Attached files
| file | filename |
|---|---|
| EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - BAKERS FOOTWEAR GROUP INC | c61781exv31w2.htm |
| EX-32.1 - CERTIFICATION OF CEO AND CFO - BAKERS FOOTWEAR GROUP INC | c61781exv32w1.htm |
| EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - BAKERS FOOTWEAR GROUP INC | c61781exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended October 30, 2010
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 000-50563
BAKERS FOOTWEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
| Missouri | 43-0577980 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 2815 Scott Avenue, | ||
| St. Louis, Missouri | 63103 | |
| (Address of principal executive offices) | (Zip Code) |
(314) 621-0699
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. þ Yes o No.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). oYes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
Common Stock, par value $0.0001 per share, 9,228,916 shares issued and outstanding as of December
4, 2010.
BAKERS FOOTWEAR GROUP, INC.
INDEX TO FORM 10-Q
INDEX TO FORM 10-Q
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| Certification of Chief Executive Officer | ||||||||
| Certification of Chief Financial Officer | ||||||||
| Certification of CEO and CFO | ||||||||
2
Table of Contents
PART I — FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
BAKERS FOOTWEAR GROUP, INC.
CONDENSED BALANCE SHEETS
| October 31, | January 30, | October 30, | ||||||||||
| 2009 | 2010 | 2010 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 164,538 | $ | 154,685 | $ | 137,467 | ||||||
Accounts receivable |
1,580,717 | 1,387,358 | 1,903,112 | |||||||||
Inventories |
23,335,432 | 20,233,207 | 27,477,487 | |||||||||
Prepaid expenses and other current assets |
978,128 | 1,234,787 | 965,404 | |||||||||
Total current assets |
26,058,815 | 23,010,037 | 30,483,470 | |||||||||
Property and equipment, net |
26,183,851 | 24,757,395 | 19,586,088 | |||||||||
Other assets |
934,700 | 851,035 | 1,098,792 | |||||||||
Total assets |
$ | 53,177,366 | $ | 48,618,467 | $ | 51,168,350 | ||||||
Liabilities and shareholders’ equity (deficit) |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 12,558,384 | $ | 10,138,635 | $ | 16,292,855 | ||||||
Accrued expenses |
8,348,935 | 7,320,595 | 8,640,830 | |||||||||
Subordinated secured term loan |
3,375,229 | 2,785,112 | 901,407 | |||||||||
Subordinated convertible debentures |
4,000,000 | 4,000,000 | — | |||||||||
Sales tax payable |
997,137 | 1,152,277 | 1,043,072 | |||||||||
Deferred income |
1,384,472 | 1,366,252 | 1,133,335 | |||||||||
Revolving credit facility |
16,693,755 | 10,531,687 | 17,495,501 | |||||||||
Total current liabilities |
47,357,912 | 37,294,558 | 45,507,000 | |||||||||
Accrued rent liabilities |
9,364,217 | 9,183,756 | 8,911,771 | |||||||||
Subordinated convertible debentures |
— | — | 4,000,000 | |||||||||
Subordinated debenture |
— | — | 4,000,000 | |||||||||
Shareholders’ equity (deficit): |
||||||||||||
Preferred stock, $0.0001 par value, 5,000,000
shares authorized, no shares outstanding |
— | — | — | |||||||||
Common Stock, $0.0001 par value; 40,000,000
shares authorized, 7,382,856 shares outstanding
at October 31, 2009 and January 30, 2010 and
9,228,916 shares outstanding at October 30, 2010 |
738 | 738 | 923 | |||||||||
Additional paid-in capital |
39,184,879 | 39,279,600 | 40,349,781 | |||||||||
Accumulated deficit |
(42,730,380 | ) | (37,140,185 | ) | (51,601,125 | ) | ||||||
Total shareholders’ equity (deficit) |
(3,544,763 | ) | 2,140,153 | (11,250,421 | ) | |||||||
Total liabilities and shareholders’ equity (deficit) |
$ | 53,177,366 | $ | 48,618,467 | $ | 51,168,350 | ||||||
See accompanying notes.
3
Table of Contents
BAKERS FOOTWEAR GROUP, INC.
| Thirteen | Thirteen | Thirty-nine | Thirty-nine | |||||||||||||
| Weeks | Weeks | Weeks | Weeks | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| October 31, 2009 | October 30, 2010 | October 31, 2009 | October 30, 2010 | |||||||||||||
Net sales |
$ | 39,042,191 | $ | 40,575,879 | $ | 127,739,083 | $ | 127,393,042 | ||||||||
Cost of merchandise sold, occupancy, and
buying expenses |
32,275,828 | 34,225,698 | 95,354,173 | 98,373,653 | ||||||||||||
Gross profit |
6,766,363 | 6,350,181 | 32,384,910 | 29,019,389 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling |
9,655,891 | 9,570,751 | 29,640,515 | 29,000,060 | ||||||||||||
General and administrative |
3,872,358 | 3,831,426 | 12,270,014 | 11,524,740 | ||||||||||||
Loss on disposal of property and equipment |
3,460 | 7,172 | 297,891 | 67,449 | ||||||||||||
Impairment of long-lived assets |
2,762,273 | 1,415,979 | 2,762,273 | 1,415,979 | ||||||||||||
Operating loss |
(9,527,619 | ) | (8,475,147 | ) | (12,585,783 | ) | (12,988,839 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(680,580 | ) | (542,348 | ) | (2,179,478 | ) | (1,537,184 | ) | ||||||||
Other, net |
41,219 | 82,514 | 92,970 | 116,787 | ||||||||||||
Loss before income taxes |
(10,166,980 | ) | (8,934,981 | ) | (14,672,291 | ) | (14,409,236 | ) | ||||||||
Provision for income taxes |
— | — | — | 51,704 | ||||||||||||
Net loss |
$ | (10,166,980 | ) | $ | (8,934,981 | ) | $ | (14,672,291 | ) | $ | (14,460,940 | ) | ||||
Basic loss per share |
$ | (1.38 | ) | $ | (1.03 | ) | $ | (2.01 | ) | $ | (1.85 | ) | ||||
Diluted loss per share |
$ | (1.38 | ) | $ | (1.03 | ) | $ | (2.01 | ) | $ | (1.85 | ) | ||||
See accompanying notes.
4
Table of Contents
BAKERS
FOOTWEAR GROUP, INC.
| Common Stock | ||||||||||||||||||||
| Shares | Additional | |||||||||||||||||||
| Issued and | Paid-In | Accumulated | ||||||||||||||||||
| Outstanding | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at January 30, 2010 |
7,382,856 | $ | 738 | $ | 39,279,600 | $ | (37,140,185 | ) | $ | 2,140,153 | ||||||||||
Stock-based compensation expense |
— | — | 269,981 | — | 269,981 | |||||||||||||||
Issuance of common stock |
1,844,860 | 184 | 799,816 | — | 800,000 | |||||||||||||||
Shares issued in connection
with exercise of stock options |
1,200 | 1 | 384 | — | 385 | |||||||||||||||
Net loss |
— | — | — | (14,460,940 | ) | (14,460,940 | ) | |||||||||||||
Balance at October 30, 2010 |
9,228,916 | $ | 923 | $ | 40,349,781 | $ | (51,601,125 | ) | $ | (11,250,421 | ) | |||||||||
See accompanying notes.
5
Table of Contents
BAKERS FOOTWEAR GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
| Thirty-nine | Thirty-nine | |||||||
| Weeks Ended | Weeks Ended | |||||||
| October 31, 2009 | October 30, 2010 | |||||||
Operating activities |
||||||||
Net loss |
$ | (14,672,291 | ) | $ | (14,460,940 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
5,021,487 | 4,389,813 | ||||||
Accretion of debt discount |
391,280 | 178,795 | ||||||
Stock-based compensation expense |
490,620 | 269,981 | ||||||
Interest expense recognized for issuing common stock related to amending
the subordinated secured term loan |
187,500 | — | ||||||
Loss on disposal of property and equipment |
297,891 | 67,450 | ||||||
Impairment of long-lived assets |
2,762,273 | 1,415,979 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(207,330 | ) | (352,385 | ) | ||||
Inventories |
(2,359,080 | ) | (7,244,280 | ) | ||||
Prepaid expenses and other current assets |
49,467 | 269,383 | ||||||
Other assets |
127,707 | (13,713 | ) | |||||
Accounts payable |
5,001,400 | 6,154,220 | ||||||
Accrued expenses and deferred income |
303,709 | 978,113 | ||||||
Accrued rent liabilities |
(410,612 | ) | (271,985 | ) | ||||
Net cash used in operating activities |
(3,015,979 | ) | (8,619,569 | ) | ||||
Investing activities |
||||||||
Purchase of property and equipment |
(331,746 | ) | (852,334 | ) | ||||
Proceeds from sale of property and equipment |
27 | 3,282 | ||||||
Net cash used in investing activities |
(331,719 | ) | (849,052 | ) | ||||
Financing activities |
||||||||
Net advances under revolving credit facility |
5,210,893 | 6,963,814 | ||||||
Net proceeds from the issuance of subordinated secured term loan and common stock |
— | 4,549,704 | ||||||
Costs of issuing subordinated term loan and common stock |
— | 385 | ||||||
Principal payments on subordinated secured term loan |
(1,833,333 | ) | (2,062,500 | ) | ||||
Net cash provided by financing activities |
3,377,560 | 9,451,403 | ||||||
Net increase (decrease) in cash and cash equivalents |
29,862 | (17,218 | ) | |||||
Cash and cash equivalents at beginning of period |
134,676 | 154,685 | ||||||
Cash and cash equivalents at end of period |
$ | 164,538 | $ | 137,467 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid for interest |
$ | 1,475,034 | $ | 1,048,992 | ||||
See accompanying notes.
6
Table of Contents
BAKERS FOOTWEAR GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
Unaudited
1. Basis of Presentation
The accompanying unaudited condensed financial statements contain all adjustments that
management believes are necessary to present fairly Bakers Footwear Group, Inc.’s (the Company’s)
financial position, results of operations and cash flows for the periods presented. Such
adjustments consist of normal recurring accruals. Certain information and disclosures normally
included in notes to financial statements have been condensed or omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. The Company’s operations are
subject to seasonal fluctuations and, consequently, operating results for interim periods are not
necessarily indicative of the results that may be expected for other interim periods or for the
full year. The condensed financial statements should be read in conjunction with the audited
financial statements and the notes thereto contained in our Annual Report on Form 10-K for the
fiscal year ended January 30, 2010. The Company has evaluated subsequent events through the date
the financial statements were issued and filed with the Securities and Exchange Commission (“SEC”)
and has made disclosures of all material subsequent events in the notes to the unaudited condensed
interim financial statements.
2. Liquidity
The Company’s cash requirements are primarily for working capital, principal and interest
payments on debt obligations, and capital expenditures. Historically, these cash needs have been
met by cash flows from operations, borrowings under the Company’s revolving credit facility and
sales of securities. The balance on the revolving credit facility fluctuates throughout the year as
a result of seasonal working capital requirements and other uses of cash.
The Company’s losses in the first thirty-nine weeks of fiscal year 2010 and fiscal years after
2005 have had a significant negative impact on the Company’s financial position and liquidity. As
of October 30, 2010, the Company had negative working capital of $15.0 million, unused borrowing
capacity under its revolving credit facility of $2.8 million, and shareholders’ deficit of $11.3
million.
The Company’s business plan for the remainder of fiscal year 2010 is based on mid-single digit
increases in comparable store sales for the remainder of the year. Based on the business plan, the
Company expects to maintain adequate liquidity for the remainder of fiscal year 2010. The business
plan reflects continued focus on inventory management and on timely promotional activity. The plan
also includes continued control over selling, general and administrative expenses. The Company
continues to work with its landlords and vendors to arrange payment terms that are reflective of
its seasonal cash flow patterns in order to manage availability. The business plan for the
remainder of fiscal year 2010 reflects continued cash flow management, but does not indicate a
return to profitability. The Company’s 2011 business plan, under which the Company expects to
maintain adequate levels of liquidity for fiscal year 2011, reflects continued mid-single digit
increases in comparable store sales and working with its vendors and landlords to arrange payment
terms that are reflective of the Company’s seasonal cash flow patterns in order to manage
availability. However, there is no assurance that the Company will achieve the sales, margin or
cash flow contemplated in its business plans.
