S-1/A 1 ds1a.htm AMENDMENT NO. 6 TO THE FORM S-1 Amendment No. 6 to the Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 4, 2010

No. 333-166436

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 6

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Gordmans Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5600   26-3171987
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer Identification No.)
 

12100 West Center Road

Omaha, Nebraska 68144

(402) 691-4000

 

 

 

Jeffrey J. Gordman

Chief Executive Officer, President and Secretary

Gordmans Stores, Inc.

12100 West Center Road

Omaha, Nebraska 68144

(402) 691-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Gerald T. Nowak, P.C.
Kirkland & Ellis LLP
300 North LaSalle
Chicago, Illinois 60654
(312) 862-2000
  W. Morgan Burns
Faegre & Benson LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402
(612) 766-7136

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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  ¨

  Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares this registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated August 4, 2010

PROSPECTUS

5,357,143 Shares

Gordmans Stores, Inc.   LOGO

Common Stock

$             per share

 

 

 

 

 

• Gordmans Stores, Inc. is offering 3,214,286 shares and the selling stockholders are offering 2,142,857 shares. We will not receive any proceeds from the sale of our shares being sold by the selling stockholders.

 

• We anticipate that the initial public offering price will be between $13.00 and $15.00 per share.

 

• This is our initial public offering and no public market currently exists for our shares.

 

• Proposed trading symbol: Nasdaq Global Select Market—GMAN.

 

 

 

 

This investment involves risk. See “Risk Factors” beginning on page 9.

 

 

 

 

     Per Share    Total

Public offering price

   $                 $       

Underwriting discount

   $      $  

Proceeds, before expenses, to Gordmans Stores, Inc.

   $      $  

Proceeds, before expenses, to the selling stockholders

   $      $  

 

 

 

The underwriters have a 30-day option to purchase up to 803,571 additional shares of common stock from the selling stockholders to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone’s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2010.

 

 

 

Piper Jaffray

Wells Fargo Securities

 

Baird

Stifel Nicolaus Weisel

 

The date of this prospectus is                     , 2010.


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Table of Contents

TABLE OF CONTENTS

 

 

     Page

Basis of Presentation

   ii

Market and Industry Data

   ii

Trademarks and Trade Names

   ii

Summary

   1

Risk Factors

   9

Forward-Looking Statements

   23

Use of Proceeds

   25

Dividend Policy

   25

Capitalization

   26

Dilution

   27

Selected Historical Consolidated Financial and Operating Data

   29

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   31

Business

   55

Management

   66

Executive Compensation

   71

Security Ownership of Certain Beneficial Owners

   88

Certain Relationships and Related Party Transactions

   90

Description of Capital Stock

   94

Description of Certain Indebtedness

   98

Shares of Common Stock Eligible For Future Sale

   101

Material U.S. Federal Income Tax Considerations to Non-U.S. Holders

   103

Underwriting

   107

Conflict of Interest

   113

Legal Matters

   114

Experts

   114

Where You Can Find More Information

   114

Index to the Consolidated Financial Statements

   F-1

 

 

 

 

You should rely only on the information contained in this prospectus or any free writing prospectus with respect thereto filed with the Securities and Exchange Commission. We have not, and the underwriters have not, authorized any other person to provide you with different information. Neither this prospectus nor any such free writing prospectus is an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus and any such free writing prospectus is complete and accurate as of its respective date, but the information may have changed since that date.

 

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BASIS OF PRESENTATION

We use a typical retail 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal years are identified in this prospectus according to the calendar year in which the year begins. For example, references to “2009,” “fiscal 2009,” “fiscal year 2009” or similar references refer to the fiscal year ended January 30, 2010.

MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data throughout this prospectus from our own internal estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither such research nor these definitions have been verified by any independent source.

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks such as “Gordmans,” which are protected under applicable intellectual property laws and are the property of Gordmans Stores, Inc. or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

 

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SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus and the financial statements. Some of the statements in this prospectus constitute forward-looking statements. See “Forward-Looking Statements.”

Except where the context otherwise requires or where otherwise indicated, the terms “Gordmans,” “we,” “us,” “our,” “our company” and “our business” refer to Gordmans Stores, Inc. together with its consolidated subsidiaries as a combined entity.

Our Company

Gordmans is an everyday low price retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel for all ages, accessories, footwear and home fashions. In fiscal year 2009, our major merchandise categories of Apparel, Home Fashions and Accessories comprised 53%, 29% and 18%, respectively, of our total revenue. The origins of Gordmans date back to 1915, and as of June 4, 2010, we operated 68 stores in 16 primarily Midwestern states situated in a variety of shopping center developments, including regional enclosed shopping malls, lifestyle centers and power centers.

Our Business Strategy

Gordmans is a uniquely positioned business model built to capitalize on what we believe is an underserved need in the marketplace. While we technically compete within the off-price segment of the industry, we are actually a unique hybrid of specialty, department store, big box and off-price retailers. Our mission, “We will delight our guests with big savings, big selection and fun, friendly associates!” reflects our differentiated selling proposition, which is comprised of three elements: (i) savings of up to 60% off department and specialty store regular prices; (ii) a broad selection of fashion-oriented department and specialty store quality apparel, footwear, accessories and home fashions; and (iii) a shopping experience that is designed to be infused with fun and entertainment and characterized by outstanding guest service in well-organized, easy-to-shop stores. We believe that while other retailers may fare better than us on any one of our key elements of savings, selection or shopping experience, few, if any, attempt to optimize all three simultaneously to the same degree that we do. The key aspects of our business strategy are as follows:

 

   

Unique Merchandise Offering.    We synthesize our fashion-oriented, name brand apparel and accessories with an expansive home fashions selection. Certain segments of Home Fashions make up our destination business of “Décor,” such as wall art, floral and garden, and accent furniture and lighting. In addition to Décor, we have developed our Juniors’ and Young Men’s Apparel categories into destination businesses (defined as categories with a broad and deep selection of brands and styles such that we believe Gordmans becomes a destination of choice for these categories), which combined represented approximately 39% of our average inventory for fiscal 2009. Our goal is to dedicate a greater proportion of inventory resources to these businesses than any other off-price, mid-tier or department store retailer.

