $0.39  $0.41 
       

   Thirteen weeks ended  Twenty-six weeks ended
   June 30, 2007  July 1, 2006  June 30, 2007  July 1, 2006

Net income

  $1,592  $2,999  $9,657  $11,345
                

Weighted average number of common
shares outstanding

   20,222,624   20,152,761   20,252,222   20,115,818
                

Effect of dilutive securities:

        

Stock options

   163,670   246,087   170,509   264,965

Restricted stock

   41,564   49,097   53,872   43,878
                

Weighted average number of common
shares—dilutive

   20,427,858   20,447,945   20,476,603   20,424,661
                

Earnings per share:

        

Basic

  $0.08  $0.15  $0.48  $0.56
                

Diluted

  $0.08  $0.15  $0.47  $0.56
                

In calculating diluted earnings per share for the thirteen and twenty-six weeks ended March 31,June 30, 2007, options to purchase 156,588145,844 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted earnings per share due to their anti-dilutive effect. An additional 215,02813,600 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted earnings per share due to their anti-dilutive effect under the provisions of SFAS No. 128,Earnings per Share(SFAS No. 128).

In calculating diluted earnings per share for the thirteen and twenty-six weeks ended AprilJuly 1, 2006, options to purchase 206,324205,948 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted earnings per share due to their anti-dilutive effect. An additional 202,631204,761 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted earnings per share due to their anti-dilutive effect under the provisions of SFAS No. 128.

7.

8. Comprehensive Income

(Restated)

Comprehensive income for the thirteen weeks ended March 31,June 30, 2007 and AprilJuly 1, 2006 was $7.2$2.7 million and $8.3$5.3 million, respectively. Comprehensive income for the twenty-six week period ended June 30, 2007 and July 1, 2006 was $10.9 million and $13.6 million, respectively. The difference between comprehensive income and net income resulted from foreign currency translation adjustments.

10


8.9. Property and Equipment

Property and equipment consist of the following (in thousands):

         
  March 31,  December 30, 
  2007  2006 
Land $2,261  $2,261 
Furniture and fixtures  33,221   33,938 
Computer hardware  15,862   15,649 
Building  14,970   14,970 
Leasehold improvements  123,847   122,043 
Computer software  14,410   12,988 
Construction in progress  4,085   2,200 
       
   208,656   204,049 
Less accumulated depreciation  79,201   73,702 
       
  $129,455  $130,347 
       
9.

   June 30,
2007
  December 30,
2006

Land

  $2,261  $2,261

Furniture and fixtures

   35,112   33,938

Computer hardware

   16,541   15,649

Building

   14,970   14,970

Leasehold improvements

   128,582   122,043

Computer software

   15,522   12,988

Construction in progress

   4,991   2,200
        
   217,979   204,049

Less accumulated depreciation

   84,977   73,702
        
  $133,002  $130,347
        

10. Income Taxes

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48) on December 31, 2006. TheAs a result of the implementation of FIN 48, the Company did not resultrecord a material adjustment in an adjustment to the liability for unrecognized income tax benefits. At the adoption date of December 31, 2006, there was approximately $1,207,000$1.2 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. At March 31,June 30, 2007, there is approximately $1,207,000$1.2 million of unrecognized tax benefits. In the short-term,next twelve months, management of the Company does not reasonably expect any significant changes.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31,June 30, 2007, there is approximately $86,000$0.1 million of accrued interest related to uncertain tax positions.

The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

10.

11. Segment Information

The Company’s operations are conducted through three reportable segments consisting of retail, international franchising, and licensing and entertainment. The retail segment includes the operating activities of company-owned stores in the United States, Canada, the United Kingdom, and Ireland, France, and other retail delivery operations, including the Company’s web store and non-traditional store locations such as baseball ballparks. The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe, Asia, Africa, and Australia. The licensing and entertainment segment has been established to market the naming and branding rights of the Company’s intellectual properties for third party use. These operating segments represent the basis on which the Company’s chief operating decision-maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. The operating segments have discrete sources of revenue, different capital structures and different cost structures. The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements.

11


Following is a summary of the financial information for the Company’s reporting segments (in thousands):
                 
      International Licensing &  
  Retail Franchising Entertainment Total
Thirteen weeks ended March 31, 2007                
Net sales to external customers $115,883  $695  $236  $116,814 
Income before income taxes  12,622   294   71   12,987 
Capital expenditures  4,941      3   4,944 
Depreciation and amortization  6,126   122   12   6,260 
                 
Thirteen weeks ended April 1, 2006                
Net sales to external customers  97,730   690   211   98,631 
Income before income taxes  13,170   271   130   13,571 
Capital expenditures  9,660   2      9,662 
Depreciation and amortization  4,634   146   2   4,782 
                 
Total Assets as of:                
March 31, 2007 $286,134  $2,427  $1,931  $290,492 
April 1, 2006  236,472   7,718   1,174   245,364 

   Retail  International
Franchising
  Licensing &
Entertainment
  Total

Thirteen weeks ended June 30, 2007

        

Net sales to external customers

  $99,102  $677  $604  $100,383

Net income before income taxes

   2,137   128   173   2,438

Capital expenditures (As restated)

   11,609   —     —     11,609

Depreciation and amortization (As restated)

   6,243   122   —     6,365

Thirteen weeks ended July 1, 2006

        

Net sales to external customers

   92,962   636   59   93,657

Net income before income taxes

   5,174   217   10   5,401

Capital expenditures

   21,668   23   —     21,691

Depreciation and amortization

   5,871   214   2   6,087

Twenty-six weeks ended June 30, 2007

        

Net sales to external customers

  $214,985  $1,372  $840  $217,197

Net income before income taxes

   14,759   422   244   15,425

Capital expenditures (As restated)

   16,551   —     3   16,554

Depreciation and amortization (As restated)

   12,369   244   12   12,625

Twenty-six weeks ended July 1, 2006

        

Net sales to external customers

   190,692   1,327   269   192,288

Net income before income taxes

   18,344   488   140   18,972

Capital expenditures

   31,327   26   —     31,353

Depreciation and amortization

   10,505   359   4   10,868

Total Assets as of:

        

June 30, 2007

  $288,863  $1,705  $2,092  $292,660

July 1, 2006 (Revised)

   244,046   2,126   1,192   247,364

The Company’s reportable segments are primarily determined by the types of products and services that they offer. Each reportable segment may operate in many geographic areas. The Company allocates revenues to geographic areas based on the location of the customer or franchisee. The following schedule is a summary of the Company’s sales to external and long-lived assets by geographic area (in thousands):

                 
  North United Kingdom    
  America & Ireland Other Total
Thirteen weeks ended March 31, 2007                
Net sales to external customers $105,320  $10,799  $695  $116,814 
Property and equipment, net  113,708   15,731   16   129,455 
Thirteen weeks ended April 1, 2006                
Net sales to external customers  97,941      690   98,631 
Property and equipment, net  95,172      22   95,194 
11.

��  North
America
  United Kingdom,
Ireland, and
France
  Other  Total

Thirteen weeks ended June 30, 2007

        

Net sales to external customers

  $88,732  $10,973  $678  $100,383

Property and equipment, net

   116,219   16,769   14   133,002

Thirteen weeks ended July 1, 2006

        

Net sales to external customers

   85,521   7,500   636   93,657

Property and equipment, net

   108,768   8,716   20   117,504

Twenty-six weeks ended June 30, 2007

        

Net sales to external customers

  $194,052  $21,773  $1,372  $217,197

Property and equipment, net

   116,219   16,769   14   133,002

Twenty-six weeks ended July 1, 2006

        

Net sales to external customers

   183,461   7,500   1,327   192,288

Property and equipment, net

   108,768   8,716   20   117,504

12. New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157,Fair Value Measurements(SFAS (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. The Company is required to adopt SFAS 157 in the first quarter of 2008. The Company is currently assessing the financial impact of SFAS 157 on its consolidated financial statements.

In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS (SFAS 159). SFAS 159 permits an entity to measure certain financial assets and liabilities at fair value. The statement’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. This statement becomes effective for fiscal years beginning after November 15, 2007 and should be applied prospectively. It is expected that this statement will not have a material effect on the Company’s financial statements.