On May 28, 2010, the Company amended its revolving credit facility. The amendment extended the
maturity of the credit facility to May 28, 2013, modified the calculation of the borrowing base,
added a new minimum availability or adjusted EBITDA interest coverage ratio covenant, added an
obligation for the Company to extend the maturity of its subordinated convertible debentures, and
made other changes to the agreement. The Company incurred fees and expenses of approximately
$250,000 in connection with this amendment. The minimum availability or adjusted EBITDA interest
coverage ratio covenant requires that either the Company maintain unused availability greater than
20% of the calculated borrowing base or maintain a ratio of adjusted EBITDA to interest expense
(both as defined in the amendment) of no less than 1.0:1.0. The minimum availability covenant is
tested daily and, if not met, then the adjusted EBITDA covenant is tested on a rolling twelve month
basis. The adjusted EBITDA calculation is substantially similar to the calculation used previously
in the Company’s subordinated secured term loan. The Company did not meet these covenants for the
months of June and July 2010; however, this covenant violation was waived by the bank in connection
with the Debenture and Stock Purchase Agreement discussed below. During the third quarter of
fiscal year 2010, the Company met the bank covenant based on maintaining unused availability
greater than 20% on a daily basis. The Company’s business plan for the remainder of 2010 and for
2011 also anticipates meeting the bank covenant on this basis. The Company continues to closely
monitor its availability and continues to be constrained by its limited unused borrowing capacity.
7
Table of Contents
On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with
Steven Madden, Ltd. In connection with the agreement, the Company sold a subordinated debenture in
the principal amount of $5,000,000. Under the subordinated debenture, interest payments are
required to be paid quarterly at an interest rate of 11% per annum. The principal amount is
required to be paid in four annual installments commencing August 31, 2017, and the subordinated
debenture matures on August 31, 2020. The subordinated debenture is generally unsecured and
subordinate to the Company’s other indebtedness. As additional consideration, Steven Madden, Ltd.
also received 1,844,860 shares of the Company’s common stock, representing a 19.99% interest in the
Company on a post-closing basis. In connection with the transaction, the Company received aggregate
net proceeds of approximately $4.5 million after transaction and other costs.
The Company allocated the net proceeds received in connection with the subordinated debenture
and the related issuance of common stock based on the relative fair values of the debt and equity
components of the transaction. Other expenses incurred by the Company relative to this transaction
were allocated either to debt issuance costs or as a reduction of additional paid-in capital based
on either specific identification of the particular expenses or on a pro rata basis. The Company is
accreting the initial value of the debt to the nominal value of the debt over the term of the loan
using the effective interest method and recognizes such accretion as a component of interest
expense. Likewise, the Company amortizes the related debt issuance costs using the effective
interest method and recognizes this amortization as a component of interest expense.
In fiscal year 2008, the Company obtained net proceeds of $6.7 million from the entry into a
$7.5 million subordinated secured term loan which is now due January 1, 2011. Originally, the term
loan agreement contained financial covenants requiring the Company to maintain specified levels of
tangible net worth and adjusted EBITDA (as defined in the agreement) measured each fiscal quarter.
The Company has amended the loan agreement four times (May 2008, April 2009, September 2009 and
March 2010) to modify these covenants in order to remain in compliance. The March 2010 amendment
completely eliminated these covenants for the remainder of the term loan.
Based on the Company’s business plans for fiscal years 2010 and 2011, the Company believes
that it will be able to comply with the minimum availability or adjusted EBITDA coverage ratio
covenant in the revolving credit facility. However, given the inherent volatility in the Company’s sales performance, there is no
assurance that the Company will be able to do so. In addition, in light of the Company’s historical
sales volatility and the current state of the economy, the Company believes that there is a
reasonable possibility that the Company may not be able to comply with its financial covenants.
Failure to comply would be a default under the terms of the Company’s revolving credit facility and
could result in the acceleration of all of the Company’s debt obligations. If the Company is unable
to comply with its financial covenants, it will be required to seek one or more amendments or
waivers from its lenders. The Company believes that it would be able to obtain any required
amendments or waivers, but can give no assurance that it would be able to do so on favorable terms,
if at all. If the Company is unable to obtain any required amendments or waivers, the Company’s
lenders would have the right to exercise remedies specified in the loan agreements, including
accelerating the repayment of debt obligations and taking collection action against the Company. If
such acceleration occurred, the Company currently has insufficient cash to pay the amounts owed and
would be forced to obtain alternative financing.
The Company continues to face considerable liquidity constraints. Although the Company
believes the business plan is achievable, should the Company fail to achieve the sales or gross
margin levels anticipated, or if the Company were to incur significant unplanned cash outlays, it
would become necessary for the Company to obtain additional sources of liquidity or make further
cost cuts to fund its operations. In recognition of existing liquidity constraints, the Company
continues to look for additional sources of capital at acceptable terms. However, there is no
assurance that the Company would be able to obtain such financing on favorable terms, if at all, or
to successfully further reduce costs in such a way that would continue to allow the Company to
operate its business.
The Company’s independent registered public accounting firm’s report issued in the Company’s
most recent Annual Report on Form 10-K included an explanatory paragraph describing the existence
of conditions that raise substantial doubt about the Company’s ability to continue as a going
concern, including recent losses and working capital deficiency. The financial statements do not
include any adjustments relating to the recoverability and classification of assets carrying
amounts or the amount of and classification of liabilities that may result should the Company be
unable to continue as a going concern.
3. Impairment of Long-Lived Assets
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The Company reviews long-lived assets to be “held and used” for impairment when events or
circumstances exist that indicate the carrying amount of those assets may not be recoverable. The
Company regularly analyzes the operating results of its stores and assess the viability of
under-performing stores to determine whether they should be closed or whether their associated
assets, including furniture, fixtures, equipment, and leasehold improvements, have been impaired.
Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing
for an appropriate start-up period, unusual nonrecurring events, and favorable trends, fixed assets
of stores indicated to be impaired are written down to fair value
based on management’s estimates of future store sales and
expenses, which are considered Level 3 inputs. During the thirty-nine weeks
ended October 30, 2010 and October 31, 2009, the Company recorded $1,415,979 and $2,762,273,
respectively, in noncash charges to earnings related to the impairment of long-lived assets.
4. Nasdaq Capital Market Delisting
On August 17, 2010, the Nasdaq Stock Market filed a Form 25 with the Securities and Exchange
Commission to complete the delisting of the common stock of the Company and Nasdaq informed the
Company of such filing. Trading of the Company’s common stock was suspended on June 18, 2010 for
failure to meet the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b), and
has not traded on Nasdaq since that time. The delisting became effective on August 27, 2010, ten
days after the filing of the Form 25. The Company’s common stock has traded on the OTC Bulletin
Board since June 18, 2010.
5. Revolving Credit Facility
The Company has a revolving credit agreement with a commercial bank (Bank). This agreement
calls for a maximum line of credit of $30,000,000 subject to the calculated borrowing base as
defined in the agreement, which is based primarily on the Company’s inventory level. The agreement
is secured by substantially all assets of the Company. The credit facility is senior to the
subordinated secured term loan, the subordinated convertible debentures and the subordinated
debenture . Interest is payable monthly at the bank’s base rate plus 3.5%. An unused line fee of
0.75% per annum is payable monthly based on the difference between the maximum line of credit and
the average loan balance. The Company had approximately $3,509,000, $1,900,000 and $2,814,000
(under the terms of the new minimum availability covenant discussed
below as applicable) of unused borrowing
capacity under the revolving credit agreement based upon the Company’s borrowing base calculation
as of October 31, 2009, January 30, 2010, and
October 30, 2010, respectively. The agreement has certain
restrictive financial and other covenants relating to, among other things, use of funds under the
facility in accordance with the Company’s business plan, prohibiting a change of control, including
any person or group acquiring beneficial ownership of 40% or more of the Company’s common stock or
combined voting power (as defined in the credit facility), maintaining a minimum availability,
prohibiting new debt, restricting dividends and the repurchase of the Company’s stock, and
restricting certain acquisitions. The revolving credit agreement also provides that the Company can
elect to fix the interest rate on a designated portion of the outstanding balance as set forth in
the agreement based on the LIBOR (London Interbank Offered Rate) plus 4.0%.
On May 28, 2010, the Company amended its revolving credit agreement. The amendment extended
the maturity of the credit facility from January 31, 2011 to May 28, 2013, modified the calculation
of the borrowing base, added a new minimum availability or adjusted EBITDA interest coverage ratio
covenant, added an obligation for the Company to extend the maturity of its subordinated
convertible debentures, and made other changes to the agreement. The Company incurred fees and
expenses of approximately $250,000 in connection with this amendment. The minimum availability or
adjusted EBITDA interest coverage ratio covenant requires that either the Company maintain unused
availability greater than 20% of the calculated borrowing base or maintain the ratio of the
Company’s adjusted EBITDA to its interest expense (both as defined in the amendment) of no less
than 1.0:1.0. The minimum availability covenant is tested daily and, if not met, then the adjusted
EBITDA covenant is tested on a rolling twelve month basis. The adjusted EBITDA calculation is
substantially similar to the calculation used previously in the Company’s subordinated secured term
loan.
6. Subordinated Debenture
On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with
Steven Madden, Ltd. In connection with the agreement, the Company sold a subordinated debenture in
the principal amount of $5,000,000. Under the subordinated debenture, interest payments are
required to be paid quarterly at an interest rate of 11% per annum. The principal amount is
required to be paid in four annual installments commencing August 31, 2017, through the final
maturity date on August 31, 2020. The subordinated debenture is generally unsecured and subordinate
to the Company’s other indebtedness. As additional consideration, Steven Madden, Ltd. also received
1,844,860 shares of the Company’s common stock, representing a 19.99% interest in the Company
9
Table of Contents
on a post-closing basis. In connection with the transaction, the Company received aggregate
net proceeds of approximately $4.5 million after transaction and other costs.
The Company allocated the net proceeds received in connection with the subordinated debenture
and the related issuance of common stock based on the relative fair values of the debt and equity
components of the transaction. The fair value of the 1,844,860 shares of common stock issued was
estimated based on the actual market value of the Company’s common stock at the time of the
transaction net of a blockage discount based on the size of the issuance relative to average
trading volume in the Company’s common stock and a discount to reflect that unregistered shares
were issued and could not be sold on the open market. The fair value of the $5.0 million principal
amount of debt was estimated based on publicly available data regarding the valuation of debt of
companies with comparable credit ratings. The relative fair values of the debt and equity
components were then pro rated into the net proceeds received by the Company to determine the
amounts to be allocated to debt and to equity. Other expenses incurred by the Company relative to
this transaction were allocated either to debt issuance costs or as a reduction of additional
paid-in capital based on either specific identification of the particular expenses or on a pro rata
basis. The Company accretes the initial value of the debt to the nominal value of the debt over the
term of the loan using the effective interest method and recognizes such accretion as a component
of interest expense. Likewise, the Company amortizes the related debt issuance costs using the
effective interest method and recognizes this amortization as a component of interest expense.
7. Subordinated Secured Term Loan
Effective February 4, 2008, the Company consummated a $7.5 million three-year subordinated
secured term loan (the Loan) and issued 350,000 shares of the Company’s common stock as additional
consideration. The Loan matures on January 3, 2011, and requires monthly payments of principal and
interest at an interest rate of 15% per annum. Net proceeds to the Company after transaction costs
were approximately $6.7 million. The Company used the net proceeds to repay amounts owed under its
revolving credit facility and for working capital purposes. The Loan is secured by substantially
all of the Company’s assets and is subordinate to the Company’s revolving credit facility but has
priority over the Company’s subordinated convertible debentures and the subordinated debenture
issued subsequent to the end of the second quarter.