 

   

Outstanding Value Proposition.    From a cost leadership standpoint, it is our goal to offer everyday savings up to 60% off department and specialty store regular ticketed prices. We believe we are able to achieve this goal because we procure merchandise from our vendors at a low up-front price, i.e., without asking for various reimbursements and discounts. We then pass those savings along to our customers by selling our merchandise at a low everyday

 

 

 

 

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price. Many other retailers, including many of our competitors, agree to pay a higher initial price to their vendors, but then seek to offset that higher price by demanding various reimbursements and discounts. Such retailers carry their products at a higher ticketed retail price, but then sell the majority of their merchandise at a discount under various promotions and sales. Thus, while our all-in cost of merchandise, and the ultimate sale price to our customers, may be similar to that of our competitors, we offer our vendors and customers greater certainty of pricing, which we believe is attractive to both vendors and customers. Finally, opportunistic merchandise procurement strategies, which in conjunction with everyday low prices define the off-price segment of the retailing industry, further enhance our value proposition. We undergo a due diligence process to validate our savings that includes verifying manufacturers’ suggested retail prices, retail prices provided by our vendor partners, examining retail prices on a variety of ecommerce sites and examining retail prices in competitor store locations.

 

   

Fun and Energetic Store Environment.    Our store shopping experience is a critical component of our holistic selling proposition. Our 50,000 square foot store model is designed to be a fun and easy-to-shop store experience, to optimize both sales productivity and operational efficiency, and finally to serve as an economical, scalable expansion vehicle.

We differentiate ourselves from discount stores (such as Target and Wal-Mart, who generally offer discount store brands and private label merchandise at similar prices) primarily by offering department and specialty store name brands, by providing a more upscale shopping environment, and finally by emphasizing apparel and apparel-related accessories within our assortments. Our everyday low price strategy and smaller, better-organized store layouts set us apart from the majority of department stores (such as Macy’s and Dillard’s, who offer a broad selection in a multi-department, multi-level, large store format).

Compared to most off-price retailers (such as T.J. Maxx, Ross Stores and Stein Mart, who offer branded merchandise at discount prices), our stores are significantly larger, which enables us to present a much broader assortment of merchandise. Moreover, unlike most off-price stores, a Gordmans store is visually appealing and well-organized, utilizing merchandising techniques, visual displays, a departmental floor layout, fixture systems, signing and graphics similar to that of department and specialty stores. Finally, we do not carry imperfect merchandise and we offer complete assortments achieved through the negotiation of up-front discounts augmented by opportunistic buying strategies.

Recent Initiatives and Accomplishments

From 2004 to 2008, we expanded our store base by approximately 55%, adding a total of 23 stores after taking into account two relocations and three store closures. Due in part to the difficult economic environment, in fiscal year 2009 we opened only one store and focused the majority of our efforts on several business plan initiatives to position us for sustainable long-term growth. These initiatives included:

 

   

Management.    We strengthened the talent level throughout the organization, particularly within the senior management, merchandising and stores teams. Several talent strategies involving the selection process, assessment tools, succession planning and engagement have facilitated our success in this arena.

 

   

Merchandising.    Over the last three years we have executed several merchandising strategies, including: the acquisition and expansion of a significant number of national brands, the augmentation of our Juniors’ Apparel, Young Men’s Apparel and Décor destination businesses and the expansion of several underdeveloped, high growth business categories.

 

 

 

 

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Marketing.    We have reengineered our marketing strategy to focus on branding Gordmans as a fun, unique, energetic shopping experience that clearly articulates our unique selling proposition in a humorous, memorable manner.

 

   

Inventory Management.    We have undertaken a number of business process initiatives to improve our inventory planning and management to maximize both gross profit and inventory utilization efficiency.

As a result of these initiatives, in conjunction with more efficiently leveraging our cost infrastructure, we were able to significantly enhance our profitability in fiscal year 2009. In particular, we generated a comparable store sales increase of 4.6% and 9.3% for fiscal year 2009 and the fourth quarter of fiscal year 2009, respectively. In addition, we improved our gross profit margin by 170 basis points over fiscal year 2008, while our net income increased 565% to $15.9 million.

During the first quarter of fiscal year 2010, we opened one store and experienced a comparable store sales increase of 15.4%. Additionally, our gross profit margin increased 170 basis points to 47.0% when compared to the first quarter of fiscal year 2009. Our net income for the first quarter of fiscal year 2010 was $6.4 million, an increase of 75.5% over the first quarter of fiscal year 2009.

Our Growth Strategy

We believe we can leverage our unique selling proposition, scalable infrastructure and portable retail model to continue to capture market share and drive increased revenue and profitability. Our multi-pronged growth strategy is as follows:

 

   

Expand Store Base.    With a current store base of only 68 stores, our objective is to increase our store base by approximately 10% annually over the next several years. We believe that we can capitalize on both new market opportunities that are primarily contiguous to our current markets, as well as on selected opportunities to fill in existing markets.

 

   

Drive Comparable Store Sales.    We seek to maximize our comparable store sales by executing on a number of recent initiatives such as: expanding our destination businesses; achieving parity between sales of our Women’s and Juniors’ Apparel; developing selected high growth potential niche businesses that we believe are underserved by the market; acquiring targeted brands desired by our guests; and finally by leveraging inventory optimization opportunities.