12


13. Investment in Unconsolidated Subsidiary

12. Subsequent Event
The Company holds a minority interest in RidemakerZ, LLC, (previously Retail Entertainment Concepts, LLC (“REC”)LLC). RECRidemakerZ is an early-stage company that has developed an interactive retail concept targeted primarilythat allows children and families to boysbuild and customize their families. REC conducts business under the RidemakerzTM brand name.own personalized cars. On April 30, 2007 the Company entered into a series of agreements whereby an additional equity investment was made and the Company agreed to perform advisory and operational support services for REC. In accordance withRidemakerZ in exchange for additional equity. The Company records the agreements,additional equity from the performance of these services quarterly. As of June 30, 2007, the investment in RidemakerZ was approximately $3.7 million. RidemakerZ is considered a variable-interest entity, for which the Company invested approximately $2.4 million on April 30, 2007, bringingis not the total investmentprimary beneficiary of gains or losses. Accordingly, the Company does not expect to be allocated gains or losses in RECfiscal 2007. Under the current agreements, Build-A-Bear Workshop, Inc. would own up to approximately $3.0 million. In exchange for performing operational support services the Company will receive additional34% of fully diluted equity in REC.

13RidemakerZ by early 2008.


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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our annual report on Form 10-K for the year ended December 30, 2006, as filed with the SEC, and the following: we may be unable to generate interest in and demand for our interactive retail experience, or to identify and respond to consumer preferences in a timely fashion; our marketing initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic; we may be unable to generate comparable store sales growth; we may be unable to open new stores or may be unable to effectively manage our growth; we may be unable to effectively manage our international franchises or laws relating to those franchises may change; we may be unable to realize some of the expected benefits of the acquisition of Amsbra and Bear Factory including making these operations profitable; we do not know the results of the strategic alternatives evaluation process announced on June 28, 2007; customer traffic may decrease in the shopping malls where we are located, on which we depend to attract guests to our stores; general economic conditions may deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending; our market share could be adversely affected by a significant, or increased, number of competitors; we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team; the ability of our principal vendors to deliver merchandise may be disrupted; the availability and costs of our products could be adversely affected by risks associated with international manufacturing and trade; high petroleum products prices could increase our inventory transportation costs and adversely affect our profitability; we may be unable to realize the anticipated benefits from our company-owned distribution center; fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; we may fail to renew, register or otherwise protect our trademarks or other intellectual property; we may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights; we may be unable to renew or replace our store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of our current leases; we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise; and we may improperly obtain or be unable to protect information from our guests in violation of privacy or security laws or expectations.

These risks, uncertainties and other factors may adversely affect our business, growth, financial condition or profitability, or subject us to potential liability, and cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements. We do not undertake any obligation or plan to update these forward-looking statements, even though our situation may change.

Overview

We are the leading, and only international, company providing a “make your own stuffed animal” interactive entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. Our concept, which we developed primarily for mall-based retailing, capitalizes on what we believe is the relatively untapped demand for experience-based shopping as well as the widespread appeal of stuffed animals. The Build-A-Bear Workshop experience appeals to a broad range of age groups and demographics, including children, teens, their parents and grandparents.

As of March 31,June 30, 2007, we operated 237252 stores in 4446 states, Canada, and Canada, 40Puerto Rico, 41 stores in the United Kingdom and Ireland, and had 3741 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we market our products and build our brand through our website, which simulates our interactive shopping experience, as well as non-traditional store locations in Major League Baseball® ballparks, one location in a zoo and one in a science center, and our presence at event-based locations through our mobile store.

14


On June 28, 2007, the Company retained Lehman Brothers to assist it and the board of directors in an analysis and consideration of a broad range of potential strategic alternatives to enhance long-term shareholder value. While the process is underway, the Company does not expect to disclose further developments regarding the process until the Board’s review of strategic alternatives has been completed. There is no assurance that the process will result in any changes to the company’s current business plans or lead to any specific action or transaction.

On April 2, 2006, the Company acquired all of the outstanding shares of The Bear Factory Limited (Bear Factory), a stuffed animal retailer in the United Kingdom, and Amsbra Limited (Amsbra), the Company’s former U.K. franchisee (collectively, the U.K. Acquisition). The results of the U.K. Acquisition operations have been included in the consolidated financial statements since that date. In conjunction with those transactions, we obtained 40 retail locations in the United Kingdom and Ireland. Four of those locations closed during 2006. Of those four locations, two closed due to overlapping store locations in the Amsbra and Bear Factory portfolios, and the other two locations arewere concessions within department stores which iswas a format that we have chosenchose not to continue. The Company expects to improve sales performance and adopt best practices in the areas of merchandising, marketing, purchasing and store operations, across the acquired store base.

In 2007, the Company expects to expand its Company-owned store base to France which was previously under a franchise agreement and had one store in operation.

We operate in three reportable segments (retail, international franchising, and licensing and entertainment) that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

Company-owned retail stores located in the United States, Canada, the United Kingdom, Ireland, France, two webstores and seasonal, event-based locations;

Company-owned retail stores located in the United States, Canada, the United Kingdom and Ireland retail stores, two webstores and seasonal, event-based locations;
International stores operated under franchise agreements; and
License arrangements with third parties which manufacture and sell to other retailers merchandise carrying the Build-A-Bear Workshop brand.

International stores operated under franchise agreements; and

License arrangements with third parties which manufacture and sell to other retailers merchandise carrying the Build-A-Bear Workshop brand.

Selected financial data attributable to each segment for the thirteen and twenty-six weeks ended March 31,June 30, 2007 and AprilJuly 1, 2006 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.

Store contribution, for our consolidated operations, was 24.4%21.9% for the thirteentwenty-six weeks ended March 31,June 30, 2007 and 27.7%25.1% for the thirteentwenty-six weeks ended AprilJuly 1, 2006 and consolidated net income as a percentage of total revenues was 6.9%4.4% for the thirteentwenty-six weeks ended March 31,June 30, 2007 and 8.5%5.9% for the thirteentwenty-six weeks ended AprilJuly 1, 2006. See “—Non-GAAP Financial Measures” for a definition of store contribution and a reconciliation of store contribution to net income. The decrease in our store contribution over the prior year was primarily due to the decline in gross margin. The decrease in gross margin was anticipated and primarily resulted from highera lack of sales leverage on store occupancy costs as a percentage of net retail sales at the U.K. stores.costs. We have maintained what we believe to be a high store contribution level through the creation of economies of scale which allow us to decrease the cost of our product on a per unit basis and continued expense management through labor planning and the monitoring of store supplies and other expenses.

We use comparable store sales as one of the performance measures for our business. ComparableThe percentage increase (decrease) in comparable store sales decreased by 6.9% in the thirteen weeks ended March 31, 2007 compared to a decrease of 3.8% for the thirteen weeks ended April 1, 2006. Theperiods presented below is as follows:

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

June 30, 2007

 

July 1, 2006

 

June 30, 2007

 

July 1, 2006

(9.4)%

 (4.4)% (8.1)% (4.1)%

We believe the decline in comparable store sales was attributed primarily to changingthe following factors:

A decline in shopping mall customer preferences. Our repeat customers, manytraffic and consumer discretionary spending resulting from more difficult macro economic conditions impacting consumers.

Changes in media, online entertainment, children’s media consumption, and play patterns, particularly for girls.

Lower than expected customer purchases of whom have built a sizable collection of Build-A-Bear Workshop stuffed animals, have become more product discriminating. Also contributing toselect licensed products introduced in the fiscal 2007 second quarter.

The Company is addressing the decline in comparable store sales waswith the following key initiatives:

Increased emphasis on product newness and product collectibility.

Expanded national brand advertising on women’s TV programming.

Enhanced communications to the Company’s loyalty program members with improved timing, personalization and incentives to nearly 4 million members enrolled in the program.

Significant expansion and enhancement to the Company’s website to create a decrease insocial networking community and interactive play platform that leverages the customer traffic in our storesstore experience and the more difficult macro economic conditions generally impacting customers.creates higher brand engagement across both physical and virtual world platforms.