On March 23, 2010, the Company amended the Loan to eliminate the financial covenant for
minimum adjusted EBITDA for the period February 1, 2009 to January 30, 2010 in order to maintain
compliance with that covenant. The amendment also eliminated the financial covenants relating to
the Company’s tangible net worth (as defined in the Loan Agreement) and minimum adjusted EBITDA for
the remaining term of the Loan.
Prior to the amendment described above, the Loan agreement contained financial covenants which
required the Company to maintain specified levels of tangible net worth and adjusted EBITDA, both
as defined in the loan agreement, each fiscal quarter and annual limits on capital expenditures, as
defined in the loan agreement, of no more than $1.0 million each for fiscal years 2009 and 2010.
Upon the occurrence of an event of default as defined in the loan agreement, the Lender will be
entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the Senior
Subordination Agreement, with the interest rate increasing to 17.5% per annum.
The Company allocated the net proceeds received in connection with this loan and the related
issuance of common stock based on the relative fair values of the debt and equity components of the
transaction. The fair value of the 350,000 shares of common stock issued was estimated based on the
actual market value of the Company’s common stock at the time of the transaction net of a discount
to reflect that unregistered shares were issued and could not be sold on the open market until the
related required registration statement, covering these shares was declared effective by the SEC,
which occurred on May 21, 2008. The fair value of the $7.5 million of debt was estimated based on
publicly available data regarding the valuation of debt of companies with comparable credit
ratings. The relative fair values of the debt and equity components were then pro rated into the
net proceeds received by the Company to determine the amounts to be allocated to debt and to
equity. Other expenses incurred by the Company relative to this transaction were allocated either
to debt issuance costs or as a reduction of additional paid-in capital based on either specific
identification of the particular expenses or on a pro rata basis. Based on this analysis, the
Company allocated $6,150,000 to the initial value of the Loan and allocated $715,000 to the value
of the 350,000 shares of common stock. The Company accretes the initial value of the debt to the
nominal value of the debt over the term of the loan using the effective interest method and
recognizes such accretion as a component of interest expense. Likewise, the Company is amortizing
the related debt issuance costs using the effective interest method and recognizes this
amortization as a component of interest expense.
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Scheduled principal payments, net of debt discount applied on the effective interest method
are $901,407 for the remainder of fiscal year 2010 subsequent to October 30, 2010. On August 26,
2010, in connection with the issuance of the subordinated debenture, the loan maturity date was
changed to January 3, 2011 from February 1, 2011.
8. Subordinated Convertible Debentures
On June 26, 2007, the Company completed a private placement of $4,000,000 in aggregate
principal amount of subordinated convertible debentures. The Company received net proceeds of
approximately $3.6 million. The subordinated convertible debentures bear interest at a rate of 9.5%
per annum, payable semi-annually. The principal balance of $4,000,000 is payable in full on June
30, 2012. As disclosed in Notes 2 and 5, the amendment to the Company’s revolving credit facility
requires that the Company amend the subordinated convertible debentures on or before May 1, 2012,
to extend the maturity to a date beyond July 27, 2013; however, the Company has not yet entered
into negotiations to obtain such amendment. As a result of the extension of the revolving credit
agreement, the issuance of the subordinated debenture, and the Company’s projected ability to
comply with its financial debt covenants, all as described in Note 2, the subordinated convertible
debentures have been classified as a noncurrent liability as of October 30, 2010. The initial
conversion price of the debentures was $9.00 per share. The conversion price is subject to
anti-dilution and other adjustments, including a weighted average conversion price adjustment for
certain future issuances or deemed issuances of common stock at a lower price, subject to
limitations. The Company can redeem the unpaid principal balance of these debentures if the closing
price of the Company’s common stock is at least $16.00 per share, subject to the adjustments and
conditions in the debentures.
These debentures contain a weighted average conversion price adjustment that is triggered by
issuances or deemed issuances of the Company’s common stock. As a result of the issuance of shares
of common stock, effective February 4, 2008, the weighted average conversion price of the
debentures decreased from $9.00 to $8.64 and on May 9, 2008, the weighted average conversion price
of the debentures decreased from $8.64 to $8.59. As a result of the issuance of shares on April 9,
2009, the weighted average conversion price of the debentures decreased from $8.59 to $8.31.
Effective August 26, 2010, the conversion price of the debentures decreased from $8.31 to $6.76
with respect to $1 million in aggregate principal amount of debentures and to $8.10, the minimum
conversion price, with respect to $3 million in aggregate principal amount of debentures held by
directors and director affiliates as a result of the issuance of the 1,844,860 shares and
subordinated debenture discussed in Note 2.
On February 1, 2009, the Company adopted updated FASB guidance in ASC 815 Derivatives and
Hedging related to determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock and established a two-step process for making such determination. There was no
significant financial impact to the Company as a result of adopting this guidance. Beginning
February 1, 2009, the Company accounts separately for the fair value of the conversion feature of
the subordinated convertible debentures. As of October 31, 2009,
January 30, 2010, and October 30, 2010
the Company
determined that the fair value of the conversion feature was de minimis. Significant future
increases in the value of the Company’s common stock would result in an increase in the fair value
of the conversion feature which would result in expense recognition in future periods.
9. Income Taxes
In accordance with ASC 740, Income Taxes, the Company regularly assesses available positive
and negative evidence to determine whether it is more likely than not that its deferred tax asset
balances will be recovered from (a) reversals of deferred tax liabilities, (b) potential
utilization of net operating loss carrybacks, (c) tax planning strategies and (d) future taxable
income. There are significant restrictions on the consideration of future taxable income in
determining the realizability of deferred tax assets in situations where a company has experienced
a cumulative loss in recent years. When sufficient negative evidence exists that indicates that
full realization of deferred tax assets is no longer more likely than not, a valuation allowance is
established as necessary against the deferred tax assets, increasing the Company’s income tax
expense in the period that such conclusion is reached. Subsequently, the valuation allowance is
adjusted up or down as necessary to maintain coverage against the deferred tax assets. If, in the
future, sufficient positive evidence, such as a sustained return to profitability, arises that
would indicate that realization of deferred tax assets is once again more likely than not, any
existing valuation allowance would be reversed as appropriate, decreasing the Company’s income tax
expense in the period that such conclusion is reached.
The Company has concluded that the realizability of net deferred tax assets is unlikely and
therefore maintains a valuation allowance against net deferred tax assets. As of October 30, 2010,
the Company increased the valuation allowance to $21,880,603.
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The Company has scheduled the reversals of its deferred tax assets and deferred tax
liabilities and has concluded that based on the anticipated reversals a valuation allowance is
necessary only for the excess of deferred tax assets over deferred tax liabilities.
As of October 30, 2010, the Company has approximately $32.9 million of net operating loss
carryforwards that expire through 2022 available to offset future taxable income.
Significant components of the provision for (benefit from) income tax expense are as follows:
| Thirteen | Thirteen | Thirty-nine | Thirty-nine | |||||||||||||
| Weeks Ended | Weeks Ended | Weeks Ended | Weeks Ended | |||||||||||||
| October 31, 2009 | October 30, 2010 | October 31, 2009 | October 30, 2010 | |||||||||||||
Current: |
||||||||||||||||
Federal |
$ | (1,896,202 | ) | $ | (1,739,470 | ) | $ | (2,959,723 | ) | $ | (3,085,410 | ) | ||||
State and local |
(439,318 | ) | (399,418 | ) | (674,481 | ) | (643,147 | ) | ||||||||
Total current |
(2,335,520 | ) | (2,138,888 | ) | (3,634,204 | ) | (3,728,557 | ) | ||||||||
Deferred: |
||||||||||||||||
Federal |
(1,320,839 | ) | (1,089,568 | ) | (1,679,324 | ) | (1,469,185 | ) | ||||||||
State and local |
(240,153 | ) | (198,103 | ) | (305,332 | ) | (267,124 | ) | ||||||||
Total deferred |
(1,560,992 | ) | (1,287,671 | ) | (1,984,656 | ) | (1,736,309 | ) | ||||||||
Valuation allowance |
3,896,512 | 3,426,559 | 5,618,860 | 5,516,570 | ||||||||||||
Total income tax expense |
$ | — | $ | — | $ | — | $ | 51,704 | ||||||||
The differences between income tax expense at the statutory U.S. federal income tax rate of
35% and the amount reported in the statements of operations are as follows:
| Thirteen | Thirteen | Thirty-nine | Thirty-nine | |||||||||||||
| Weeks Ended | Weeks Ended | Weeks Ended | Weeks Ended | |||||||||||||
| October 31, 2009 | October 30, 2010 | October 31, 2009 | October 30, 2010 | |||||||||||||
Federal income tax at statutory rate |
$ | (3,558,443 | ) | $ | (3,127,243 | ) | $ | (5,135,302 | ) | $ | (5,043,233 | ) | ||||
Impact of State NOL carryback refund restrictions |
— | — | — | 51,704 | ||||||||||||
Impact of graduated Federal rates |
101,670 | 89,350 | 146,723 | 144,092 | ||||||||||||
State and local taxes, net of federal income taxes |
(449,604 | ) | (395,118 | ) | (648,846 | ) | (637,216 | ) | ||||||||
Change in valuation allowance |
3,896,512 | 3,426,558 | 5,618,860 | 5,516,570 | ||||||||||||
Permanent differences |
9,865 | 6,453 | 18,565 | 19,787 | ||||||||||||
Total income tax expense |
$ | — | $ | — | $ | — | $ | 51,704 | ||||||||
Deferred income taxes arise from temporary differences in the recognition of income and
expense for income tax purposes. Deferred income taxes were computed using the liability method and
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used for income tax purposes.
Components of the Company’s deferred tax assets and liabilities are as follows:
| October 31, 2009 | January 30, 2010 | October 30, 2010 | ||||||||||
Deferred tax assets: |
||||||||||||
Net operating loss carryforward |
$ | 10,966,852 | $ | 8,894,200 | $ | 12,822,453 | ||||||
Vacation accrual |
398,736 | 396,524 | 410,565 | |||||||||
Inventory |
1,386,641 | 989,396 | 1,419,073 | |||||||||
Stock-based compensation |
1,079,577 | 1,116,518 | 1,221,810 | |||||||||
Accrued rent |
3,652,044 | 3,581,665 | 3,475,591 | |||||||||
Property and equipment |
1,185,803 | 1,496,584 | 2,664,962 | |||||||||
Total deferred tax assets |
18,669,653 | 16,474,887 | 22,014,454 | |||||||||
Deferred tax liabilities: |
||||||||||||
Prepaid expenses |
154,787 | 111,467 | 133,851 | |||||||||
Total deferred tax liabilities |
154,787 | 111,467 | 133,851 | |||||||||
Valuation allowance |
(18,514,866 | ) | (16,363,420 | ) | (21,880,603 | ) | ||||||
Net deferred tax assets |
$ | — | $ | — | $ | — | ||||||
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The Company’s federal income tax returns subsequent to the fiscal year ended January 1, 2005
remain open. As of October 30, 2010, the Company has not recorded any unrecognized tax benefits.
The Company’s policy, if it had unrecognized benefits, is to recognize accrued interest and
penalties related to unrecognized tax benefits as interest expense and other expense, respectively.
10. Stock-Based Compensation
During the thirty-nine weeks ended October 30, 2010, the Company issued 227,000 nonqualified
stock options with a weighted average exercise price of $2.50. These options are exercisable in
equal annual installments of 20% on or after each of the first five years from the date of grant
and expire ten years from the date of grant. In June 2009, the executive officers and members of
the Company’s Board of Directors surrendered, for no current or future consideration, 224,073 stock
options with exercise prices ranging from $7.75 to $20.06. In accordance with ASC 718, the Company
recognized $171,966 of non-cash stock-based compensation expense as a result of these surrenders.