 

   

Leverage Cost Infrastructure.    We intend to enhance our profit margins by leveraging economies of scale with respect to our cost infrastructure. We believe that a significant portion of our corporate overhead and distribution center costs will not increase at a rate proportionate with new and comparable store sales growth.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including the risks discussed in the section entitled “Risk Factors,” beginning on page 9 of this prospectus, before investing in our common stock. Risks relating to our business include, among others:

 

   

our ability to adjust to changes in consumer spending and general economic conditions;

 

   

our ability to identify and respond to new and changing fashion trends, guest preferences and other related factors;

 

 

 

 

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our ability to compete with other retailers;

 

   

our ability to maintain or improve comparable store sales; and

 

   

our ability to obtain merchandise at acceptable prices.

Our Equity Sponsor

Sun Capital Partners, Inc. (“Sun Capital”) is a leading private investment firm focused on leveraged buyouts, equity, debt, and other investments in companies that can benefit from its in-house operating professionals and experience. Sun Capital affiliates have invested in more than 220 companies worldwide with combined sales in excess of $40 billion since Sun Capital’s inception in 1995. Sun Capital has offices in Boca Raton, Los Angeles, and New York, as well as affiliates with offices in London, Paris, Frankfurt, Shanghai and Shenzhen. Sun Capital has invested in several specialty retail and apparel companies, including Edwin Watts Golf Shop, Gerber Childrenswear, Hanna Andersson, Mattress Firm, Limited Stores, Pamida and Shopko Stores.

On September 17, 2008, investment funds managed by affiliates of Sun Capital acquired 100% of the equity interests of Gordmans, Inc. for aggregate consideration of $55.7 million, mainly consisting of $32.5 million of proceeds from debt issuance and a $20.0 million capital contribution from Sun Capital, in a reverse triangular merger. See “Certain Relationships and Related Party Transactions—Merger Agreement.”

Following completion of this offering, Sun Gordmans, LP, an affiliate of Sun Capital, will own approximately 71.4% of our outstanding common stock, or 67.1% if the underwriters’ option to purchase additional shares is fully exercised. As a result, funds advised by affiliates of Sun Capital will be able to have a significant effect relating to votes over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We are a ‘controlled company,’ controlled by investment funds managed by affiliates of Sun Capital, whose interests in our business may be different from yours.”

Office Location

Gordmans Stores, Inc., the issuer of the common stock in this offering, is a Delaware corporation. Our corporate headquarters is located at 12100 West Center Road, Omaha, Nebraska 68144. Our telephone number is (402) 691-4000. Our website address is www.gordmans.com. The information on our website is not deemed to be part of this prospectus.

 

 

 

 

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The Offering

 

Common stock offered:   

By Gordmans Stores, Inc.

  

3,214,286 shares

By selling stockholders

   2,142,857 shares

Total

   5,357,143 shares

Common stock outstanding after this offering

   18,703,086 shares

Use of proceeds

  

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $38.6 million, assuming the shares are offered at $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

 

We intend to use the net proceeds from the sale of common stock by us in this offering to pay fees and expenses incurred in connection with this offering, including payments to affiliates of Sun Capital, as well as to pay down borrowings under our revolving line of credit facility. We will use any remaining net proceeds from this offering for working capital and general corporate purposes, including the payment of bonus agreements with certain of our executive officers.

 

We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Dividend policy

   We currently expect to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and therefore we do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends on our common stock is limited by our existing credit agreement, and may be further restricted by the terms of any of our future debt or preferred securities. See “Dividend Policy.”

Risk factors

   Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed symbol for trading on the Nasdaq Global Select Market

  

GMAN

 

 

 

 

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Conflict of interest

   An affiliate of Wells Fargo Securities, LLC, one of the underwriters, is a lender under our revolving line of credit facility and may receive more than five percent of the net proceeds of this offering. Thus, Wells Fargo Securities, LLC may be deemed to have a “conflict of interest” under the applicable provisions of Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc. and, accordingly, Piper Jaffray & Co. is acting as the “qualified independent underwriter.” See “Conflict of Interest.”

Except as otherwise indicated, all information in this prospectus:

 

   

reflects a 15.4888 for 1 stock split of our outstanding common stock that will be effective upon completion of this offering;

 

   

excludes 1,285,570 shares of common stock issuable upon the exercise of options outstanding as of May 1, 2010 at a weighted average exercise price of $2.66 per share which are being terminated in connection with this offering;

 

   

excludes 573,086 shares of common stock reserved for future grants under our equity compensation plan; and

 

   

assumes (1) no exercise by the underwriters of their option to purchase up to 803,571 additional shares from the selling stockholders and (2) an initial public offering price of $14.00 per share, the midpoint of the initial public offering price range indicated on the cover of this prospectus.

 

 

 

 

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Summary Historical Consolidated Financial and Operating Data

The following table summarizes our consolidated financial and operating data as of the dates and for the periods indicated. The statement of operations and cash flows data for the fiscal years or periods, as applicable, ended February 2, 2008, September 17, 2008, January 31, 2009 and January 30, 2010 and the balance sheet data as of January 31, 2009 and January 30, 2010 have been derived from our audited consolidated financial statements for such fiscal years or periods included elsewhere in this prospectus, which were audited by Grant Thornton LLP, an independent registered public accounting firm. The balance sheet data as of February 2, 2008 is derived from our audited consolidated financial statements that are not in this prospectus. The summary consolidated selected financial data for the thirteen week periods ended May 1, 2010 and May 2, 2009 was derived from the unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The unaudited condensed consolidated interim financial information set forth below was prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of our financial position and operating results for such periods. The interim results set forth below are not necessarily indicative of results for the fiscal year ending January 29, 2011 or for any other period.