15


Expansion and Growth Potential

Company-owned stores:Retail Stores:

The table below sets forth the number of Build-A-Bear Workshop Company-owned stores in the United States, Canada, the United Kingdom, Ireland, and IrelandFrance for the periods presented:

         
  Thirteen weeks ended
  March 31, 2007 April 1, 2006
Beginning of period  271   200 
Opened  6   2 
Closed      
         
End of period  277   202 
         

   Twenty-six weeks ended
   June 30, 2007  July 1, 2006

Beginning of period

  271  200

UK acquisition

  —    40

Opened

  22  16

Closed

  —    —  
      

End of period

  293  256
      

During fiscal 2007, we anticipate opening 39 Build-A-Bear Workshop stores in the United States and Canada, and 7 to 10eight new stores in the United Kingdom and Ireland.Ireland, and three new stores in France. We believe there is a market potential for at least 350 Build-A-Bear Workshop stores in the United States and Canada, and approximately 70 to 75 stores in the United Kingdom and Ireland. Additionally, we expect to expand our Company-owned store base in 2007 to France, which previously had one franchised store in operation. We expect to open three newIreland, and approximately 50 stores in France during fiscal 2007.

France.

In fiscal 2003, we began testing in certain markets our initial brand expansion initiative, our proprietary “Friends 2B Made” line of make-your-own dolls and related products. As of March 31,June 30, 2007, we operated one stand-alone Friends 2B Made store and eight Friends 2B Made stores adjacent to or within Build-A-Bear Workshop stores in the United States. Other than the one stand-alone store, these Friends 2B Made stores are not considered new stores but rather expansions of Build-A-Bear Workshop stores.

Non-store locations:Non-Store Locations:

In fiscal 2004, we began offering merchandise in seasonal, event-based locations such as Major League Baseball® ballparks, as well as at temporary locations such as at the NBA All-Star Jam Session. We expect to expand our future presence at select seasonal, event-based locations contingent on their availability. As of the end of March 31,June 30, 2007, we had a total of five ballpark locations and one store within a zoo. We also opened our first store within a science center during the thirteen weeks ended March 31, 2007.

International Franchise Revenue:

Our first franchised location opened in November 2003. The number of international, franchised stores for the periods presented below can be summarized as follows:

         
  Thirteen weeks ended
  March 31, 2007 April 1, 2006
Beginning of period  34   30 
Opened  4    
Closed  (1)   
         
End of period  37   30 
         

16


   Twenty-six weeks ended 
   June 30, 2007  July 1, 2006 

Beginning of period

  34  30 

U.K. Acquisition

  —    (11)

Opened

  9  3 

Closed

  (2) —   
       

End of period

  41  22 
       

As of March 31,June 30, 2007, we had 1314 master franchise agreements, which typically grant franchise rights for a particular country or countries, covering 1621 countries. We anticipate signing additional master franchise agreements in the future. We expect our current and future franchisees to open a total of 20 to 25 stores in fiscal 2007. We believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, the United Kingdom, Ireland and Ireland.
France.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operation data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to the cost of merchandise sold being expressed as a percentage of net retail sales and rounding:

         
  Thirteen weeks ended
  March 31, April 1,
  2007 2006
Revenues:        
Net retail sales  99.2   99.1 
Franchise fees  0.6   0.7 
Licensing revenue  0.2   0.2 
         
Total revenues  100.0   100.0 
         
         
Costs and expenses:        
Cost of merchandise sold (1)  53.6   51.0 
Selling, general and administrative  35.6   35.9 
Store preopening  0.6   0.6 
Interest expense (income), net  (0.5)  (0.9)
         
Total costs and expenses  88.9   86.2 
         
Income before income taxes  11.1   13.8 
Income tax expense  4.2   5.3 
         
Net income  6.9   8.5 
         
         
Gross Margin % (2)  46.4%  49.0%

   Thirteen weeks ended  Twenty-six weeks ended 
   June 30,
2007
  July 1,
2006
  June 30,
2007
  July 1,
2006
 

Revenues:

     

Net retail sales

  98.7  99.2  99.0  99.2 

Franchise fees

  0.7  0.7  0.6  0.7 

Licensing revenue

  0.4  0.1  0.4  0.1 
             

Total revenues

  100.0  100.0  100.0  100.0 
             

Costs and expenses:

     

Cost of merchandise sold (1)

  58.2  56.1  55.7  53.5 

Selling, general and administrative

  39.1  37.1  37.2  36.5 

Store preopening

  1.4  1.7  0.9  1.1 

Interest expense (income), net

  (0.4) (0.3) (0.4) (0.6)
             

Total costs and expenses

  97.6  94.2  92.9  90.1 
             

Income before income taxes

  2.4  5.8  7.1  9.9 

Income tax expense

  0.8  2.6  2.7  4.0 
             

Net income

  1.6  3.2  4.4  5.9 
             

Gross Margin % (2)

  41.8% 43.9% 44.3% 46.5%

(1)Cost of merchandise sold is expressed as a percentage of net retail sales.
(2)Gross margin represents net retail sales less cost of merchandise sold. Gross margin percentage represents gross margin divided by net retail sales.

Thirteen weeks ended March 31,June 30, 2007 compared to thirteen weeks ended AprilJuly 1, 2006

Total revenues.Net retail sales increased to $115.9$99.1 million for the thirteen weeks ended March 31,June 30, 2007 from $97.7$93.0 million for the thirteen weeks ended AprilJuly 1, 2006, an increase of $18.2$6.1 million, or 18.6%6.6%. Net retail sales for new stores in North America contributed a $12.6$9.8 million increase in net retail sales. U.K. sales contributed $10.8 million.Sales from stores located in the United Kingdom and Ireland increased $3.5 million from the same period in the prior year. Sales over the Internet increased by $0.6$0.1 million, or 24.0%8.6%. Comparable store sales decreased $6.5$7.6 million, or 6.9%9.4%. TheAn increase of $0.3 million of other items, including, but not limited to deferred revenue adjustment and increased currency translation on Canadian sales, compared to the prior period also contributed to the increase in net retail sales.

We believe the decline in comparable store sales was attributed primarily to a change in preferences from our repeat customers who have become more product discriminating. Also contributing to the following factors:

A decline in comparable store sales was a decrease inshopping mall customer traffic in our stores and theconsumer discretionary spending resulting from more difficult macro economic conditions generally impacting customers.consumers.

Changes in media, online entertainment, children’s media consumption, and play patterns, particularly for girls.

Lower than expected customer purchases of select licensed products introduced in the fiscal 2007 second quarter.

Revenue from franchise fees was $0.6increased to $0.7 million for both the thirteen weeks ended March 31,June 30, 2007 andfrom $0.6 million for the thirteen weeks ended AprilJuly 1, 2006.

2006, an increase of $0.1 million. This increase was primarily due to the addition of new franchise agreements and new franchised stores opened in the past year. Revenue from licensing increased to $0.6 million for the thirteen weeks ended June 30, 2007 from $0.1 million for the thirteen weeks ended July 1, 2006, an increase of $0.6 million. This increase was primarily related to increased licensing activities.

Gross margin.Gross margin increased to $53.7$41.5 million for the thirteen weeks ended March 31,June 30, 2007 from $47.9$40.8 million for the thirteen weeks ended AprilJuly 1, 2006, an increase of $5.8$0.7 million, or 12.1%1.7%. As a percentage of net retail sales, gross margin decreased to 46.4%41.8% for the thirteen weeks ended March 31,June 30, 2007 from 49.0%43.9% for the thirteen weeks ended AprilJuly 1, 2006, a decrease of 2.6%2.1%. This decrease was

17


anticipated and primarily resulted from higherthe lack of sales leverage on store occupancy costs as a percentage of net retail sales in the U.K. Improved merchandise margins partially offset the decreaseby an improvement in gross margin percentage.
merchandise margin.