The Company uses the Black-Scholes option pricing model to determine the fair value of
stock-based compensation. The number of stock options granted, their grant-date weighted-average
fair value, and the significant assumptions used to determine fair-value during the thirty-nine
weeks ended October 31, 2009 and October 30, 2010, are as follows:
| Thirty-nine | Thirty-nine | |||||||
| Weeks Ended | Weeks Ended | |||||||
| October 31, 2009 | October 30, 2010 | |||||||
Options granted |
72,000 | 227,000 | ||||||
Weighted-average fair value of options granted |
$ | 0.33 | $ | 1.96 | ||||
Assumptions |
||||||||
Dividends |
0 | % | 0 | % | ||||
Risk-free interest rate |
2.2 | % | 2.8 | % | ||||
Expected volatility |
54 | % | 97 | % | ||||
Expected option life |
6 years | 6 years | ||||||
During the thirty-nine weeks ended October 30, 2010, the Company also issued 84,000 shares of
restricted common stock and cancelled 7,000 previously issued shares of restricted stock. Shares of
restricted stock cliff vest on the five year anniversary of the grant date. The value of the
Company’s common stock on the date the restricted shares were issued was $0.32.
11. Earnings (Loss) Per Share
Basic earnings (loss) per share are computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share are computed using the weighted
average number of common shares and potential dilutive securities that were outstanding during the
period. Potential dilutive securities consist of outstanding stock options and warrants and shares
underlying the subordinated convertible debentures.
The following table sets forth the components of the computation of basic and diluted earnings
(loss) per share for the periods indicated.
| Thirteen | Thirteen | Thirty-nine | Thirty-nine | |||||||||||||
| Weeks | Weeks | Weeks | Weeks | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| October 31, 2009 | October 30, 2010 | October 31, 2009 | October 30, 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net loss |
$ | (10,166,980 | ) | $ | (8,934,981 | ) | $ | (14,672,291 | ) | $ | (14,460,940 | ) | ||||
Numerator for loss per share |
(10,166,980 | ) | (8,934,981 | ) | (14,672,291 | ) | (14,460,940 | ) | ||||||||
Interest expense related to convertible debentures |
— | — | — | — | ||||||||||||
Numerator for diluted loss per share |
$ | (10,166,980 | ) | $ | (8,934,981 | ) | $ | (14,672,291 | ) | $ | (14,460,940 | ) | ||||
Denominator: |
||||||||||||||||
Denominator for basic earnings (loss) per
share — weighted average shares |
7,382,856 | 8,701,813 | 7,309,830 | 7,822,982 | ||||||||||||
Effect of dilutive securities |
||||||||||||||||
Stock purchase warrants |
— | — | — | — | ||||||||||||
Convertible debentures |
— | — | — | — | ||||||||||||
Denominator for diluted earnings (loss) per share
— adjusted weighted average shares and assumed
conversions |
7,382,856 | 8,701,813 | 7,309,830 | 7,822,982 | ||||||||||||
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The diluted earnings per share calculation for the thirteen weeks ended October 30, 2010
excludes 28,365 incremental shares related to outstanding stock options and 508,148 incremental
shares underlying convertible debentures because they are antidilutive. The diluted earnings per
share calculation for the thirty-nine weeks ended October 30, 2010 excludes 34,241 incremental
shares related to outstanding stock options and 490,281 incremental shares underlying convertible
debentures because they are antidilutive. The diluted earnings per share calculation for the
thirteen weeks ended October 31, 2009 excludes 22,241 incremental shares related to outstanding
stock options and 481,348 incremental shares underlying convertible debentures because they are
antidilutive. The diluted earnings per share calculation for the thirty-nine weeks ended October
31, 2009 excludes 16,750 incremental shares related to outstanding stock options and 477,440
incremental shares underlying convertible debentures because they are antidilutive.
12. Commitments and Contingencies
The Company has certain contingent liabilities resulting from litigation and claims incident
to the ordinary course of business. Management believes the probable resolution of such
contingencies will not materially affect the financial position or results of operations of the
Company. The Company, in the ordinary course of store construction and remodeling, is subject to
mechanic’s liens on the unpaid balances of the individual construction contracts. The Company
obtains lien waivers from all contractors and subcontractors prior to or concurrent with making
final payments on such projects.
13. Fair Value of Financial Instruments
Effective with the second quarter of fiscal 2009, the Company adopted the provisions of ASC
825 Financial Instruments related to interim disclosures about fair value of financial instruments.
This guidance requires disclosures regarding fair value of financial instruments in interim
financial statements, as well as in annual financial statements. The adoption had no impact on the
Company’s financial statements other than additional disclosures.
| October 31, 2009 | ||||||||
| Carrying | ||||||||
| Amount | Fair Value | |||||||
Cash and cash equivalents |
$ | 164,538 | $ | 164,538 | ||||
Revolving credit facility |
16,693,755 | 16,693,755 | ||||||
Subordinated secured term loan |
3,375,229 | 3,369,606 | ||||||
Subordinated convertible debentures |
4,000,000 | 2,466,896 | ||||||
| January 30, 2010 | ||||||||
| Carrying | ||||||||
| Amount | Fair Value | |||||||
Cash and cash equivalents |
$ | 154,685 | $ | 154,685 | ||||
Revolving credit facility |
10,531,687 | 10,531,687 | ||||||
Subordinated secured term loan |
2,785,112 | 2,811,386 | ||||||
Subordinated convertible debentures |
4,000,000 | 2,578,638 | ||||||
| October 30, 2010 | ||||||||
| Carrying | ||||||||
| Amount | Fair Value | |||||||
Cash and cash equivalents |
$ | 137,467 | $ | 137,467 | ||||
Revolving credit facility |
17,495,501 | 17,495,501 | ||||||
Subordinated debenture |
4,000,000 | 4,000,000 | ||||||
Subordinated secured term loan |
901,407 | 901,407 | ||||||
Subordinated convertible debentures |
4,000,000 | 3,017,069 | ||||||
The carrying amount of cash equivalents approximates fair value because of the short maturity
of those instruments. The carrying amount of the revolving credit facility approximates fair value
because the facility has a floating interest rate. The fair values of the subordinated secured term
loan and the subordinated convertible debentures and the subordinated debenture have been estimated
based on current rates available to the Company for similar debt of the same maturity.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s unaudited condensed
financial statements and notes thereto provided herein and the Company’s audited financial
statements and notes thereto in our annual report on Form 10-K for the fiscal year ended January
30, 2010. The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in the forward-looking statements. The
factors that might cause such a difference also include, but are not limited to, those discussed in
our Annual Report on Form 10-K under “Item 1. Business — Cautionary Note Regarding Forward-Looking
Statements and Risk Factors” and under “Item 1. Business — Risk Factors” and those discussed
elsewhere in our Annual Report on Form 10-K and related notes thereto and elsewhere in this
quarterly report.
Overview
We are a national, mall-based, specialty retailer of distinctive footwear and accessories
targeting young women who demand quality fashion products. We feature private label and national
brand dress, casual and sport shoes, boots, sandals and accessories. As of October 30, 2010, we
operated 236 stores, including 220 Bakers stores and 16 Wild Pair stores located in 35 states.
During the first thirty-nine weeks of 2010, our net sales decreased 0.3% compared to the first
thirty-nine weeks of 2009, reflecting unfavorable response to our sandal assortment in the Spring,
partially offset by a 3.9% increase in net sales in the third quarter resulting from strength in
dress and boot sales in the fall. Comparable store sales in the first thirty-nine weeks of 2010
increased 1.3%, compared to an increase of 0.2% in the first thirty-nine weeks of last year. Gross
profit percentage decreased to 22.8% of sales in the first thirty-nine weeks of 2010 compared to
25.4% in the first thirty-nine weeks of 2009 due to increased markdown activity during the year. We
ended the first thirty-nine weeks of 2010 with inventory up 17.8% from a year ago in connection
with the launch of H by Halston ™ and Wild Pair ™ lines. Our selling expenses decreased 2.2% and
our general and administrative expenses decreased 6.1%. We recognized noncash impairment expense of
$1.4 million compared to $2.8 million last year. Our net loss was $14.5 million for the first
thirty nine weeks of 2010, compared to a net loss of $14.7 million in the first thirty nine weeks
of 2009. Comparable store sales for the fourth quarter of 2010, through December 4, have increased
6.6%.
We incurred net losses of $9.1 million and $15.0 million in fiscal years 2009 and 2008. These
losses have had a significant negative impact on our financial position and liquidity. As of
October 30, 2010, we had negative working capital of $15.0 million, unused borrowing capacity under
our revolving credit facility of $2.8 million, and a shareholders’ deficit of $11.3 million.
Our business plan for fiscal year 2010 is based on mid-single digit increases in comparable
store sales for the remainder of the year. Fourth quarter comparable store sales through December
4, 2010 are up 6.6%. Based on our business plan, we expect to maintain adequate liquidity for the
remainder of fiscal year 2010. The business plan reflects continued focus on inventory management
and on timely promotional activity. The plan also includes continued control over selling, general
and administrative expenses. We continue to work with our landlords and vendors to arrange payment
terms that are reflective of our seasonal cash flow patterns in order to manage availability. The
business plan for fiscal year 2010 reflects continued management of cash flow, but does not
indicate a return to profitability. Our 2011 business plan, under which we expect to maintain
adequate levels of liquidity for fiscal year 2011, reflects continued mid-single digit increases in
comparable store sales and working with our vendors and landlords to maintain payment terms that
are reflective of our seasonal cash flow patterns in order to manage availability. However, there
is no assurance that we will achieve the sales, margin or cash flow contemplated in our business
plan.
Debt Agreements
On May 28, 2010, we amended our revolving credit facility. The amendment extended the maturity of
the credit facility to May 28, 2013, modified the calculation of the borrowing base, added a new
minimum availability or adjusted EBITDA interest coverage ratio covenant, added an obligation for
us to extend the maturity of our subordinated convertible debentures, and made other changes to the
agreement. We incurred fees and expenses of approximately $250,000 in connection with this
amendment. The minimum availability or adjusted EBITDA interest coverage ratio covenant requires
that either we maintain unused availability greater than 20% of the calculated borrowing base or
maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the
amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily and, if not
met, then the adjusted EBITDA covenant is tested
15
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on a rolling twelve month basis. The adjusted EBITDA calculation is substantially similar to the
calculation used previously in our subordinated secured term loan. We did not meet these covenants
for the months of June and July 2010; however, this covenant violation was waived by the bank in
connection with the August 2010 debt and equity issuance discussed below. During the third quarter
of fiscal year 2010, we met the bank covenant based on maintaining unused availability greater than
20% on a daily basis. Our business plan for the remainder of 2010 and for 2011 also anticipates
meeting the bank covenant on this basis. We continue to closely monitor our availability and
continue to be constrained by our limited unused borrowing capacity. As of December 4, 2010, the
balance on our revolving line of credit was $18.8 million and our unused borrowing capacity in
excess of the covenant minimum was $1.5 million.
On August 26, 2010, we issued debt and equity to Steven Madden, Ltd., as investor. In
connection with that arrangement, we sold to the investor a subordinated debenture in the principal
amount of $5,000,000. Under the subordinated debenture, interest payments are required to be paid
quarterly at an interest rate of 11% per annum. The principal amount is required to be paid in four
annual installments commencing on August 31, 2017, through the final maturity date of August 31,
2020. The subordinated debenture is generally unsecured and subordinate to our other indebtedness.
As additional consideration, Steve Madden, Ltd. also received 1,844,860 shares of our common stock,
representing a 19.99% interest in our common stock on a post-closing basis. In connection with the
transaction, we received aggregate net proceeds of $4.5 million after transaction and other costs.
We are using the net proceeds for working capital purposes. We received consents from all of our
other debt holders to enter into the transaction.