On September 17, 2008, Midwest Shoppes Intermediate Holding Corp. (“Midwest Shoppes”), an affiliate of Sun Capital, acquired 100% of the outstanding common shares of Gordmans, Inc., through a merger of Gordmans, Inc. with Midwest Shoppes Integrated, Inc., a direct wholly owned subsidiary of Midwest Shoppes. Gordmans, Inc. was the surviving entity of the merger. Midwest Shoppes subsequently changed its name to Gordmans Intermediate Holding Corp. and is owned by Gordmans Stores, Inc., which we refer to as the “Successor.” The Successor was formed as a Delaware corporation in 2008 for the sole purpose of acquiring Gordmans, Inc. and had no prior operations. As a result of the acquisition (the “Sun Capital Acquisition”) a new basis of accounting was created effective September 18, 2008. We refer to the Company prior to the Sun Capital Acquisition as the “Predecessor.” The periods prior to the Sun Capital Acquisition are referred to as the “Predecessor periods” and the periods following the Sun Capital Acquisition are referred to as the “Successor periods.” Our 2008 fiscal year is therefore divided into a Predecessor period from February 3, 2008 through September 17, 2008 and a Successor period from September 18, 2008 through January 31, 2009. Due to the significance of the Sun Capital Acquisition and related transactions, our capitalization and cost structure changed. Therefore, the financial information, other than net sales, license fees, cost of sales, and gross profit, for all Successor periods are not comparable to that of the Predecessor periods presented in the following table.

 

 

 

 

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The summary historical consolidated data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto and other financial data included elsewhere in this prospectus. Our historical results are not necessarily indicative of our operating results or financial position to be expected in the future.

 

    Predecessor          Successor  
    Year Ended
February 2,
2008
    228 Days
ended
September 17,
2008
         136 Days
Ended
January 31,
2009
    Year Ended
January 30,
2010
    13  Weeks
Ended

May 2,
2009
    13  Weeks
Ended

May 1,
2010
 
    (dollars in thousands, excluding store count and share data)  

Statement of Operations Data:

               

Net sales

  $ 437,070      $ 244,212          $ 188,458      $ 457,533      $ 93,472      $ 111,891   

License fees from leased departments

    5,433        3,362            2,103        5,679        1,347        1,596   

Cost of sales

    (268,086     (145,668         (116,410     (269,177     (52,503 )     (60,938 )
                                                   

Gross profit

    174,417        101,906            74,151        194,035        42,316        52,549   

Selling, general and administrative expenses

    (169,195     (104,433         (66,100     (167,842     (36,292 )     (42,248 )
                                                   

Income / (loss) from operations

    5,222        (2,527         8,051        26,193        6,024        10,301   

Interest expense

    (1,937     (822         (697     (1,052     (267 )     (179 )
                                                   

Income / (loss) before taxes

    3,285        (3,349         7,354        25,141        5,757        10,122   

Income tax (expense) / benefit

    (1,168     998            (2,616     (9,273     (2,123 )     (3,745 )
                                                   

Net income / (loss)

  $ 2,117      $ (2,351       $ 4,738      $ 15,868      $ 3,634      $ 6,377   
                                                   

Net income (loss) per share

               

Basic

  $ 0.13      $ (0.14       $ 0.31      $ 1.02      $ 0.23      $ 0.41   

Diluted

    0.13        (0.14         0.31        0.99        0.23        0.39   

Weighted average shares

               

Basic

    16,610,300        16,597,100            15,488,800        15,488,800        15,488,800        15,488,800   

Diluted

    16,703,342        16,611,040            15,488,800        16,036,422        15,488,800        16,167,302   

Other Financial and Operating Data:

               

Comparable store sales growth(1)

    1.4     (2)          (2)      4.6     2.8 %     15.4 %

Store count, end of period

    63        65            65        66        65        67   

Average store sales(3)

  $ 6,938      $ 3,757          $ 2,899      $ 6,932      $ 1,438      $ 1,670   

Capital expenditures

    11,576        8,528            1,883        3,865        406        2,708   

Dividends per share

    —          —              —          0.97        —          —     

Balance Sheet Data (at period end):

               

Cash and cash equivalents

  $ 5,222            $ 5,218      $ 16,601      $ 6,876      $ 13,055   

Working capital

    21,152              11,791        16,163        14,812        21,053   

Total assets

    109,075              77,859        92,118        94,107        100,001   

Total long-term obligations(4)

    13,576              —          1,513        1,889       1,326   

Total stockholders’ equity

    40,440              24,738        25,949        28,371        32,449   

 

 

(1)

We consider all stores opened for more than 16 months as of the end of the reporting period as comparable stores.

(2)

The Sun Capital Acquisition did not impact net sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Unaudited Pro Forma Condensed Consolidated Financial Information.” Therefore, comparable store sales decreased 4.5% for the combined periods ending January 31, 2009.

(3)

Average store sales is calculated by dividing net sales by the store count at the end of the period.

(4)

Consists of current and noncurrent portions of long-term debt and capital leases.

 

 

 

 

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RISK FACTORS

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks Related to Our Business

Our business is sensitive to consumer spending and general economic conditions, and a continued or further economic slowdown could adversely affect our financial performance.

Consumer purchases of discretionary retail items, including our merchandise, generally decline during recessionary periods and other periods when disposable income is adversely affected. Our performance is subject to factors that affect domestic and worldwide economic conditions, including employment, consumer debt, reductions in net worth based on recent severe market declines, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the United States dollar versus foreign currencies and other macroeconomic factors. Further deterioration in economic conditions or increasing unemployment levels, may continue to reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our revenues and profits. In recessionary periods, we may have to increase our inventory markdowns or otherwise dispose of inventory for which we have previously paid, which could adversely affect our profitability. Our financial performance is particularly susceptible to economic and other conditions in regions or states where we have a significant number of stores. Current economic conditions and further slowdown in the economy could adversely affect shopping center traffic and new shopping center development and could have a material adverse effect on our business, our financial condition and our results of operations.

In addition, the current economic environment and future recessionary periods may exacerbate, individually or collectively, some of the risks noted below, including consumer demand, strain on available resources, store growth, interruption of the flow of merchandise from vendors and foreign exchange rate fluctuations.