Selling, general and administrative.Selling, general and administrative expenses were $41.6$39.3 million for the thirteen weeks ended March 31,June 30, 2007 as compared to $35.5$34.8 million for the thirteen weeks ended AprilJuly 1, 2006, an increase of $6.1$4.5 million, or 17.2%12.9%. As a percentage of total revenues, selling, general and administrative expenses decreasedincreased to 35.6%39.1% for the thirteen weeks ended March 31,June 30, 2007 as compared to 35.9%37.1% for the thirteen weeks ended AprilJuly 1, 2006, a decreaseincrease of 0.3%2.0%. The dollar increase was primarily due to higher selling, general and administrative costs associated with the acquired operations of the U.K., and having 7537 more stores in operation at March 31,June 30, 2007 as compared to AprilJuly 1, 2006. Additionally, during the thirteen weeks ended March 31, 2007 the Company incurred bad debt expense of $0.3 million associated with receivables owed by our former franchisee in France. The operations of the one franchised store in France ceased in April 2007. The decreaseincrease in selling, general and administrative expenses as a percent of revenue was primarily due to an increase in advertising expenses and language translation costs associated with the leveraging ofCompany’s expansion into Montreal and Puerto Rico. Partially offsetting this increase were improved efficiencies in the company’s store payroll over a larger revenue baseexpenses. Selling, general, and a decline in central office management payroll resulting primarily from lower performance-based bonus expense.

administrative expenses for the thirteen weeks ended June 30, 2007 also include $0.2 million of initial spending related to our analysis of strategic alternatives.

Store preopening.Store preopening expense was $0.7$1.4 million for the thirteen weeks ended March 31,June 30, 2007 as compared to $0.6$1.6 million for the thirteen weeks ended AprilJuly 1, 2006. ContributingThe decrease in store preopening for the period was the result of timing of store preopening activities. We expect to the higher expenseopen twelve stores during the thirteen weeks ended March 31,fiscal 2007 was U.K. preopening expenses of $0.2 million.third quarter as compared to ten stores opened during the same period in fiscal 2006. Preopening expenses include expenses for stores that opened in the current period as well as some expenses incurred for stores that will be opened in future periods.

Interest expense (income), net.Interest income, net of interest expense, was $0.5$0.4 million for the thirteen weeks ended March 31,June 30, 2007 as compared to $0.9$0.3 million for the thirteen weeks ended AprilJuly 1, 2006. This decreaseincrease was due to lowerhigher cash balances in the fiscal 2007 firstsecond quarter as compared to the fiscal 2006 firstsecond quarter.

Provision for income taxes.The provision for income taxes was $4.9$0.8 million for the thirteen weeks ended March 31,June 30, 2007 as compared to $5.2$2.4 million for the thirteen weeks ended AprilJuly 1, 2006. The effective tax rate was 37.9%34.7% for the thirteen weeks ended March 31,June 30, 2007 compared to 38.5%44.5% for the thirteen weeks ended AprilJuly 1, 2006. The decrease in the effective tax rate is primarily attributable to tax benefits associated with our company-owned distribution center and our full year tax position outlook in the 2007 period compared to the tax effect of U.K. projected losses and costs related to the acquisition in the 2006 period. We expect the effective tax rate for full year 2007 to be approximately 38.0% compared to 39.0% in fiscal year 2006.

Twenty-six weeks ended June 30, 2007 compared to twenty-six weeks ended July 1, 2006

Total revenues.Net retail sales increased to $215.0 million for the twenty-six weeks ended June 30, 2007 from $190.7 million for the twenty-six weeks ended July 1, 2006, an increase of $24.3 million, or 12.7%. Net retail sales for new stores contributed a $22.4 million increase in net retail sales. U.K. sales contributed $14.3 million in additional sales over the same period a year ago. Sales from non-store locations and non-comparable stores contributed a $0.7 million increase in net retail sales. Sales over the

Internet increased by $0.6 million, or 12.8%. Comparable store sales decreased $14.1 million, or 8.1%. An increase of $0.4 million of other items, including, but not limited to, deferred revenue adjustment and increased currency translation on Canadian sales, compared to the prior period also contributed to the increase in net retail sales.

We believe the decline in comparable store sales was attributed primarily to the following factors:

A decline in shopping mall customer traffic and consumer discretionary spending resulting from more difficult macro economic conditions impacting consumers.

Changes in media, online entertainment, children’s media consumption, and play patterns, particularly for girls.

Lower than expected customer purchases of select licensed products introduced in the fiscal 2007 second quarter.

Revenue from franchise fees increased to $1.4 million for the twenty-six weeks ended June 30, 2007 from $1.3 million for the twenty-six weeks ended July 1, 2006, an increase of $0.1 million. This increase was primarily due to the addition of new franchisee agreements and new franchised stores opened in the past year. Revenue from licensing increased to $0.8 million for the twenty-six weeks ended June 30, 2007 from $0.3 million for the twenty-six weeks ended July 1, 2006, an increase of $0.5 million. This increase was primarily related to increased licensing activities.

Gross margin.Gross margin increased to $95.2 million for the twenty-six weeks ended June 30, 2007 from $88.6 million for the twenty-six weeks ended July 1, 2006, an increase of $6.6 million, or 7.4%. As a percentage of net retail sales, gross margin decreased to 44.3% for the twenty-six weeks ended June 30, 2007 from 46.5% for the twenty-six weeks ended July 1, 2006, a decrease of 2.2%. This decrease was anticipated and resulted primarily from higher occupancy costs as a percentage of net retail sales in the U.K. Also, a lack of sales leverage on store occupancy costs in North America contributed to the decline in gross margin as a percent of net retail sales.

Selling, general and administrative.Selling, general and administrative expenses were $80.8 million for the twenty-six weeks ended June 30, 2007 as compared to $70.2 million for the twenty-six weeks ended July 1, 2006, an increase of $10.6 million, or 15.1%. As a percentage of total revenues, selling, general and administrative expenses increased to 37.2% for the twenty-six weeks ended June 30, 2007 as compared to 36.5% for the twenty-six weeks ended July 1, 2006, an increase of 0.7%. The dollar increase was primarily due to having 37 more stores in operation at June 30, 2007 as compared to July 1, 2006, higher central office expenses required to support a larger store base, and higher selling, general and administrative costs associated with the U.K. Acquisition. The increase in selling, general and administrative expenses as a percent of revenue was primarily due to an increase in advertising expenses and language translation costs associated with the Company’s expansion into Montreal and Puerto Rico. Partially offsetting this increase were improved efficiencies in the company’s store payroll expenses. Selling, general, and administrative expenses for the twenty-six weeks ended June 30, 2007 also include $0.2 million of initial spending related to our analysis of strategic alternatives.

Store preopening.Store preopening expense was $2.1 million for the twenty-six weeks ended June 30, 2007 as compared to $2.2 million for the twenty-six weeks ended July 1, 2006. We expect to open twelve stores during the fiscal 2007 third quarter as compared to ten stores opened during the same period in fiscal 2006. Preopening expenses include expenses for stores that opened in the current period as well as some expenses incurred for stores that will be opened in future periods.

Interest expense (income), net.Interest income, net of interest expense, was $0.9 million for the twenty-six weeks ended June 30, 2007 as compared to $1.2 million for the twenty-six weeks ended July 1, 2006. This decrease was due to higher cash balances in the fiscal 2006 period as compared to the fiscal 2007 period.

Provision for income taxes.The provision for income taxes was $5.8 million for the twenty-six weeks ended June 30, 2007 as compared to $7.6 million for the twenty-six weeks ended July 1, 2006. The effective tax rate was 37.4% for the twenty-six weeks ended June 30, 2007 and 40.2% for the twenty-six weeks ended July 1, 2006. The decrease in the effective tax rate is attributable to tax benefits associated with our company-owned distribution center.center and our full year tax position outlook. We expect the effective tax rate for full year 2007 to be approximately 38.0% compared to approximately 39.0% in fiscal year 2006.

Non-GAAP Financial Measures

We use the term “store contribution” in this quarterly report on Form 10-Q. Store contribution consists of income before income tax expense, interest, store depreciation and amortization, store preopening expense and general and administrative expense, excluding franchise fees, income from licensing activities and contribution from our webstore and seasonal and event-based locations. This term, as we define it, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with U.S. generally accepted accounting principles (GAAP).