Based on our business plan for fiscal years 2010 and 2011, we believe that we will be able to
comply with the minimum availability or adjusted EBITDA coverage ratio covenant in our revolving
credit facility. However, given the inherent volatility in our sales performance, there is no
assurance that we will be able to do so. In addition, in light of our historical sales volatility
and the current state of the economy, we believe that there is a reasonable possibility that we may
not be able to comply with the financial covenants. Failure to comply would be a default under the
terms of the revolving credit facility and could result in the acceleration of all of our debt
obligations. If we are unable to comply with our financial covenants, we will be required to seek
one or more additional amendments or waivers from our lenders. We believe that we would be able to
obtain any required amendments or waivers, but can give no assurance that we would be able to do so
on favorable terms, if at all. If we are unable to obtain any required amendments or waivers, our
lenders would have the right to exercise remedies specified in the loan agreements, including
accelerating the repayment of debt obligations and taking collection action against us. If such
acceleration occurred, we currently have insufficient cash to pay the amounts owed and would be
forced to obtain alternative financing.
We continue to face considerable liquidity constraints. Although we believe our business plan
is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we
were to incur significant unplanned cash outlays, it would become necessary for us to obtain
additional sources of liquidity or make further cost cuts to fund our operations. In recognition of
existing liquidity constraints, we continue to look for additional sources of capital at acceptable
terms. However, there is no assurance that we would be able to obtain such financing on favorable
terms, if at all, or to successfully further reduce costs in such a way that would continue to
allow us to operate our business.
For comparison purposes, we classify our stores as comparable or non-comparable. A new store’s
sales are not included in comparable store sales until the thirteenth month of operation. Sales
from remodeled stores are excluded from comparable store sales during the period of remodeling. We
include our Internet and call center sales (“Multi-Channel Sales”) as one store in calculating our
comparable store sales.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting
principles, which require us to make estimates and assumptions about future events and their impact
on amounts reported in our Financial Statements and related Notes. Since future events and their
impact cannot be determined with certainty, the actual results will inevitably differ from our
estimates. These differences could be material to the financial statements.
We believe that our application of accounting policies, and the estimates that are inherently
required by these policies, are reasonable. We believe that the following significant accounting
policies may involve a higher degree of judgment and complexity.
Merchandise inventories
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Merchandise inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out retail inventory method. Consideration received from vendors relating to
inventory purchases is recorded as a reduction of cost of merchandise sold, occupancy, and buying
expenses after an agreement with the vendor is executed and when the related inventory is sold. We
physically count all merchandise inventory on hand annually, generally during the month of January,
and adjust the recorded balance to reflect the results of the physical count. We record estimated
shrinkage between physical inventory counts based on historical results. Inventory shrinkage is
included as a component of cost of merchandise sold, occupancy, and buying costs. Permanent
markdowns are recorded to reflect expected adjustments to retail prices in accordance with the
retail inventory method. In determining permanent markdowns, we consider current and recently
recorded sales prices, the length of time product is held in inventory, and quantities of various
product styles contained in inventory, among other factors. The process of determining our expected
adjustments to retail prices requires significant judgment by management. The ultimate amount
realized from the sale of inventories could differ materially from our estimates. If market
conditions are less favorable than those projected, additional inventory markdowns may be required.
Store closing and impairment charges
Long-lived assets to be “held and used” are reviewed for impairment when events or
circumstances exist that indicate the carrying amount of those assets may not be recoverable. We
regularly analyze the operating results of our stores and assess the viability of under-performing
stores to determine whether they should be closed or whether their associated assets, including
furniture, fixtures, equipment, and leasehold improvements, have been impaired. Asset impairment
tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate
start-up period, unusual nonrecurring events, and favorable trends, fixed assets of stores
indicated to be impaired are written down to fair value.
During the thirty-nine weeks ended October 30, 2010, we recorded $1.4 million in noncash
charges to earnings related to the impairment of furniture, fixtures, and equipment, leasehold
improvements, and other assets at certain underperforming stores. We recognized impairment expense
of $2.8 million during the thirty-nine weeks ended October 31, 2009.
Stock-based compensation expense
We compensate certain employees with various forms of share-based payment awards and recognize
compensation expense for stock-based compensation based on the grant date fair value. Stock-based
compensation expense is then recognized ratably over the service period related to each grant. We
determine the fair value of stock-based compensation using the Black-Scholes option pricing model,
which requires us to make assumptions regarding future dividends, expected volatility of our stock,
and the expected lives of the options. We also make assumptions regarding the number of options and
the number of shares of restricted stock and performance shares that will ultimately vest. The
assumptions and calculations are complex and require a high degree of judgment. Assumptions
regarding the vesting of grants are accounting estimates that must be updated as necessary with any
resulting change recognized as an increase or decrease in compensation expense at the time the
estimate is changed. Excess tax benefits related to stock option exercises are reflected as
financing cash inflows and operating cash outflows.
Deferred income taxes
We calculate income taxes using the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized based on the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and income
tax reporting purposes. Deferred tax assets and liabilities are measured using the tax rates in
effect in the years when those temporary differences are expected to reverse. Inherent in the
measurement of deferred taxes are certain judgments and interpretations of existing tax law and
other published guidance as applied to our operations.
We regularly assess available positive and negative evidence to determine whether it is more
likely than not that our deferred tax asset balances will be recovered from (a) reversals of
deferred tax liabilities, (b) potential utilization of net operating loss carrybacks, (c) tax
planning strategies and (d) future taxable income. Accounting standards place significant
restrictions on the consideration of future taxable income in determining the realizability of
deferred tax assets in situations where a company has experienced a cumulative loss in recent
years. When sufficient negative evidence exists that indicates that full realization of deferred
tax assets is no longer more likely than not, a valuation allowance is established as necessary
against the deferred tax assets, increasing our income tax expense in the period that such
conclusion is reached. Subsequently, the valuation allowance is adjusted up or down as necessary to
maintain coverage against the deferred tax assets. If, in the future, sufficient positive evidence,
such as a sustained return to
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profitability, arises that would indicate that realization of deferred tax assets is once
again more likely than not, any existing valuation allowance would be reversed as appropriate,
decreasing our income tax expense in the period that such conclusion is reached.
We have concluded that the realizability of net deferred tax assets is unlikely, and maintain
a full valuation allowance against our net deferred tax assets. We have scheduled the reversals of
our deferred tax assets and deferred tax liabilities and have concluded that based on the
anticipated reversals, a valuation allowance is necessary only for the excess of deferred tax
assets over deferred tax liabilities.
We anticipate that until we re-establish a pattern of continuing profitability, in accordance
with the applicable accounting guidance, we will not recognize any material income tax expense or
benefit in our statement of operations for future periods, as pretax profits or losses generally
will generate tax effects that will be offset by decreases or increases in the valuation allowance
with no net effect on the statement of operations. If a pattern of continuing profitability is
re-established and we conclude that it is more likely than not that deferred income tax assets are
realizable, we will reverse any remaining valuation allowance which will result in the recognition
of an income tax benefit in the period that it occurs.
We regularly analyze filing positions in all of the federal and state jurisdictions where
required to file income tax returns, as well as all open tax years in these jurisdictions. Our
federal income tax returns subsequent to the fiscal year ended January 1, 2005 remain open. As of
October 30, 2010, we have not record any unrecognized tax benefits. Our policy, if we had
unrecognized benefits, is to recognize accrued interest and penalties related to unrecognized tax
benefits as interest expense and other expense, respectively.
Results of Operations
The following table sets forth our operating results, expressed as a percentage of sales, for
the periods indicated.
| Thirteen | Thirteen | Thirty- | Thirty- | |||||||||||||
| Weeks | Weeks | nine Weeks | nine Weeks | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| October 31, | October 30, | October 31, | October 30, | |||||||||||||
| 2009 | 2010 | 2009 | 2010 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of merchandise sold, occupancy and buying expense |
82.7 | 84.4 | 74.6 | 77.2 | ||||||||||||
Gross profit |
17.3 | 15.6 | 25.4 | 22.8 | ||||||||||||
Selling expense |
24.7 | 23.6 | 23.2 | 22.8 | ||||||||||||
General and administrative expense |
9.9 | 9.4 | 9.6 | 9.0 | ||||||||||||
Loss on disposal of property and equipment |
— | — | 0.2 | 0.1 | ||||||||||||
Impairment of long-lived assets |
7.1 | 3.5 | 2.1 | 1.1 | ||||||||||||
Operating loss |
(24.4 | ) | (20.9 | ) | (9.9 | ) | (10.2 | ) | ||||||||
Other income, net |
0.1 | 0.2 | 0.1 | 0.1 | ||||||||||||
Interest expense |
(1.7 | ) | (1.3 | ) | (1.7 | ) | (1.2 | ) | ||||||||
Loss before income taxes |
(26.0 | ) | (22.0 | ) | (11.5 | ) | (11.3 | ) | ||||||||
Provision for income taxes |
— | — | — | — | ||||||||||||
Net loss |
(26.0 | )% | (22.0 | )% | (11.5 | )% | (11.3 | )% | ||||||||
The following table sets forth our number of stores at the beginning and end of each period
indicated and the number of stores opened and closed during each period indicated.
| Thirteen | Thirteen | Thirty- | Thirty- | |||||||||||||
| Weeks | Weeks | nine Weeks | nine Weeks | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| October 31, | October 30, | October 31, | October 30, | |||||||||||||
| 2009 | 2010 | 2009 | 2010 | |||||||||||||
Number of stores at beginning of period |
240 | 237 | 239 | 238 | ||||||||||||
Stores opened during period |
1 | 2 | 4 | 4 | ||||||||||||
Stores closed during period |
— | (3 | ) | (2 | ) | (6 | ) | |||||||||
Number of stores at end of period |
241 | 236 | 241 | 236 | ||||||||||||
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Thirteen Weeks Ended October 30, 2010 Compared to Thirteen Weeks Ended October 31, 2009
Net sales. Net sales increased to $40.6 million for the thirteen weeks ended October 30, 2010
(third quarter 2010) from $39.0 million for the thirteen weeks ended October 31, 2009 (third
quarter 2009), an increase of $1.6 million or 3.9%. This increase reflected strong demand for dress
shoes and casual boots. Our comparable store sales for the third quarter of 2010 increased by 5.9%
compared to a 5.1% decrease in comparable store sales in the third quarter of 2009. Average unit
selling prices increased 9.3% while unit sales decreased 4.1% compared to the third quarter of
2009. Our multi-channel sales increased 19.5% to $2.6 million.
Gross profit. Gross profit decreased to $6.4 million in the third quarter of 2010 from $6.8
million in the third quarter of 2009, a decrease of $0.4 million or 6.2%. As a percentage of
sales, gross profit decreased to 15.7% in the third quarter of 2010 from 17.3% in the third quarter
of 2009. The decrease in gross profit percentage results from higher costs and higher inventory
levels in connection with the launch of H by Halston ™ and Wild Pair ™ lines. We attribute the
decrease in gross profit dollars to the following components: a decrease of $0.6 million from
reduced gross margin percentage, a decrease of $0.1 million from net store closures, partially
offset by comparable store sales increase of $0.3 million. Total markdown costs increased to $9.1
million in the third quarter of 2010 from $8.0 million in the third quarter of 2009.
Selling expense. Selling expense decreased to $9.6 million in the third quarter of 2010 from
$9.7 million in the third quarter of 2009, a decrease of $0.1 million or 0.9%, and decreased as a
percentage of sales to 23.6% from 24.7%.
General and administrative expense. General and administrative expense decreased to $3.8
million in the third quarter of 2010 from $3.9 million in the third quarter of 2009, a decrease of
$0.1 million or 1.1%, and decreased as a percentage of sales to 9.4% from 9.9%.
Impairment of long-lived assets. Based on the criteria in ASC 360, long-lived assets to be
“held and used” are reviewed for impairment when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable. During the third quarter of 2010, we
recognized $1.4 million in noncash charges related to the impairment of fixed assets and other
assets at specific underperforming stores compared to $2.8 million in the third quarter of 2009.
Interest expense. Interest expense decreased to $0.5 million in the third quarter of 2010 from
$0.7 million in the third quarter of 2009.