Our business is highly dependent upon our ability to identify and respond to new and changing fashion and style trends, guest preferences and other related factors, and our inability to identify and respond to these new trends may lead to inventory markdowns and write offs, which could adversely affect us and our brand image.

Our success depends in large part upon our ability to effectively identify and respond to changing fashion trends and consumer demands, and to translate market trends into appropriate, saleable merchandise offerings. Although we attempt to stay abreast of the fashion tastes of our guests and provide merchandise that satisfies guest demand, fashion trends can change rapidly and we cannot assure you that we will accurately anticipate shifts in fashion trends and adjust our merchandise mix to appeal to changing consumer tastes in a timely manner. If we misjudge the market for our merchandise or are unsuccessful in responding to changes in fashion trends or in market demand, we could experience insufficient or excess inventory levels which could result in higher markdowns, any of which would have a material adverse effect on our business, our financial condition and our results of operations.

There can be no assurance that our new merchandise offerings will have the same level of acceptance as our merchandise offerings in the past or that we will be able to adequately and timely respond to the preferences of our guests. The failure of any new merchandise offerings to appeal to our guests could have a material adverse effect on our business, our financial condition and our results of operations.

 

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Our sales and profitability fluctuate on a seasonal basis and are affected by a variety of other factors.

Our business is affected by the seasonal pattern common to most retailers. Historically, our highest net sales occur during the fourth quarter, which includes the holiday selling season. Any significant decrease in net sales during the holiday season would have a material adverse effect on our business, our financial condition and our results of operations. In addition, in order to prepare for this season, we must order and keep in stock significantly more merchandise than we carry during other parts of the year. This inventory build-up may require us to expend cash faster than we generate by our operations during this period. Any unanticipated decrease in demand for our merchandise during this peak shopping season could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, profitability, ability to repay any indebtedness and our brand image with guests.

We face intense competition in the retail industry.

We face substantial competition for guests from regional and national department stores, specialty stores, discount stores, mid-tier stores and off-price retail chains. We compete on the basis of a combination of factors, including among others, price, breadth, quality and style of merchandise offered, in-store experience, level of guest service, ability to identify and offer new and emerging fashion trends and brand image. Many of these competitors are larger and have significantly greater financial and marketing resources than we do. Many of our competitors also generate ecommerce sales, and although we do maintain a website, we do not sell merchandise online. Accordingly, we may face periods of intense competition in the future which could have a material adverse effect on our profitability and results of operations. We cannot assure you that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our profitability and results of operations.

Our inability to maintain or improve levels of comparable store sales could cause our stock price to decline.

We may not be able to maintain or improve the levels of comparable store sales that we have experienced in the recent past. Although we experienced comparable sales growth in fiscal year 2009, our annual comparable store sales have ranged from a decrease of 4.5% to an increase of 4.6%, during the past five fiscal years. We have recently experienced strong comparable store sales growth, which we may not be able to sustain. If our future comparable store sales decline or fail to meet market expectations, the price of our common stock could decline. In addition, the aggregate results of operations of our stores have fluctuated in the past and will fluctuate in the future. A variety of factors affect comparable store sales, including fashion trends, competition, current national and regional economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our merchandise mix, inventory shrinkage, the success of our multi-channel marketing programs, the timing and level of markdowns and weather conditions. In addition, many retailers have been unable to sustain high levels of comparable store sales growth during and after periods of substantial expansion. These factors may cause our comparable store sales results to be materially lower than in recent periods and our expectations, which could harm our business and result in a decline in the price of our common stock.

Our advertising, marketing and promotional strategies may be ineffective and inefficient.

Our profitability and results of operations may be materially affected by the effectiveness and efficiency of our marketing expenditures and our ability to select the right markets and media in which to advertise. In particular, we may not be successful in our efforts to: create greater awareness of our stores and our promotions, identify the most effective and efficient level of spending in each market and specific media vehicle and determine the appropriate creative message and media mix for our advertising, marketing and promotional expenditures. While we utilize several methods of distribution, daily newspapers are an important delivery vehicle for both run of press advertising and circular insertions.

 

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The newspaper business is under increasing economic pressure, and the demise of certain newspapers would jeopardize an important distribution method for our advertising. As such, we plan to allocate a greater portion of our advertising budget to television advertising. We do not yet know what effect this increase in television advertising and corresponding decrease in newspaper advertising will have on our business. Our planned marketing expenditures may not result in increased revenues. In addition, if we are not able to manage our marketing expenditures on a cost-effective basis, our profitability and results of operations could be materially and adversely affected.

The termination or non-renewal of our licensing agreements with DSW Inc. and/or Destination Maternity Corporation could adversely affect our business.

Our footwear business is currently operated under a license agreement with DSW, Inc. Our maternity business is currently operated under a license agreement with Destination Maternity Corporation for its Motherhood Maternity® brand. In both instances, we receive a license fee equal to a specified percentage of net footwear and maternity revenue. Our total license fee income in fiscal year 2009 was $5.7 million, or approximately 1% of our net sales. If either DSW or Destination Maternity is unable or unwilling to continue to act as our licensee or supply us with our desired level of inventory, we could suffer a loss of income and guest traffic until such time as we are able to replace these licensees or to establish the structure to manage these businesses directly.

Failure to execute our buying and inventory management strategies could adversely affect our business.

Our business is dependent, to a significant degree, upon our ability to purchase fashion and brand name merchandise, and to do so at prices that are consistent with our cost leadership strategy. We must continuously seek out buying opportunities from our existing suppliers and from new sources, for which we compete with other retailers. Driving traffic to the stores and increasing same store sales, requires continued replenishment of fresh, high quality, attractively priced merchandise in our stores. Our buying philosophy gives considerable discretion to our buyers, subjecting us to risks on the timing, pricing, quality and nature of inventory flowing to the stores. In addition, we base our purchases of inventory, in part, on sales forecasts. If our sales forecasts do not match guest demand, we may experience higher inventory levels and decreased profit margins.