We use store contribution as a measure of our stores’ operating performance. Store contribution should not be considered a substitute for net income, net income per store, cash flows provided by operating activities, cash flows provided by operating activities per store, or other income or cash flow data prepared in accordance with GAAP.

We believe store contribution is useful to investors in evaluating our operating performance because it, along with the number of stores in operation, directly impacts our profitability. Historically, central office general and administrative expenses and preopening expenses have increased at a rate of less than our total net retail sales increases. Therefore, as we have opened additional new stores and leveraged our central office and general and administrative and preopening expenses over this larger store base and sales volume, we have been able to increase our net income each year.

18


The following table sets forth a reconciliation of store contribution to net income for our company-owned stores located in the U.S. and Canada (North America), stores located in the U.K. and Ireland (United Kingdom), and for our consolidated store base (Total) (in thousands):
                         
  Thirteen weeks ended  Thirteen weeks ended 
  March 31, 2007  April 1, 2006 
  North  United      North  United    
  America  Kingdom  Total  America  Kingdom  Total 
Net income $10,296  $(2,231) $8,065  $8,346  $  $8,346 
Income tax expense  4,922      4,922   5,225      5,225 
Interest expense (income)  (545)     (545)  (866)     (866)
Store depreciation and amortization (1)  4,148   545   4,693   3,912      3,912 
Store preopening expense  513   175   688   615      615 
General and administrative expense (2)  10,084   861   10,945   9,852      9,852 
Franchising and licensing contribution (3)  (539)     (539)  (457)     (457)
Non-store activity contribution (4)  (1,016)     (1,016)  (403)     (403)
                   
Store contribution $27,863  $(650) $27,213  $26,224  $  $26,224 
                   
                         
Total revenues $106,015  $10,799  $116,814  $98,631  $  $98,631 
Franchising and licensing revenues  (931)     (931)  (901)     (901)
Revenues from non-store activities (4)  (3,985)  (197)  (4,182)  (3,001)     (3,001)
                   
Store location net retail sales $101,099  $10,602  $111,701  $94,729  $  $94,729 
                   
Store contribution as a percentage of store location net retail sales  27.6%  -6.1%  24.4%  27.7%  0.0%  27.7%
                   
Total net income as a percentage of total revenues  9.7%  -20.7%  6.9%  8.5%  0.0%  8.5%
                   

   

Twenty-six weeks ended

June 30, 2007

  

Twenty-six weeks ended

July 1, 2006

 
   North
America
  United
Kingdom
  Total  North
America
  United
Kingdom
  Total 

Net income

  $13,593  $(3,936) $9,657  $14,045  $(2,700) $11,345 

Income tax expense

   5,768   —     5,768   7,627   —     7,627 

Interest expense (income)

   (901)  —     (901)  (1,165)  —     (1,165)

Store depreciation and amortization (1)

   8,391   1,165   9,556   7,790   408   8,198 

Store preopening expense

   1,798   259   2,057   2,020   177   2,197 

General and administrative expense (2)

   19,915   1,872   21,787   19,178   845   20,023 

Franchising and licensing contribution (3)

   (922)  —     (922)  (963)  —     (963)

Non-store activity contribution (4)

   (1,670)  —     (1,670)  (1,108)  —     (1,108)
                         

Store contribution

  $45,972  $(640) $45,332  $47,424  $(1,270) $46,154 
                         

Total revenues

  $195,424  $21,773  $217,197  $184,788  $7,500  $192,288 

Franchising and licensing revenues

   (2,212)  —     (2,212)  (1,660)  —     (1,660)

Revenues from non-store activities (4)

   (7,716)  —     (7,716)  (6,502)  —     (6,502)
                         

Store location net retail sales

  $185,496  $21,773  $207,269  $176,626  $7,500  $184,126 
                         

Store contribution as a percentage of store location net retail sales

   24.8%  -2.9%  21.9%  26.8%  -16.9%  25.1%
                         

Total net income as a percentage of total revenues

   7.0%  -18.1%  4.4%  7.6%  -36.0%  5.9%
                         

(1)Store depreciation and amortization includes depreciation and amortization of all capitalized assets in store locations, including leasehold improvements, furniture and fixtures, and computer hardware and software.
(2)General and administrative expenses consist of non-store, central office general and administrative functions such as management payroll and related benefits, travel, information systems, accounting, purchasing and legal costs as well as the depreciation and amortization of central office leasehold improvements, furniture and fixtures, computer hardware and software and intellectual property. General and administrative expenses also include a central office marketing department, primarily payroll and related benefits expense, but exclude advertising expenses, such as direct mail catalogs and television advertising, which are included in store contribution.
(3)Franchising and licensing contribution includes franchising and licensing revenues and all expenses attributable to the international franchising and licensing and entertainment segments other than depreciation, amortization and interest expense/income. Depreciation and amortization related to franchising and licensing is included in the general and administrative expense caption. Interest expense/income related to franchising and licensing is included in the interest expense (income) caption.
(4)Non-store activities include our webstore, and seasonal and event-based locations.

Seasonality and Quarterly Results

Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including: (1) the timing of our new store openings and related expenses; (2) the profitability of our stores; (3) increases or decreases in our comparable store sales; (4) the timing and frequency of our marketing initiatives; (5) changes in general economic

19


conditions and consumer spending patterns; (6) changes in consumer preferences; (7) the effectiveness of our inventory management; (8) the actions of our competitors or mall anchors and co-tenants; (9) seasonal shopping patterns and holiday and vacation schedules; (10) the timing and frequency of national media appearances and other public relations events; and (11) weather conditions.

The timing of new store openings may result in fluctuations in quarterly results as a result of the revenues and expenses associated with each new store location. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening. We expect our growth, operating results and profitability to depend in some degree on our ability to increase our number of stores.

Historically, for North American stores (U.S. and Canada) open more than twelve months, seasonality has not been a significant factor in our results of operations, although we cannot assure you that this will continue to be the case. U.K.-based store sales have historically been weighted more heavily in the fourth quarter as compared to North American stores. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years.

Liquidity and Capital Resources

During the third quarter of 2007, an error was identified in the previously reported consolidated statement of cash flows for the twenty-six weeks ended June 30, 2007, related to the calculation of depreciation and amortization and purchases of property and equipment, net, which resulted in an understatement of cash used in operating activities and an overstatement of cash used in investing activities. The net change in cash and cash equivalents was not impacted. Consequently, the Company has restated the presentation of the consolidated statement of cash flows for the twenty-six weeks ended June 30, 2007. For the twenty-six weeks ended July 1, 2006, no restatement was necessary to the consolidated statements of cash flows. The Company also determined that comprehensive income, as presented in the notes to consolidated financial statements, was misstated for the thirteen and twenty-six weeks ended June 30, 2007, and July 1, 2006, respectively. This report on Form 10-Q/A reflects the impact of those restatements on the consolidated statement of cash flows for the twenty-six weeks ended June 30, 2007 and the notes to consolidated financial statements. The following discussion of liquidity and capital resources is based on the restated consolidated statement of cash flows for the twenty-six weeks ended June 30, 2007, which is more fully discussed in Note 2 of notes to consolidated financial statements herein.

Our cash requirements are primarily for the opening of new stores, information systems and working capital. Historically, we have met these requirements through capital generated from the sale and issuance of our securities to private investors and through our initial public offering, cash flow provided by operations and our revolving line of credit.

Operating Activities.Cash used in operating activities was $1.0$11.9 million for the thirteentwenty-six weeks ended March 31,June 30, 2007 as compared with cash used in operating activities of $1.8$11.2 million for the thirteentwenty-six weeks ended AprilJuly 1, 2006, or an decreaseincrease of $0.8$0.7 million. This increase over the year ago period was primarily due to the timing of inventory purchases through better inventory managementincrease in prepaid rent due to new stores in the UK, partially offset by the increasetiming of cash used in the prepayment of rent in the U.K.

received for tenant allowances on new stores.