Net loss. Net loss decreased to $8.9 million in the third quarter of 2010 compared to a net
loss of $10.2 million in the third quarter of 2009.
Thirty-nine Weeks Ended October 30, 2010 Compared to Thirty-nine Weeks Ended October 31, 2009
Net sales. Net sales decreased to $127.4 million for the thirty-nine weeks ended October 30,
2010 from $127.7 million for the thirty-nine weeks ended October 31, 2009, a decrease of $0.3
million or 0.3%, reflecting unfavorable response to our sandal assortment in the Spring, partially
offset by a 3.9% increase in net sales in the third quarter resulting from strength in dress and
boot sales in the fall. Our comparable store sales for the first thirty-nine weeks of 2010
increased by 1.3% compared to a 0.2% decrease in comparable store sales in the first thirty-nine
weeks of 2009. Average unit selling prices increased 2.8% and unit sales decreased 2.1% compared to
the first thirty-nine weeks of 2009. Our multi-channel sales increased 9.3% to $7.6 million for the
first three quarters of 2010.
Gross profit. Gross profit decreased to $29.0 million in 2010 from $32.4 million in 2009, a
decrease of $3.4 million or 10.4%. As a percentage of sales, gross profit decreased to 22.8% in
2010 from 25.4% in 2009. The decrease in gross profit is primarily attributable to weak demand for
our spring offerings and higher inventory levels, collectively resulting in higher markdown
activity. We attribute the decrease in gross profit dollars to the following components: a decrease
$3.1 million from reduced gross margin percentage, a decrease of $0.5 million from net store
closures, partially offset by a $0.2 million increase in margins from our comparable store sales
increase. Total markdown costs increased to $21.2 million in the first thirty-nine weeks of 2010
from $19.1 million in the first thirty-nine weeks of 2009.
Selling expense. Selling expense decreased to $29.0 million in 2010 from $29.6 million in
2009, a decrease of $0.6 million or 2.2%, and decreased as a percentage of sales to 22.8% from
23.2%. This decrease primarily reflects a $0.5 million in lower store
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depreciation, $0.2 million decrease in store payroll expenses, $0.1 million decrease in
repairs and maintenance due to a reduction in store count, partially offset by $0.2 million
increase in store supplies.
General and administrative expense. General and administrative expense decreased to $11.5
million in 2010 from $12.3 million in 2009, a decrease of $0.8 million or 6.1% and decreased as a
percentage of sales to 9.0% from 9.6%. This decrease primarily reflects $0.3 million of lower
group health insurance costs, $0.3 million decrease in professional fees and $0.2 million in lower
depreciation.
Impairment of long-lived assets. During the first three quarters of 2010, we recognized $1.4
million in noncash charges related to the impairment of fixed assets and other assets at specific
underperforming stores. We recognized $2.8 million of impairment expense in the first three
quarters of 2009.
Interest expense. Interest expense decreased to $1.5 million in 2010 from $2.2 million in
2009.
Net loss. We had a net loss of $14.5 million in the first three quarters of 2010 compared to a
net loss of $14.7 million in the first three quarters of 2009.
Seasonality and Quarterly Fluctuations
Our operating results are subject to significant seasonal variations. Our quarterly results of
operations have fluctuated, and are expected to continue to fluctuate in the future, as a result of
these seasonal variances, in particular our principal selling seasons. We have five principal
selling seasons: transition (post-holiday), Easter, back-to-school, fall and holiday. Sales and
operating results in our third quarter are typically much weaker than in our other quarters.
Quarterly comparisons may also be affected by the timing of sales promotions and costs associated
with remodeling stores, opening new stores, or acquiring stores.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, principal and interest payments on
our debt obligations and capital expenditures. Historically, these cash needs have been met by cash
flows from operations, borrowings under our revolving credit facility and sales of securities. As
discussed below in “Financing Activities” the balance on our revolving credit facility fluctuates
throughout the year as a result of our seasonal working capital requirements and our other uses of
cash.
Our losses in the first three quarters of fiscal year 2010 and recent years have had a
significant negative impact on our financial position and liquidity. As of October 30, 2010, we had
negative working capital of $15.0 million, unused borrowing capacity under our revolving credit
facility of $2.8 million, and shareholders’ deficit of $11.3 million.
Our business plan for the remainder fiscal year 2010 is based on mid-single digit increases in
comparable store sales for the remainder of the year. Fourth quarter comparable store sales through
December 4, 2010 are up 6.6%. Based on our business plan, we expect to maintain adequate liquidity
for the remainder of fiscal year 2010. The business plan reflects continued focus on inventory
management and on timely promotional activity. The plan also includes continued control over
selling, general and administrative expenses. We continue to work with our landlords and vendors to
arrange payment terms that are reflective of our seasonal cash flow patterns in order to manage
availability. The business plan for fiscal year 2010 reflects continued management of cash flow,
but does not indicate a return to profitability. Our 2011 business plan, under which we expect to
maintain adequate levels of liquidity for fiscal year 2011, reflects continued mid-single digit
increases in comparable store sales and working with our vendors and landlords to maintain payment
terms that are reflective of our seasonal cash flow patterns in order to manage availability.
However, there is no assurance that we will achieve the sales, margin or cash flow contemplated in
our business plans.
As of December 4, 2010, the balance on our subordinated secured term loan was $0.5 million,
with a final principal and interest payment due January 3, 2011. We have amended the loan agreement
four times (May 2008, April 2009, September 2009 and March 2010) to modify certain financial
covenants, including a minimum adjusted EBITDA covenant, in order to remain in compliance. The
March 2010 amendment completely eliminated these covenants for the remainder of the term loan.
On May 28, 2010, we amended our revolving credit facility. The amendment extended the maturity
of the credit facility to May 28, 2013, modified the calculation of the borrowing base, added a new
minimum availability or adjusted EBITDA interest coverage ratio covenant, added an obligation for
us to extend the maturity of its subordinated convertible debentures, and made other changes to
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the agreement. We incurred fees and expenses of approximately $250,000 in connection with this
amendment. The minimum availability or adjusted EBITDA interest coverage ratio covenant requires
that either we maintain unused availability greater than 20% of the calculated borrowing base or
maintain the ratio of our adjusted EBITDA to our interest expense (both as defined in the
amendment) of no less than 1.0:1.0. The minimum availability covenant is tested daily, and if not
met, then the adjusted EBITDA covenant is tested monthly on a rolling twelve month basis. The
adjusted EBITDA calculation is substantially similar to the calculation used previously in our
subordinated secured term loan. We did not meet these covenants for the months of June and July
2010; however, this covenant violation was waived by the bank in connection with the August 2010
debt and equity issuance discussed below. During the third quarter of fiscal year 2010, we met the
bank covenant based on maintaining unused availability greater than 20% on a daily basis. Our
business plan for the remainder of 2010 and for 2011 also anticipates meeting the bank covenant on
this basis. We continue to closely monitor our availability and continue to be constrained by our
limited unused borrowing capacity. As of December 4, 2010, the balance on our revolving line of
credit was $18.8 million and our unused borrowing capacity was $1.5 million or 25.2% of the
calculated borrowing base.
On August 26, 2010, we issued debt and equity to Steven Madden, Ltd. In connection with that
arrangement, we sold to the investor a debenture in the principal amount of $5,000,000. Under the
subordinated debenture, interest payments are required to be paid quarterly at an interest rate of
11% per annum. The principal amount is required to be repaid in four annual installments commencing
on August 31, 2017, through the final maturity date on August 31, 2020. The subordinated debenture
is generally unsecured and subordinate to our other indebtedness. As additional consideration,
Steven Madden, Ltd. also received 1,844,860 shares of our common stock, representing a 19.99%
interest in our Company on a post-closing basis. In connection with the transaction, we received
aggregate net proceeds of $4.6 million after transaction and other costs. We are using the net
proceeds for working capital purposes. We received consents from all of our other debt holders to
enter into the transaction.
Based on our business plan for fiscal years 2010 and 2011, we believe that we will be able to
comply with the minimum availability or adjusted EBITDA coverage ratio covenant. However, given the
inherent volatility in our sales performance, there is no assurance that we will be able to do so.
In addition, in light of our historical sales volatility and the current state of the economy, we
believe that there is a reasonable possibility that we may not be able to comply with the financial
covenants. Failure to comply would be a default under the terms of our revolving credit facility
and could result in the acceleration of all of our debt obligations. If we are unable to comply
with our financial covenants, we will be required to seek one or more additional amendments or
waivers from our lenders. We believe that we would be able to obtain any required amendments or
waivers, but can give no assurance that we would be able to do so on favorable terms, if at all. If
we are unable to obtain any required amendments or waivers, our lenders would have the right to
exercise remedies specified in the loan agreements, including accelerating the repayment of debt
obligations and taking collection action against us. If such acceleration occurred, we currently
have insufficient cash to pay the amounts owed and would be forced to obtain alternative financing.
Please see “Part II — Item 1A. — Risk Factors — The terms of our revolving credit facility
contain certain financial covenants with respect to our performance and other covenants that
restrict our activities. If we are unable to comply with these covenants, we would have to
negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our
indebtedness” in our Quarterly Report on Form 10-Q for the period ended May 1, 2010.
We continue to face considerable liquidity constraints. Although we believe our business plan
is achievable, should we fail to achieve the sales or gross margin levels we anticipate, or if we
were to incur significant unplanned cash outlays, it would become necessary for us to obtain
additional sources of liquidity or make further cost cuts to fund our operations. In recognition of
existing liquidity constraints, we continue to look for additional sources of capital at acceptable
terms. However, there is no assurance that we would be able to obtain such financing on favorable
terms, if at all, or to successfully further reduce costs in such a way that would continue to
allow us to operate our business.
As described in Note 4 to the financial statements, our common stock has been delisted from
the Nasdaq Stock Market. Our common stock has traded on the OTC Bulletin Board since June 18, 2010.
Delisting could limit our ability to raise capital from the sale of securities. See “Part II —
Item 1A. — Risk Factors — We were recently delisted from the Nasdaq Stock Market. Our common
stock is not quoted on a national exchange, and there is relatively limited trading in our common
stock, which limits the ability of our shareholders or potential shareholders to purchase or sell
shares of our common stock and limits our ability to obtain financing” in our Quarterly Report on
Form 10-Q for the period ended July 31, 2010.
Our independent registered public accounting firm’s report issued in our most recent Annual
Report on Form 10-K included an explanatory paragraph describing the existence of conditions that
raise substantial doubt about our ability to continue as a going concern, including our recent
losses and working capital deficiency. See Note 2 to our financial statements. Our financial
statements
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do not include any adjustments relating to the recoverability and classification of assets
carrying amounts or the amount of and classification of liabilities that may result should we be
unable to continue as a going concern. We have taken several steps that we believe will be
sufficient to allow us to continue as a going concern and to improve our liquidity, operating
results and financial condition. See “Item 1. Business — Risk Factors — The report issued by our
independent registered public accounting firm on our fiscal year 2009 financial statements contains
language expressing substantial doubt about our ability to continue as a going concern” in our
Annual Report on Form 10-K for the fiscal year ended January 30, 2010.
The following table summarizes certain key liquidity measurements as of the dates indicated:
| October 31, 2009 | January 30, 2010 | October 30, 2010 | ||||||||||
Cash |
$ | 164,538 | $ | 154,685 | $ | 137,467 | ||||||
Inventories |
23,335,432 | 20,233,207 | 27,477,487 | |||||||||
Total current assets |
26,058,815 | 23,010,037 | 30,483,470 | |||||||||
Property and equipment, net |
26,183,851 | 24,757,395 | 19,586,088 | |||||||||
Total assets |
53,177,366 | 48,618,467 | 51,168,350 | |||||||||
Revolving credit facility |
16,693,755 | 10,531,687 | 17,495,501 | |||||||||
Subordinated convertible debentures |
4,000,000 | 4,000,000 | 4,000,000 | |||||||||
Subordinated debenture |
— | — | 4,000,000 | |||||||||
Subordinated secured term loan |
3,375,229 | 2,785,112 | 901,407 | |||||||||
Total current liabilities |
47,357,912 | 37,294,558 | 45,507,000 | |||||||||
Total shareholders’ equity (deficit) |
(3,544,763 | ) | 2,140,153 | (11,250,421 | ) | |||||||
Net working capital (deficit) |
(21,299,097 | ) | (14,284,521 | ) | (15,023,530 | ) | ||||||
Unused borrowing capacity* |
3,508,600 | 1,928,913 | 2,813,626 | |||||||||
| * | as calculated under the terms of our revolving credit facility |
Operating activities
Cash used in operating activities was $8.6 million in the first three quarters of 2010
compared to cash used in operating activities of $3.0 million in the first three quarters of 2009.