Our ability to purchase merchandise could become limited by the consolidation or demise of merchandise vendors. Our ability to obtain merchandise may also depend on certain manufacturers’ ability to obtain vendor financing through factoring companies, and to the extent they are unable to secure sufficient credit from those factors, we may not be able to purchase merchandise from them.

We have two distribution facilities and have not yet implemented disaster recovery procedures, and if we encounter difficulties associated with our distribution facilities or if either facility were to shut down for any reason, we could face shortages of inventory that would have a material adverse effect on our business operations and harm our reputation.

Our two distribution facilities are located in Omaha, Nebraska. Our distribution facilities support our entire business. All of our merchandise is shipped to the distribution facilities from our vendors, and then packaged and shipped from our distribution facilities to our stores. The success of our stores depends on their timely receipt of merchandise. The efficient flow of our merchandise requires that we have adequate capacity in our distribution facilities to support our current level of operations, and the anticipated increased levels that may follow from our growth plans. If we encounter difficulties associated with our distribution facilities or if either were to shut down for any reason, including by fire or other natural disaster, we could face shortages of inventory, resulting in out-of-stock conditions in our stores, as well as incur significantly higher costs and longer lead times associated with distributing merchandise to our

 

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stores, which could have a material adverse effect on our business and harm our reputation. We are in the process of developing disaster recovery and business continuity plans. Without proper disaster recovery and business continuity plans, if we encounter difficulties with our distribution facilities or other problems or disasters arise, we cannot ensure that critical systems and operations will be restored in a timely manner or at all, which would have a material adverse effect on our business.

We may from time to time seek to lease new facilities or vacate existing facilities as our operations require. Appropriate locations or financing for the purchase or lease of such additional real estate may not be available at reasonable costs or at all. Our failure to secure new store locations or additional distribution capacity when necessary could impede our growth plans.

We rely upon independent third-party transportation providers for substantially all of our merchandise shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis.

We currently rely upon independent third-party transportation providers for substantially all of our merchandise shipments, including shipments to and from all of our stores. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, labor strikes and inclement weather, which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from our current third-party transportation providers which in turn would increase our costs.

Our growth strategy is dependent on a number of factors, any of which could strain our resources or delay or prevent the successful penetration into new markets.

Our growth strategy is partially dependent on opening new stores and operating them profitably. Additional factors required for the successful implementation of our growth strategy include, but are not limited to: obtaining desirable store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and successfully hiring and training store managers and sales associates. In order to optimize profitability for new stores, we must secure desirable retail lease space when opening stores in new and existing markets. We must choose store sites, execute favorable real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores. We historically have received developer funding for store build outs, which offset certain capital expenditures we must make to open a new store. If developer funding ceases to be available to us in the future or decreases, opening new stores would require more capital outlay, which could adversely affect our ability to continue opening new stores.

To the extent we open new stores in markets where we have existing stores, our existing stores in those markets may experience reduced net sales. Our planned growth will also require additional infrastructure for the development, maintenance and monitoring of those stores. In addition, if our current management systems and information systems are insufficient to support this expansion, our ability to open new stores and to manage our existing stores would be adversely affected. If we fail to continue to improve our infrastructure, we may be unable to implement our growth strategy or maintain current levels of operating performance in our existing stores.

Our growth plans will place increased demands on our financial, operational, managerial and administrative resources. These increased demands may cause us to operate our business less efficiently, which in turn could cause deterioration in the performance of our existing stores.

 

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Our business depends in part on a strong brand image, and if we are not able to maintain or enhance our brand, particularly in new markets where we have limited brand recognition, we may be unable to attract sufficient numbers of guests to our stores or sell sufficient quantities of our merchandise.

Our ability to maintain our reputation is critical to our brand image. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to maintain high ethical, social and environmental standards for all of our operations and activities or adverse publicity regarding our responses to these concerns could also jeopardize our reputation. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these reasons could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation.

We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs.

We lease all of our store locations, our corporate headquarters and our distribution facilities. Our continued growth and success depends in part on our ability to renew leases for successful stores. There is no assurance that we will be able to re-negotiate leases at similar or favorable terms at the end of the lease, and we could be forced to move or exit a market if another favorable arrangement cannot be made. Additionally, in certain cases, we take responsibility for construction of a new store and are reimbursed for our construction costs by the landlord.

We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business.

If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.

Our failure to find store associates that reflect our brand image and embody our culture could adversely affect our business.

Our continued success depends in part upon our ability to attract, motivate and retain a sufficient number of store associates, including store managers, who understand and appreciate our corporate culture and guests, and are able to adequately and effectively represent this culture and establish credibility with our guests. The store associate turnover rate in the retail industry is generally high. Excessive store associate turnover will result in higher associate costs related to finding, hiring and training new store associates. If we are unable to hire and retain store personnel capable of consistently providing a high level of guest service, as demonstrated by their enthusiasm for our culture, understanding of our guests and knowledge of the merchandise we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially and adversely affected and our brand image may be negatively impacted. Competition for such qualified individuals could require us to pay higher wages to attract a sufficient number of associates. Additionally, our labor costs are subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other

 

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insurance costs and changes in employment and labor legislation or other workplace regulation (including changes in entitlement programs such as health insurance and paid leave programs). Such increase in labor costs may adversely impact our profitability, or if we fail to pay such higher wages we could suffer increased associate turnover.

We depend on key executive management and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

We depend on the leadership and experience of our key executive management. The loss of the services of any of our executive management members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our growth and harm our business.

We rely significantly on information systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate our business.

Our ability to effectively manage and maintain our inventory, and to ship products to our stores on a timely basis, depends significantly on our information systems. To manage the growth of our operations, personnel and real estate portfolio, we will need to continue to improve and expand our operational and financial systems, real estate management systems, transaction processing, internal controls and business processes; in doing so, we could encounter implementation issues and incur substantial additional expenses. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems or expanding them into new stores, or a breach in security of these systems could adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting and reporting, the efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Such events may have a material adverse effect on our business.