Investing Activities.Cash used in investing activities was $5.6$20.2 million for the thirteentwenty-six weeks ended March 31,June 30, 2007 as compared to $46.9$71.1 million for the thirteentwenty-six weeks ended AprilJuly 1, 2006. The decreaseCash used in cashinvesting activities during the twenty-six weeks ended June 30, 2006 primarily relates to new store construction costs for store openings in fiscal 2007. Cash used forin investing activities during the twenty-six weeks ended July 1, 2006 relates primarily to cash held in escrow for the U.K. Acquisition of $36.9which used $38.3 million in cash. An additional $31.3 million for the thirteen weeks ended April 1, 2006. Additionally, cash flows from investing activities decreased for the periods presented as the thirteen weeks ended April 1,this period in 2006 included cash expenditures for therelates to progress payments on construction of the company-owned distribution center. As theCompany-owned distribution center was completed in fiscal 2006, first quarter 2007 capital expenditures had no additional cash outflows related to this project.

and new store construction.

Financing Activities.Cash used in financing activities was $4.2$3.8 million in the thirteentwenty-six weeks ended March 31,June 30, 2007 which consisted of cash spent for the repurchase of the Company’s common stock and slightlypartially offset by proceeds from the exercise of employee stock options and the tax benefit from the exercise of stock options. Cash flows provided by financing activities of $1.1$1.8 million for the thirteen weekstwenty-six ended AprilJuly 1, 2006 consisted primarily of proceeds from the exercise of employee stock options and the tax benefit from the exercise of stock options. No borrowings were made under our line of credit in either the thirteentwenty-six weeks ended March 31,June 30, 2007 or the thirteentwenty-six weeks ended AprilJuly 1, 2006.

Capital Resources.As of March 31,June 30, 2007, we had a cash balance of $42.4$17.2 million. We also have a line of credit, which we can use to finance capital expenditures and seasonal working capital needs throughout the year. The credit agreement is with U.S. Bank, National Association and was amended effective June 30, 200619, 2007 to include a seasonal overline from July 1 to December 31 each year during which the line availability increases from $15 million to $30 million. Borrowings under the credit agreement are not collateralized, but availability under the credit agreement can be limited by the vendor based on our

20


level of accounts receivable, inventory, and property and equipment. The credit agreement expires on September 30, 20072008 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates, and investments. It also prohibits

us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the loan agreement. Borrowings bear interest at our option of prime minus 1.0% or LIBOR plus 1.5%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge cover ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of March 31,June 30, 2007, we were in compliance with these covenants. There were no borrowings under our line of credit as of March 31,June 30, 2007. There was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement as of March 31,June 30, 2007. Accordingly, there was approximately $28.9 million available for borrowing under the line of credit as of March 31,June 30, 2007.

Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels. Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved. In addition, some of these leases contain various restrictions relating to change of control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases.

Our leases in the U.K. typically have terms of 10-15 years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease.

Our French leases each have terms of 10 years. French leases for premier retail properties frequently have entry fees and/or key money payments required to be made in conjunction with signature of the leases. Such entry fees or key money payments may be recovered, in whole or in part, upon disposal of the leases. The leases typically provide the lessee with the first right for renewal at the end of the lease. Rent deposits consisting of three months rent are also required to be paid on execution of the leases. Rents are negotiated on a fixed basis, but are reviewed annually in relation to an inflation index and therefore also have a variable rent component. Rents are charged quarterly and paid in advance.

In fiscal 2007, we expect to spend a total of $35 to $40 million on capital expenditures. Capital spending through the thirteentwenty-six weeks ended March 31,June 30, 2007 totaled $5.6 million.$15.8 million, on track with our full year plans. Capital spending in fiscal 2007 is primarily for the opening of approximately 4450 new stores (38(39 in North America and 7 to 108 in the United Kingdom)Kingdom and 3 in France), and the continued installation and upgrades of central office information technology systems. In fiscal 2006, the average investment per new store in North America, which includes leasehold improvements, fixtures, equipment and inventory, was approximately $0.5 million. We anticipate the investment per store in fiscal 2007 will be approximately the same as fiscal 2006.

We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for at least the next 18 months. Our credit agreement expires on September 30, 2007.

2008.

On February 20, 2007 we announced a $25 million share repurchase program of our outstanding stock. During the thirteen weeks ended June 30, 2007 we did not repurchase stock under the program.

Off-Balance Sheet Arrangements

We do not have any arrangements classified as off-balance sheet arrangements.

Inflation

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

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Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of 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. Such differences could be material to the financial statements.

We believe our selection and application of accounting policies, and the estimates inherently required therein, is reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Our accounting policies and use of estimates are discussed in and should be read in conjunction with the annual consolidated financial statements and notes included in our annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 15, 2007, which includes audited consolidated financial statements for our 2006, 2005 and 2004 fiscal years. We have identified certain critical accounting policies which are described below.

Inventory

Inventory is stated at the lower of cost or market, with cost determined on an average cost basis. Historically, we have not conducted sales whereby we offer significant discounts or markdowns, nor have we experienced significant occurrences of obsolete or slow moving inventory. However, future changes in circumstances, such as changes in guest merchandise preference, could cause reclassification of inventory as obsolete or slow-moving inventory. The effect of this reclassification would be the recording of a reduction in the value of inventory to realizable values.

Throughout the year we record an estimated cost of shortage based on past historical results. Periodic physical inventories are taken and any difference between the actual physical count of merchandise and the recorded amount in our records are adjusted and recorded as shortage. Historically, the timing of the physical inventory has been near the end of the fiscal year so that no material amount of shortage was required to be estimated on activity between the date of the physical count and year-end. However, future physical counts of merchandise may not be at times at or near the end of a fiscal quarter or fiscal year-end, and our estimate of shortage for the intervening period may be material based on the amount of time between the date of the physical inventory and the date of the fiscal quarter or year-end.

Long-Lived Assets

If facts and circumstances indicate that a long-lived asset, including property and equipment, may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.

Goodwill and Other Intangible Assets

Intangible assets deemed to have indefinite lives and goodwill are not subject to amortization. All other intangible assets are amortized over their estimated useful lives. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This testing requires comparison of carrying values to fair values, and when appropriate, the carrying values of impaired assets is reduced to

22


fair value. We reviewed our goodwill and other intangible assets as of December 30, 2006 and determined that no impairment existed.

Revenue Recognition

Revenues from retail sales, net of discounts and excluding sales tax, are recognized at the time of sale. Guest returns have not been significant. Revenues from gift certificates are recognized at the time of redemption. Unredeemed gift cards are included in current liabilities on the consolidated balance sheets.

We have an automated frequent shopper program in the United States, the Stuff Fur Stuff® club, whereby guests enroll in the program and receive one point for every dollar or partial dollar spent and after reaching 100 points receive a $10 discount on a future purchase. This program was automated in July 2006 and replaced our former Buy Stuff Program, which was a manual punch card system with limited tracking capability. The reward earned under the new program did not change. An estimate of the obligation related to the program, based on historical redemption rates, is recorded as deferred revenue and a reduction of net retail sales at the time of purchase. The deferred revenue obligation is reduced, and a corresponding amount is recognized in net retail sales, in the amount of and at the time of redemption of the $10 discount.

Under the previous Buy Stuff Program, the first card had no expiration date. Beginning in June 2002, and continuing each summer up to July 1, 2006, a series of cards waswere issued that had an expiration date of December 31 of the year following the year in which that series of cards was first issued. Beginning in July 2006, the automated Stuff Fur Stuff® club was introduced which provides greater visibility to the rewards earned by our guests and the historical redemption rates. We track redemptions of these various cards and use actual redemption rates by card series and historical results to estimate how much revenue to defer. We review these redemption rates and assess the adequacy of the deferred revenue account at the end of each fiscal quarter. Due to the estimates involved in these assessments, adjustments to the deferral rate are generally made no more often than bi-annually in order to allow time for more definite trends to emerge.