Other than our net loss of $14.5 million, the most significant use of cash in operating activities
in the first three quarters of 2010 relates to a $7.2 million increase in inventory partially
offset by significant noncash expenses ($4.4 million of depreciation, $1.4 million of impairment
expense, $0.3 million of stock-based compensation expense and $0.2 million of accretion of debt
discount) and a $6.9 million increase of accounts payables, accrued expenses and accrued
liabilities, as we have been working with our vendors and landlords to maintain terms that are
reflective of our seasonal cash flow patterns.
Besides our net loss of $14.7 million in the first three quarters of 2009, the most
significant use of cash in operating activities in the first three quarters of 2009 relates to a
$2.4 million increase in inventory partially offset by significant noncash expenses ($5.0 million
of depreciation, $2.8 million of impairment expense, $0.5 million of stock-based compensation
expense and $0.4 million of accretion of debt discount) and a $4.9 million increase of accounts
payables, accrued expenses and accrued liabilities, as we have been working with our vendors and
landlords to maintain terms that are reflective of our seasonal cash flow patterns.
Inventories at October 30, 2010 increased $4.1 million, or 17.8%, over inventories at October
31, 2009. The increased inventory levels reflect the fall launch of our H by Halston ™ and our Wild
Pair ™ lines, acceleration of merchandise receipts, and incremental inventory to support our
increased comparative store sales. Although we believe that at October 30, 2010, inventory levels
and valuations are appropriate given current and anticipated sales trends, there is always the
possibility that fashion trends could change suddenly. We monitor our inventory levels closely and
will take appropriate actions, including taking additional markdowns, as necessary, to maintain the
freshness of our inventory.
Investing activities
Cash used in investing activities was $0.8 million in the first three quarters of 2010
compared to $0.3 million for the first three quarters of 2009. During each period, cash used in
investing activities substantially consisted of capital expenditures for furniture, fixtures and
leasehold improvements for both new and remodeled stores.
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Our future capital expenditures will depend primarily on the number of new stores we open, the
number of existing stores we remodel and the timing of these expenditures. We continuously evaluate
our future capital expenditure plans and adjust planned expenditures, as necessary, based on
business conditions. As of December 4, 2010, we have opened four new stores and closed six stores
in fiscal year 2010. We currently anticipate that our capital expenditures in fiscal year 2010,
primarily related to new stores, store remodelings, distribution and general corporate activities,
will be approximately $1.0 million.
Financing activities
Cash provided by financing activities was $9.5 million in the first three quarters of 2010
compared to $3.4 million for the first three quarters of 2009. The principal source of cash from
financing activities in the first three quarters of 2010 were the net draws of $7.0 million on our
revolving line of credit, $4.5 million aggregate net proceeds from the issuance of common stock and
the subordinated debenture, partially offset by $2.1 million of principal payments on the
subordinated secured term loan. The principal sources of cash from financing activities in the
first three quarters of 2009 were the net draws of $5.2 million on our revolving line of credit
offset by $1.8 million of principal payments on the subordinated secured term loan.
Revolving Credit Facility
We have a $30 million senior secured revolving credit facility with Bank of America, N.A. On
May 28, 2010, we amended our revolving credit agreement to extend the maturity of the credit
facility from 2010 to May 28, 2013, modify the calculation of the borrowing base, add a new minimum
availability or adjusted EBITDA interest coverage ratio covenant, add an obligation for the Company
to extend the maturity of its subordinated convertible debentures by May 2012, add an early
termination fee, and make other changes to the agreement. The minimum availability or adjusted
EBITDA interest coverage ratio covenant requires that either the Company maintain unused
availability greater than 20% of the calculated borrowing base or maintain the ratio of our
adjusted EBITDA to our interest expense (both as defined in the amendment) of no less than 1.0:1.0.
The minimum availability covenant is tested daily, and if not met the adjusted EBITDA covenant is
tested monthly on a rolling twelve month basis. The adjusted EBITDA calculation is substantially
similar to the calculation used previously in our subordinated secured term loan. We did not meet
these covenants for the months of June and July 2010; however, this covenant violation was waived
by the bank in connection with the issuance of the subordinated debenture issued in August 2010
discussed below.
Amounts borrowed under the facility bear interest at a rate equal to the base rate (as defined
in the agreement) plus a margin amount between 3.0% and 3.5%. The base rate equals the greater of
the bank’s prime rate, the federal funds rate plus 0.50% or the Libor rate plus 1.0% (all as
defined in the agreement).
The revolving credit facility also allows us to apply an interest rate based on Libor (as
defined in the agreement) plus a margin amount to a designated portion of the outstanding balance
as set forth in the agreement. The Libor margin (as defined in the agreement) ranges from 3.5% to
4.0%. Following the occurrence of any event of default, the bank may increase the rate by an
additional two percentage points.
The unused line fee is 0.75% per annum. The unused line fee is payable monthly based on the
difference between the revolving credit ceiling and the average loan balance under the agreement.
The aggregate amount that we may borrow under the agreement at any time is further limited by a
formula, which is based substantially on our inventory level but cannot be greater than the
revolving credit ceiling of $30 million.
Amounts borrowed under the credit facility are secured by substantially all of our assets. If
contingencies related to early termination of the revolving credit facility were to occur, or if we
request and receive an accommodation from the lender in connection with the facility, we may be
required to pay additional fees. We may be required to pay an early termination fee of up to
$150,000 in the event we terminate the facility before May 2012.
The credit facility includes financial, reporting and other covenants relating to, among other
things, use of funds under the facility in accordance with the our business plan, prohibiting a
change of control, including any person or group acquiring beneficial ownership of 40% or more of
our common stock or combined voting power (as defined in the credit facility), maintaining a
minimum availability, prohibiting new debt, restricting dividends and the repurchase of our stock,
and restricting certain acquisitions. In the event that we violate any of these covenants,
including the minimum availability or adjusted EBITDA interest coverage financial covenant or the
obligation to extend the maturity of our subordinated convertible debentures (both as described
above), or if other
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indebtedness in excess of $1.0 million could be accelerated, or in the event that 10% or more
of our leases could be terminated (other than solely as a result of certain sales of our common
stock), the bank would have the right to accelerate repayment of all amounts outstanding under the
agreement, or to commence foreclosure proceedings on our assets.
We had balances under our revolving credit facility of $17.5 million, $10.5 million and $16.7
million as of October 30, 2010, January 30, 2010 and October 31, 2009, respectively. We had
approximately $2.8 million, $1.9 million and $3.5 million in unused borrowing capacity calculated
under the provisions of our revolving credit facility as of October 30, 2010, January 30, 2010, and
October 31, 2009, respectively. During the first thirty-nine weeks of fiscal years 2010 and 2009,
the highest outstanding balances on our revolving credit facility were $17.5 million and $16.9
million, respectively. We primarily have used the borrowings on our revolving credit facility for
working capital purposes and capital expenditures.
Subordinated Secured Term Loan
We have a subordinated secured term loan with Private Equity Management Group, Inc. (PEM) as
arranger and administrative agent on behalf of the lender, and an affiliate of PEM, as the lender,
pursuant to a Second Lien Credit Agreement dated February 4, 2008. The loan now matures on January
3, 2011. The loan is secured by substantially all of our assets. The loan is subordinate to our
senior secured revolving credit facility with Bank of America, N.A., our senior lender, but it is
senior to our $4 million in aggregate principal amount of subordinated convertible debentures due
2012 and our subordinated debenture issued in August 2010.
Originally, the loan agreement contained financial covenants requiring us to maintain
specified levels of tangible net worth and adjusted EBITDA (as defined in the agreement) each
fiscal quarter. We have amended the loan agreement four times (May 2008, April 2009, September 2009
and March 2010) to modify these covenants in order to remain in compliance. The March 2010
amendment completely eliminated these covenants for the remainder of the term loan. As
consideration for the initial loan and the May 2008 amendment thereto, PEM received 400,000 shares
of our common stock, an advisory fee of $300,000 and PEM’s costs and expenses. As consideration for
the April 2009 and September 2009 amendments, we paid fees totaling $265,000 and issued an
additional 250,000 shares of our common stock. We did not pay any fees in connection with the March
2010 amendment.
We entered into the loan in February 2008. At that time, we received aggregate gross proceeds
of $7.5 million and net proceeds of approximately $6.7 million from the term loan. We used the net
proceeds initially to repay amounts owed under our senior credit facility and for working capital
purposes. We also have broad obligations to indemnify, and pay the fees and expenses of PEM and the
Lender in connection with, among other things, the enforcement, performance and administration of
the loan agreement and the other loan documents.
The loan agreement still contains a financial covenant which sets an annual limit of $1
million for capital expenditures. The loan agreement also contains certain other restrictive
covenants, including covenants that restrict our ability to incur additional indebtedness, to
pre-pay other indebtedness, to dispose of assets, to effect certain corporate transactions,
including specified mergers and sales of all or substantially all of our assets, to change the
nature of our business, to pay dividends (other than in the form of common stock dividends), as
well as covenants that limit transactions with affiliates and prohibit a change of control. For
this purpose, a change of control is generally defined as, among other things, a person or entity
acquiring beneficial ownership of more than 50% of our common stock, specified changes to our Board
of Directors, sale of all or substantially all of our assets or certain recapitalizations. The loan
agreement also contains customary representations and warranties and affirmative covenants,
including provisions relating to providing reports, inspections and appraisal, and maintenance of
property and collateral.
Upon the occurrence of an event of default under the loan agreement, the Lender will be
entitled to acceleration of the debt plus all accrued and unpaid interest, subject to the senior
subordination agreement, with the interest rate increasing to 17.5% per annum. The loan agreement
generally provides for customary events of default, including default in the payment of principal
or interest or other required payments, failure to observe or perform covenants or agreements
contained in the transaction documents (excluding the registration rights agreement), materially
breaching our credit facility with our senior lender or the terms of our subordinated convertible
debentures, generally failure to pay when due debt obligations (broadly defined, subject to certain
exceptions) in excess of $1 million, specified events of bankruptcy or specified judgments against
us.
We have granted certain registration rights to PEM with respect to the initial 400,000 shares
described above, including the potential payments of liquidated damages in certain circumstances in
relating to the timing and effectiveness of the registration statement. As required, we filed the
registration statement at our expense and the SEC declared the registration statement effective
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within the required time periods, and our potential liability for liquidated damages ended on
February 1, 2010. We also have certain other ongoing obligations, including providing PEM specified
notices and certain information, indemnifying PEM for certain liabilities and using reasonable best
efforts to timely file all required filings with the SEC and make and keep current public
information about us. We did not grant PEM any registration rights with respect to the 250,000
additional shares issued in connection with the April 2009 amendment to the term loan.
On August 26, 2010, in connection with the issuance of the subordinated debentures, we entered
into an amendment to the loan that adjusted the maturity date from February 1, 2011 to January 3,
2011.
Subordinated Convertible Debentures
On June 26, 2007, we issued $4 million in aggregate principal amount of subordinated
convertible debentures to seven accredited investors in a private placement generating net proceeds
of approximately $3.6 million, which were used to repay amounts owed under our revolving credit
facility. The subordinated convertible debentures are nonamortizing, bear interest at a rate of
9.5% per annum, payable semi-annually on each June 30 and December 31, and mature on June 30, 2012.