In addition, we may now and in the future implement new systems to increase efficiencies and profitability. To manage growth of our operations and personnel, we will need to continue to improve and expand our operational and financial systems, transaction processing, internal controls and business processes. When implementing or changing existing processes, we may encounter transitional issues and incur substantial additional expenses.

System security risk issues could disrupt our internal operations or information technology services, and any such disruption could harm our net sales, increase our expenses and harm our reputation.

Experienced computer programmers and hackers, or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our guests, create system disruptions or cause shutdowns. In addition, associate error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of our network. This risk is heightened because we collect and store guest information, including credit card information, and use certain guest information for marketing purposes. Any compromise of guest information could subject us to guest or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or breaches. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including

 

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“bugs” and other problems that could unexpectedly interfere with the operation of the systems. The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated with the outsourced services, could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

There are claims made against us from time to time that can result in litigation or regulatory proceedings which could distract management from our business activities and result in significant liability.

We face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business and include commercial disputes, intellectual property issues, product-oriented allegations and slip and fall claims. In addition, we could face a wide variety of associate claims against us, including general discrimination, privacy, labor and employment, ERISA and disability claims. Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time and expense. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability, and could also materially and adversely affect our operations and our reputation.

In addition, we may be subject to liability if we infringe the trademarks or other intellectual property rights of third parties. If we were to be found liable for any such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claims could subject us to boycotts by our guests and harm to our reputation. In addition, any payments we are required to make and any injunctions we are required to comply with as a result of such infringement actions could adversely affect our financial results.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business.

We are subject to numerous regulations, including labor and employment, customs, truth-in-advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. If these regulations were to change or were violated by our management, associates, vendors, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.

In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our associates, which would likely cause us to reexamine our entire wage structure for stores. Other laws related to employee benefits and treatment of associates, including laws related to limitations on associate hours, supervisory status, leaves of absence, mandated health benefits (for example, those health benefits proposed in the Patient Protection and Affordable Care Act passed in March 2010) or overtime pay, could also negatively impact us, such as by increasing compensation and benefits costs for overtime and medical expenses.

Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws and future actions or payments related to such changes could be material to us.

 

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We may be subject to unionization, work stoppages, slowdowns or increased labor costs, especially if the Employee Free Choice Act is adopted.

Currently, none of our associates are represented by a union. However, our associates have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our profitability. The Employee Free Choice Act of 2007: H.R. 800, or EFCA, was passed in the United States House of Representatives in 2008 and the same legislation was introduced again in 2009 as H.R. 1409 and S. 560. President Obama and leaders of Congress have made public statements in support of this bill. Accordingly, this bill or a variation of it could be enacted in the future and the enactment of this bill could have an adverse impact on our business, by making it easier for workers to obtain union representation and increasing the penalties employers may incur if they engage in labor practices in violation of the National Labor Relations Act.

We may be unable to protect our trademarks or other intellectual property rights, which could harm our business.

We rely on certain trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However, there can be no assurance that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our trademarks by others or to prevent others from claiming that sales of our merchandise infringe, dilute or otherwise violate third party trademarks or other proprietary rights in order to block sales of our merchandise.

Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or violate third party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all, prevent us from manufacturing or selling certain products and/or require us to redesign or relabel our merchandise or rename our brand, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our lease obligations could adversely affect our financial flexibility and our competitive position.

We have, and will continue to have, significant lease obligations. As of January 30, 2010, our minimum annual rental obligations under long-term operating leases for fiscal years 2010 and 2011 are $34.3 million and $33.5 million, respectively. Our lease obligations could have other important consequences to you and significant effects on our business. For example, it could:

 

   

increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to make payments on our leases, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

make it more difficult to satisfy our financial obligations, including payments on our leases; and

 

   

place us at a disadvantage compared to our competitors that have fewer lease obligations.

 

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In addition, the agreements governing our existing credit agreements contain, and the agreements evidencing or governing other future indebtedness may contain, restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our revolving line of credit facility.

Our loan agreement may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

Our loan agreement contains limitations on our ability to:

 

   

incur additional indebtedness;

 

   

create liens on assets;

 

   

engage in mergers, consolidations, liquidations and dissolutions;

 

   

sell assets (including pursuant to sale leaseback transactions);

 

   

pay consulting fees, dividends and distributions or repurchase capital stock;

 

   

make investments (including acquisitions), loans, or advances;

 

   

engage in certain transactions with affiliates; and

 

   

change our lines of business.

In addition, our loan agreement requires us to maintain minimum excess availability equal to the greater of 12.5% of the weekly borrowing base and $6.0 million; provided that during a seasonal borrowing period, we must maintain minimum excess availability equal to the greater of (i) 15% of the lesser of (x) the borrowing base and (y) the revolving commitment and (ii) $8 million. The loan agreement also prohibits the making of capital expenditures in any fiscal year in excess of $25 million.

A failure by us or our subsidiaries to comply with these covenants would result in an event of default under such indebtedness. Upon an event of default, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the loan agreement. If any of our indebtedness were to be accelerated, it would adversely affect our ability to respond to changes in our business and manage our operations. In addition, upon an acceleration, there can be no assurance that our assets would be sufficient to repay the accelerated indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. See “Description of Certain Indebtedness.”

Our results may be adversely affected by fluctuations in energy costs.

Energy costs have fluctuated dramatically in the past. These fluctuations may result in an increase in our transportation costs for distribution and utility costs for our retail stores and distribution centers. A continual rise in energy costs could adversely affect consumer spending and demand for our merchandise and increase our operating costs, both of which could have a material adverse effect on our financial condition and results of operations.

We may recognize impairment on long-lived assets.