     Based upon

In the fiscal 2007 second quarter the company made an assessment atadjustment to the end of fiscal 2003, thefrequent shopper program resulting in a reduction in deferred revenue account was adjusted downward by $1.1of $0.3 million with a corresponding increase toin net retail sales anand a $0.2 million increase in net income of $0.7 million. Additionally,income. This adjustment reflected the amount of revenue being deferred beginningfact that the paper card program continues to decline with all paper cards expiring in fiscal 2004 was decreased by 0.2%, and by another 0.5% beginning with the third quarter of 2004, to give effect to the change in redemption experience. The changes made to the deferral rate in fiscal 2004 were prospective in nature with no impact on previously reported results of operations. Beginning with the second quarter of fiscal 2005, the amount of revenue being deferred was reduced by 0.1% on a prospective basis from its then current level due to further changes in the Company’s redemption experience.

     Based on the most recent assessment atAugust 2007.

At the end of fiscal 2006, the deferred revenue account was adjusted downward by $3.6 million, effective at the beginning of fiscal 2006, with a corresponding increase to net sales, and a $2.2 million increase in net income. Additionally, the amount of revenue being deferred for future periods has been decreased by 0.6%, to give effect to the change in redemption experience and the increased visibility of the redemptions with the automated system. An additional 0.1% adjustment of the ultimate redemption rate at the end of fiscal 2006 for the current cards expiring on December 30, 2006 and December 29, 2007 would have an approximate impact of $0.5 million on the deferred revenue balance and net retail sales.

Leases

We lease all of our store locations and our corporate headquarters. We account for our leases under the provisions of FASB Statement No. 13,Accounting for Leases(SFAS (SFAS 13) and subsequent amendments, which require that our leases be evaluated and classified as operating or capital leases for financial reporting purposes. All of our store leases are classified as operating leases pursuant to the

23


requirements of SFAS 13. We disburse cash for leasehold improvements and furniture fixtures and equipment to build out and equip our leased premises. We may also expend cash for permanent improvements that we make to leased premises that generally are reimbursed to us by our landlords as construction allowances (also known as tenant improvement allowances) pursuant to agreed-upon terms in our leases. Landlord allowances can take the form of up-front cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination thereof. Under the provisions of FASB Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” we account for these landlord allowances as lease incentives resulting in a deferred credit to be recognized over the term of the lease as a reduction of rent expense.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157,Fair Value Measurements(SFAS (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. We are required to adopt SFAS 157 in the first quarter of 2008. We are currently assessing the financial impact of SFAS 157 on our consolidated financial statements.

In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 permits an entity to measure certain financial assets and liabilities at fair value. The statement’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. This statement becomes effective for fiscal years beginning after November 15, 2007 and should be applied prospectively. It is expected that this statement will not have a material effect on the our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our market risks relate primarily to changes in interest rates. We bear this risk in two specific ways. First, our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows could have been impacted by changes in interest rates. We had no borrowings outstanding under our revolving credit facility during the thirteen weeks ended March 31,June 30, 2007. Accordingly, a 100 basis point change in interest rates would result in no material change to our recorded interest expense. The second component of interest rate risk involves the short term investment of excess cash in short term, investment grade interest-bearing securities. These investments are considered to be cash equivalents and are shown that way on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures:The Company’s management, In connection with the participationpreparation of our Quarterly Report on Form 10-Q, for the Company’speriod ended June 30, 2007, originally filed on August 9, 2007, an evaluation was performed under the supervision of our management, including our Chief Executive Bear (“CEB”) and Chief Financial Bear has evaluated(“CFB”), of the effectiveness of the Company’sdesign and operation of our disclosure controls and procedures (as such term is defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange(“Exchange Act”)),. Based on that evaluation, our Chief Executive Bear and Chief Financial Bear concluded at that time that our disclosure controls and procedures were effective as of the end of the period covered by that Quarterly Report. Subsequently, the Company determined that it was necessary to restate the Company’s consolidated statement of cash flows for the twenty-six weeks ended June 30, 2007 and comprehensive income for the thirteen and twenty-six week periods ended June 30, 2007 and July 1, 2006, respectively, and that the consolidated statement of cash flows for the twenty-six weeks ended June 30, 2007 and comprehensive income for the thirteen and twenty-six week periods ended June 30, 2007 and July 1, 2006 should no longer be relied upon.

These restatements had no impact to the consolidated balance sheet as of June 30, 2007, the consolidated statement of operations (including earnings per share) for the thirteen and twenty-six weeks ended June 30, 2007, or the net decrease in cash and cash equivalents reported in the consolidated statement of cash flows as of June 30, 2007.

In connection with the restatement, as of the end of the period covered by this report. Based on suchreport, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive BearCompany’s CEB and Chief Financial Bear, haveCFB of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15 (e) under the Exchange Act). Based upon that evaluation, our CEB and CFB concluded that the Company’sour disclosure controls and procedures were not effective as of March 31,June 30, 2007 because of a material weakness in internal controls over financial reporting. The Company identified the following material weakness in our internal control over financial reporting as of June 30, 2007:

The Company did not have effective internal controls over financial reporting for depreciation and amortization and purchases of property and equipment, net, in the consolidated statement of cash flows, and comprehensive income. Specifically, the Company did not properly reconcile depreciation and amortization presented in the consolidated statement of cash flows to the depreciation and amortization expense recorded on the consolidated statement of operations, and purchases of property and equipment, net, recorded on the consolidated balance sheet. The Company’s corporate monitoring controls failed to operate at a sufficient level of precision to detect the overstatement of depreciation and amortization and capital expenditures, and the material misstatement of comprehensive income. As a result, the Company did not detect that net cash used in operating activities was understated and that net cash used in investing activities was overstated as reported in the consolidated statements of cash flows for the twenty-six weeks ended June 30, 2007. This also resulted in an overstatement of capital expenditures and depreciation and amortization for the retail segment as presented in the segment footnote. Also, the Company did not detect the foreign currency translation effects of the Company’s incorrect accounting for the note receivable and related interest due from Amsbra. The foreign currency translation effects should have been included in comprehensive income for the thirteen and twenty-six week periods ended July 1, 2006 and the year ended December 30, 2006.

These restatements were immaterial to the December 30, 2006 balance sheet which has been revised, resulting in an understatement in goodwill, an understatement in other comprehensive income and comprehensive income and an overstatement in accounts payable. The error had no impact to the consolidated balance sheet as of June 30, 2007, the endconsolidated statement of operations (including earnings per share) for the period covered by this quarterly report.

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     It should be noted that our management, including the Chief Executive Bearthirteen and the Chief Financial Bear, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions,twenty-six weeks ended June 30, 2007, or the degreenet decrease in cash and cash equivalents reported in the consolidated statement of compliance with the policies or procedures may deteriorate. Becausecash flows as of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
June 30, 2007.

Changes in Internal Control Over Financial Reporting:The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Financial Bear, also conducted an evaluation of the Company’s There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to determine whether any changesthat occurred during the period covered by this reportthree months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting. Based

Subsequent to June 30, 2007, the Company developed a remediation plan that would result in the implementation of changes in our internal control over financial reporting, including the following:

The Company’s procedures regarding the calculation of cash flows from foreign subsidiaries with functional currencies other than U.S. Dollars were enhanced to include additional steps, including a reconciliation of the total depreciation and amortization as stated on that evaluation, therethe statement of cash flows to the total included in the consolidated income statement, and calculating the translation of foreign currency additions with respect to property, plant and equipment by month. Additionally, the Company has been no such changeenhanced controls over the reporting of comprehensive income.

The Company began to execute these remediative measures above during the period covered by this report.

25preparation of the 2007 third quarter financial reports. Additional measures may be forthcoming as the Company evaluates the effectiveness of these efforts. We cannot assure you that these remediation efforts will be successful or that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time.


PART II OTHER INFORMATION

Item 1A. Risk Factors.