Investors included corporate directors Andrew N. Baur and Scott C. Schnuck, an entity affiliated
with Mr. Baur, and advisory directors Bernard A. Edison and Julian Edison.
The subordinated convertible debentures are convertible into shares of common stock at any
time. The initial conversion price was $9.00 per share. The conversion price, and thus the number
of shares into which the debentures are convertible, is subject to anti-dilution and other
adjustments. If we distribute any assets (other than ordinary cash dividends), then generally each
holder is entitled to receive a like amount of such distributed property. In the event of a merger,
consolidation, sale of substantially all of our assets, or reclassification or compulsory share
exchange, then upon any subsequent conversion each holder will have the right to either the same
property as it would have otherwise been entitled or cash in an amount equal to 100% principal
amount of the debenture, plus interest and any other amounts owed. The subordinated convertible
debentures also contain a weighted average conversion price adjustment generally for future
issuances, at prices less than the then current conversion price, of common stock or securities
convertible into, or options to purchase, shares of common stock, excluding generally currently
outstanding options, warrants or performance shares and any future issuances or deemed issuances
pursuant to any properly authorized equity compensation plans. The subordinated convertible
debentures contain limitations on the number of shares issuable pursuant to the subordinated
convertible debentures regardless of how low the conversion price may be, including limitations
generally requiring that the conversion price not be less than $8.10 per share for subordinated
convertible debentures issued to advisory directors, corporate directors or the entity affiliated
with Mr. Baur, that we do not issue common stock amounting to more than 19.99% of our common stock
in the transaction or such that following conversion, the total number of shares beneficially owned
by each holder does not exceed 19.999% of our common stock. These limitations may be removed with
shareholder approval.
As a result of the issuance of the 1,844,860 shares of our common stock in August 2010, the
weighted average conversion price of the subordinated convertible debentures decreased from $8.31
to $6.76 with respect to $1 million in aggregate principal amount of debentures and to $8.10, the
minimum conversion price, with respect to $3 million in aggregate principal amount of debentures
held by directors and director affiliates. The debentures are now convertible into a total of
518,299 shares of the Company’s common stock.
The subordinated convertible debentures generally provide for customary events of default,
which could result in acceleration of all amounts owed, including default in required payments,
failure to pay when due, or the acceleration of other monetary obligations for indebtedness
(broadly defined) in excess of $1 million (subject to certain exceptions), failure to observe or
perform covenants or agreements contained in the transaction documents, including covenants
relating to using the net proceeds, maintaining legal existence, prohibiting the sale of material
assets outside of the ordinary course, prohibiting cash dividends and distributions, share
repurchases, and certain payments to our officers and directors. We generally have the right, but
not the obligation, to redeem the unpaid principal balance of the subordinated convertible
debentures at any time prior to conversion if the closing price of our common stock (as adjusted
for stock dividends, subdivisions or combinations) is equal to or above $16.00 per share for each
of 20 consecutive trading days and certain other conditions are met. We have also agreed to provide
certain piggyback and demand registration rights, until two years after the subordinated
convertible debentures cease to be outstanding, to the holders under the Securities Act of 1933
relating to the shares of common stock issuable upon conversion of the subordinated convertible
debentures. In April 2010, the debenture documents were amended to remove our de-listing from the
Nasdaq Stock Market as an event of default.
Subordinated Debenture
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On August 26, 2010, we entered into a Debenture and Stock Purchase Agreement with Steven
Madden, Ltd. In connection with the Purchase Agreement, we sold to Steven Madden, Ltd. a debenture
in the principal amount of $5,000,000 (the “subordinated debenture”). Under the subordinated
debenture, interest payments are required to be paid quarterly at an interest rate of 11% per
annum. The principal amount is required to be repaid in four annual installments commencing on
August 31, 2017, through the final maturity on August 31, 2020. As additional consideration, Steven
Madden, Ltd. also received 1,844,860 shares of the our common stock which are subject to a voting
agreement in favor of Peter Edison, representing a 19.99% interest in the Company on a post-closing
basis. In connection with the transaction, we received aggregate net proceeds of $4.6 million after
transaction and other costs.
The transaction documents contain standstill provisions which generally prohibit Steven
Madden, Ltd. from owning more than 19.999% of our outstanding shares of common stock or from
engaging in certain transactions in our common stock for ten years, subject to certain conditions.
Until the earlier of August 26, 2012 or the termination or departure of Peter A. Edison as our
Chief Executive Officer, Steven Madden, Ltd. is generally prohibited from transferring the shares
issued or the subordinated debenture.
The subordinated debenture is subordinate to our other indebtedness, and is generally
unsecured. We are required to offer to redeem the subordinated debenture at 101% of the outstanding
principal amount in certain circumstances, including a change of control of the Company (as defined
in the subordinated debenture), including the termination or departure of Peter A. Edison as our
Chief Executive Officer for any reason.
The subordinated debenture generally provides for customary events of default, including
default in the payment of principal or interest or other required payments in favor of Steven
Madden, Ltd., breach of representations, and specified events of bankruptcy or specified judgments
against us. Upon the occurrence of an event of default under the subordinated debenture, Steven
Madden, Ltd. would be entitled to acceleration of the debt (at between 102% and 100% of principal
depending on when a default occurred) plus all accrued and unpaid interest, with the interest rate
increasing to 13.0% per annum. We may prepay the debenture at any time, subject to prepayment
penalties of between 1% and 2% of the principal amount over the first two years. We also granted
certain demand and piggy-back registration rights in respect of the shares covering a period of ten
years.
Off-Balance Sheet Arrangements
At October 30, 2010, January 30, 2010, and October 31, 2009, we did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities or variable interest entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity,
market or credit risk that could otherwise have arisen if we had engaged in such relationships.
Contractual Obligations
The following table summarizes our contractual obligations as of October 30, 2010:
| Payments due by Period | ||||||||||||||||||||
| Less than | ||||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1 - 3 Years | 3 -5 Years | More than 5 Years | |||||||||||||||
Long-term debt obligations (1) |
$ | 15,395,744 | $ | 1,930,244 | $ | 5,486,333 | $ | 1,100,000 | $ | 6,879,167 | ||||||||||
Operating lease obligations (2) |
118,297,309 | 24,027,652 | 42,399,809 | 31,963,379 | 19,906,469 | |||||||||||||||
Purchase obligations (3) |
13,972,194 | 9,097,194 | 3,000,000 | 1,875,000 | — | |||||||||||||||
Total |
$ | 147,665,247 | $ | 35,055,090 | $ | 50,886,142 | $ | 34,938,379 | $ | 26,785,636 | ||||||||||
| (1) | Includes principal and interest payments on our subordinated convertible debentures, subordinated debenture, and our subordinated secured term loan. | |
| (2) | Includes minimum payment obligations related to our store leases. | |
| (3) | Includes merchandise on order, minimum royalty payments and payment obligations relating to store construction and miscellaneous service contracts. |
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Recent Accounting Pronouncements
None.
Impact of Inflation
Overall, we do not believe that inflation has had a material adverse impact on our business or
operating results during the periods presented. We cannot give assurance, however, that our
business will not be affected by inflation in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the
end of the period covered by this report. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company’s disclosure controls and procedures
provided reasonable assurance that the disclosure controls and procedures were effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act and in
accumulating and communicating such information to management, including the Company’s Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal Control Over Financial Reporting. The Company’s management, with the participation of
the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
Company’s internal control over financial reporting to determine whether any changes occurred
during the Company’s third fiscal quarter ended October 30, 2010 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial
reporting. Based on that evaluation, there has been no such change during the Company’s third
quarter of fiscal year 2010.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various lawsuits and claims arising in the ordinary
course of business. Although the outcomes of these lawsuits and claims are uncertain, we do not
believe any of them will have a material adverse effect on our business, financial condition or
results of operations.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors disclosed in our Annual Report on Form 10-K
for fiscal year 2009 and in our Quarterly Reports on Form 10-Q for the quarters ended May 1, 2010
and July 31, 2010.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The Company does not have any programs to repurchase shares of its common stock and no such
repurchases were made during the thirteen weeks ended October 30, 2010.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. [Removed and Reserved]
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Exhibit Index herein
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Quarterly Report on Form 10-Q to be signed, on its behalf by the undersigned thereunto duly authorized.
Date: December 14, 2010
| BAKERS FOOTWEAR GROUP, INC. (Registrant) |
||||
| By: | /s/ Peter A. Edison | |||
| Peter A. Edison | ||||
| Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) Bakers Footwear Group, Inc. (On behalf of the Registrant) |
||||
| By: | /s/ Charles R. Daniel, III | |||
| Charles R. Daniel, III | ||||
| Executive Vice President and Chief Financial Officer, Controller, Treasurer, and Secretary (Principal Financial Officer and Principal Accounting Officer) |
||||
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EXHIBIT INDEX
| Exhibit No. | Description | |
3.1
|
Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)). | |
3.2
|
Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 filed on April 2, 2004 (File No. 000-50563)). | |
4.1
|
Debenture and Stock Purchase Agreement dated August 26, 2010 by and among the Company and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.2
|
Debenture issued by the Company to Steven Madden, Ltd. on August 26, 2010 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.3
|
Voting Agreement dated August 26, 2010 by and among the Company, Peter A. Edison, and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.4
|
Registration Rights Agreement dated August 26, 2010 by and among the Company and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.5
|
Subordination Agreement dated August 26, 2010 by and among the Company, Bank of America, N.A., and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.6
|
Subordination Agreement dated August 26, 2010 by and among the Company, Private Equity Management Group, Inc., in its capacity as administrative agent for GVECR II 2007 E Trust dated December 17, 2007, and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.7
|
Subordination Agreement dated August 26, 2010 by and among the Company, the holders of $4 million aggregate principal amount of the Company’s 9.5% Subordinated Convertible Debentures due June 30, 2012, and Steven Madden, Ltd. (incorporated by reference to Exhibit 4.7 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
4.8
|
Amendment Number 5 to Loan Documents dated August 26, 2010 by and among the Company, Private Equity Management Group, Inc. and the Lender named therein. (incorporated by reference to Exhibit 4.8 to the Company’s Quarterly Report on Form 10-Q filed on September 14, 2010 (File No. 000-50563)). | |
10.1
|
Second Amended and Restated Loan and Security Agreement dated as of August 31, 2006 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)). | |
10.2
|
Amended and Restated Revolving Credit Note dated as of August 31, 2006 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 7, 2006 (File No. 000-50563)). | |
10.3
|
Waiver and consent agreement dated as of April 18, 2007 by and between Bank of America, N.A. and the Company (incorporated by reference to Exhibit 10.14.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007 filed on April 24, 2007 (File No. 000-50563)). | |
10.4
|
First Amendment to Second Amended and Restated Loan and Security Agreement dated as of May 17, 2007 by and between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 18, 2007 (File No. 000-50563)). |
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| Exhibit No. | Description | |
10.5
|
Extension Agreement dated June 26, 2007 between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on July 2, 2007 (File No. 000-50563)). | |
10.6
|
Second Amendment to Second Amended and Restated Loan and Security Agreement dated February 1, 2008 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2008 (File No. 000-50563)). | |
10.7
|
Third Amendment to Second Amended and Restated Loan and Security Agreement dated April 9, 2009 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 15, 2009 (File No. 000-50563)). | |
10.8
|
Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated September 8, 2009 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on September 10, 2009 (File No. 000-50563)). | |
10.9
|
Fifth Amendment to Second Amended and Restated Loan and Security Agreement dated May 28, 2010 by and among the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on May 28, 2010 (File No. 000-50563)). | |
10.10
|
Waiver of Bank of America, N.A., dated August 26, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
10.11
|
Consent of Bank of America, N.A., dated August 26, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 27, 2010 (File No. 000-50563)). | |
11.1
|
Statement regarding computation of per share earnings (incorporated by reference from Note 11 to the unaudited interim financial statements included herein). | |
31.1
|
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer). | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Financial Officer). | |
32.1
|
Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive Officer and the Chief Financial Officer). |
32