There have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 30, 2006 as filed with the SECSecurities and Exchange Commission on March 15, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

                 
              (d)
              Maximum Number
              (or Approximate
          (c) Dollar Value) of
          Total Number of Shares (or Units)
  (a) (b) Shares (or Units) that May Yet Be
  Total Number of Average Purchased as Part of Purchased Under
  Shares (or Units) Price Paid Publicly Announced the
Period Purchased Per Share (or Unit) Plans or Program Plans or Programs
Dec. 31, 2006 — Jan. 27, 2007
     N/A       
                 
Jan. 28, 2007 — Feb. 24, 2007 (1)
  30,000  $27.54   30,000  $24,173,677 
                 
Feb. 25, 2007 — March 31, 2007(1) (2)
  164,093  $26.34   146,500  $20,333,516 
                 
Total
  194,093  $26.52   176,500  $20,333,516 

Period

  

(a)

Total Number of
Shares (or Units)
Purchased

  

(b)

Average
Price Paid
Per Share
(or Unit)

  

(c)

Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Program

  

(d)

Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the
Plans or Programs

Apr. 1, 2007 – Apr. 28, 2007

  —     N/A  —    —  

Apr. 29, 2007 – May 26, 2007

  —     N/A  —    —  

May 27, 2007 – June 30, 2007 (1)

  208  $29.92  —    —  

Total

  208  $29.92  —    —  

(1)On February 20, 2007, we announced a $25 million share repurchase program of our outstanding common stock over the next twelve months. The program was authorized by our board of directors. Purchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity depending on market conditions, other investment opportunities, and other factors. Purchases may be increased, decreased or discontinued at any time without notice. Shares purchased under the program were subsequently retired.
(2)Represents shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the quarter. Our equity incentive plans provide that the value of shares delivered to us to pay the withheld to cover tax obligations is calculated as the average of the high and low trading price of our common stock on the date the relevant transaction occurs.

26On February 20, 2007 we announced a $25 million share repurchase program of our outstanding common stock over the next twelve months. The program was authorized by our board of directors. Purchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity depending on market conditions, other investment opportunities, and other factors. Purchases may be increased, decreased or discontinued at any time without notice. Shares repurchased under the program were subsequently retired. No shares were repurchased under this stock repurchase program during the period covered by this report.


Item 4. Submission of Matters to a Vote of Security Holders

At our annual meeting of stockholders held on May 10, 2007, the following matters were submitted to a vote of the stockholders:

Final Voting Results

Item No. 1

The election of the Class III Directors identified below to the Board of Directors of Build-A-Bear Workshop, Inc. to serve until 2010 or until their successors are elected and qualified. The final voting results were:

Election of Class III Directors

  For  Withheld

James M. Gould

  14,853,135  3,552,285

Joan Ryan

  18,040,487  364,933

Item No. 2

The approval of the U.K. Stock Plan (formally known as the “Rules of the Build-A-Bear Workshop, Inc. Share Option Scheme”). The final voting results were:

For Against Abstain
15,745,720 850,137 7,716

Item No. 3

The ratification of KPMG LLP as the Company’s independent registered public accounting firm for fiscal 2007. The final voting results were:

For Against Abstain
18,032,688 368,193 4,538

All matters voted on at the annual meeting were approved. In addition to the directors elected at the annual meeting, William Reisler, Coleman Peterson, Maxine Clark, Mary Lou Fiala and Louis Mucci continue to serve as directors. Ms. Clark, Ms. Fiala and Mr. Mucci serve as Class I directors and their terms will expire at the 2008 annual meeting. Mr. Reisler and Mr. Peterson serve as Class II directors and their terms will expire at the 2009 annual meeting.

Mr. Ebsworth agreed to continue to serve the Company as Board Member Emeritus effective after the 2006 annual meeting.

Item 5. Other Information

(a) The following individuals maintain Rule 10b5-1 trading plans (each, a “Plan” and together, the “Plans”): (1) Maxine Clark, Chairman, Board of Directors and Chief Executive Bear, (2) Scott Seay, President and Chief Operating Bear, (3) Tina Klocke, Chief Financial Bear, Treasurer and Secretary, and (4) Teresa Kroll, Chief Marketing. Barry Erdos terminated his Rule 10b5-1 plan in conjunction with his departure on January 5, 2007. Barney Ebsworth, Director Emeritus, terminated his Rule 10b5-1 plan effective April 30, 2007.

Chief Executive Bear Maxine Clark’s Plan was adopted under the name of Smart Stuff, Inc. Ms. Clark controls the voting and/or investment power for the shares held by Smart Stuff, Inc, as its president and sole shareholder. Ms. Clark currently owns 3,071,5292,943,614 shares of the Company (including vested options and the shares she owns through Smart Stuff, Inc.). Ms. Clark’s Plan permits no more than a maximum of 8% of her current share holdings (including vested options) to be sold per year (in each of 2007 and 2008). Accordingly, Ms. Clark will continue to have a significant ownership interest in the Company,

Company.

The participants in the Plans will have no control over the timing of any sales under their respective Plans and there can be no assurance that the shares covered by the Plans actually will be sold. The participants entered into the Plans in order to diversify their respective financial holdings.

The Plans are intended to comply with Rule 10b5-1 of the Securities Exchange Act of 1934 and the Company’s insider trading policy. Rule 10b5-1 allows corporate insiders to establish prearranged written plans to buy or sell a specified number of shares of a company stock over a set period of time. The specified number of shares sold may be determined pursuant to a formula or may be at the discretion of a third party, so long as such person is not aware of material non-public information. Among other things, the Company’s insider trading policy allows insiders to implement a written trading plan provided such person is not in possession of material non-public information about the Company at the time the plan is entered into, consistent with Rule 10b5-1. The Plans were established during an “open window” under the Company’s insider trading policy.

Except as may be required by law, the Company does not undertake to report written trading plans established by other Company officers or directors, nor to report modifications, terminations, transactions or other activities under the Plans or the plan of any other officer or director. Actual sales made pursuant to the Plans will be disclosed publicly through Form 4 and Form 144 filings with the Securities and Exchange Commission.

27


(b) In connection with the Board’s consideration of certain strategic alternatives the Company’s Board of Directors formed a special committee comprised of four independent non-management directors. On July 25, 2007, the Board passed a resolution to compensate these directors. Each non-management director serving on the special committee (including the Chairman of the committee) will be paid $6,000 per month, with a maximum total potential payment of $30,000 per member. The Chair of the special committee will receive an additional $10,000 per month, with a maximum total potential payment of $50,000. The Company will also reimburse the special committee members for all out-of-pocket expenses.

Item 6. Exhibits.

The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:

Exhibit No.  

Description

Exhibit
No.Description
10.1  Rules of the

Sixth Amendment to Loan Documents between Build-A-Bear Workshop, Inc. U.K. Share Option Scheme,, Build-A-Bear Workshop Franchise Holdings, Inc. Build-A-Bear Entertainment, LLC, Build-A-Bear Retail Management, Inc., and Build-A-Bear Workshop UK Holdings Ltd., as borrowers, Build-A-Bear Workshop Canada, Ltd. and US Bank National Association, as lender entered into on and effective as of on June 19, 2007, incorporated by reference to

Build-A-Bear Workshop, Inc. Form 8-K filed on February 9,June 20, 2007, Exhibit 10.1

10.2Employment, Confidentiality, and Non-compete Agreement between Build-a-Bear Workshop, Inc. and Paul Bundonis dated January 16, 2007, incorporated by reference to Build-A-Bear Workshop, Inc. Form 8-K filed on January 18, 2007, Exhibit 10.1
10.3Separation Agreement and General Release by and between Build-A-Bear Workshop, Inc. and Barry Erdos dated January 5, 2007, incorporated by reference to Build-A-Bear Workshop, Inc. Form 8-K filed on January 5, 2007, Exhibit 10.1
10.4Second Amendment to the Employment, Confidentiality, and Non-Compete Agreement between Build-A-Bear Workshop, Inc. and Scott Seay dated January 5, 2007, incorporated by reference to Build-A-Bear Workshop, Inc. Form 8-K filed January 5, 2007, Exhibit 10.2
31.1  Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)
31.2  Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Bear)
32.1  Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)
32.2  Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Bear)

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BUILD-A-BEAR WORKSHOP, INC.

SIGNATURES

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 10,November 14, 2007

BUILD-A-BEAR WORKSHOP, INC.

(Registrant)

By: /s/    Maxine Clark        
 Maxine Clark
 Chairman of the Board and Chief Executive Bear
By:By: /s/    Tina Klocke        
 Tina Klocke
 Chief Financial Bear, Treasurer and Secretary

29

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