Our long-lived assets, primarily stores and intangible assets, are subject to periodic testing for impairment. Store assets are reviewed using factors including, but not limited to, our future operating plans and projected future cash flows. Failure to achieve our future operating plans or generate sufficient levels of cash flow at our stores could result in impairment charges on long-lived assets, which could have a material adverse effect on our financial condition or results of operations.

 

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Risks Related to this Offering and Ownership of Our Common Stock

An active public market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

We are a “controlled company,” controlled by investment funds managed by affiliates of Sun Capital, whose interests in our business may be different from yours.

Upon completion of this offering, Sun Gordmans, LP, an affiliate of Sun Capital, will own approximately 13,330,248 shares, or 71.4% of our outstanding common stock. As such, affiliates of Sun Capital will, for the foreseeable future, have significant influence over our reporting and corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. For so long as affiliates of Sun Capital own 30% or more of our outstanding shares of common stock, they will have the right to designate a majority of our Board of Directors. For so long as Sun Capital has the right to designate a majority of our Board of Directors, the directors designated by affiliates of Sun Capital are expected to constitute a majority of each committee of our Board of Directors (other than the Audit Committee) and the chairman of each of the committees (other than the Audit Committee) is expected to be a director serving on such committee who is selected by affiliates of Sun Capital, provided that, at such time as we are not a “controlled company” under the Nasdaq Global Select Market corporate governance standards, our committee membership will comply with all applicable requirements of those standards and a majority of our Board of Directors will be “independent directors,” as defined under the rules of the Nasdaq Global Select Market.

As a “controlled company,” the rules of the Nasdaq Global Select Market exempt us from the obligation to comply with certain corporate governance requirements, including the requirements that a majority of our board of directors consists of “independent directors,” as defined under the rules of the Nasdaq Global Select Market and that we have nominating and compensation committees that are each composed entirely of independent directors. These exemptions do not modify the requirement for a fully independent audit committee, which is permitted to be phased-in as follows: (1) one independent committee member at the time of our initial public offering; (2) a majority of independent committee members within 90 days of our initial public offering; and (3) all independent committee members within one year of our initial public offering. Similarly, once we are no longer a “controlled company,” we must comply with the independent board committee requirements as they relate to the nominating and compensation committees, on the same phase-in schedule as set forth above, with the trigger date being the date we are no longer a “controlled company” as opposed to our initial public offering date. Additionally, we will have 12 months from the date we cease to be a “controlled company” to have a majority of independent directors on our Board of Directors.

Affiliates of Sun Capital will control actions to be taken by us and our Board of Directors, including amendments to our amended and restated certificate of incorporation and amended and restated bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors designated by affiliates of Sun Capital will have the authority, subject to the terms of our indebtedness and the rules and regulations of the Nasdaq Global Select Market, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. Because of the equity ownership of Sun Gordmans, LP, we are considered a “controlled company” for the purposes of the Nasdaq Global Select Market listing requirements. As such, we would be exempt from the Nasdaq Global Select Market corporate governance requirements that our Board of Directors, our Corporate

 

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Compensation and our Nominating and Corporate Governance Committee meet the standard of independence established by those corporate governance requirements. The Nasdaq Global Select Market independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. Our amended and restated certificate of incorporation will provide that the doctrine of “corporate opportunity” will not apply against Sun Capital, or any of our directors who are associates of, or affiliated with, Sun Capital, in a manner that would prohibit them from investing in competing businesses or doing business with our clients or guests. It is possible that the interests of Sun Capital and its affiliates may in some circumstances conflict with our interests and the interests of our other stockholders, including you.

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

   

quarterly variations in our operating results compared to market expectations;

 

   

changes in preferences of our guests;

 

   

announcements of new merchandise or significant price reductions by us or our competitors;

 

   

size of the public float;

 

   

stock price performance of our competitors;

 

   

fluctuations in stock market prices and volumes;

 

   

default on our indebtedness or foreclosure of our properties;

 

   

actions by competitors or other shopping center tenants;

 

   

changes in senior management or key personnel;

 

   

changes in financial estimates by securities analysts;

 

   

negative earnings or other announcements by us or other retail apparel companies;

 

   

downgrades in our credit ratings or the credit ratings of our competitors;

 

   

issuances of capital stock; and

 

   

global economic, legal and regulatory factors unrelated to our performance.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 18,703,086 shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

 

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We, each of our officers and directors and the selling stockholders have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for, or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Piper Jaffray & Co. and Wells Fargo Securities, LLC. See “Underwriting.”

All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable limitations imposed under federal securities laws. See “Shares of Common Stock Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue our securities if we need to raise capital in connection with a capital raise or acquisitions. The amount of shares of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors. These provisions include:

 

   

establish a classified Board of Directors so that not all members of our Board of Directors are elected at one time;

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

requires that two-thirds of our stockholders approve amendments to our amended and restated certificate of incorporation or amended and restated bylaws;

 

   

provides that special meetings of our stockholders may only be called by a resolution adopted by a majority of our directors then in office;

 

   

provide that the Board of Directors is expressly authorized to make, alter, or repeal our amended and restated bylaws; and

 

   

establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Our amended and restated certificate of incorporation will also contain a provision that provides us with protections similar to Section 203 of the Delaware General Corporate Law, and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval is obtained prior to the acquisition.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

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If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $10.32 per share, because the assumed initial public offering price of $14.00 per share (the midpoint of the range set forth on the cover of this prospectus) is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. On September 17, 2008, Sun Capital acquired 100% of the equity interests of Gordmans, Inc. for aggregate consideration of $55.7 million (or approximately $3.60 per pro forma share, as compared to an assumed initial public offering price of $14.00 per share (the midpoint of the range set forth on the cover page of this prospectus)), mainly consisting of $32.5 million of proceeds from debt issuance and a $20.0 million capital contribution from Sun Capital. See “Certain Relationships and Related Party Transactions—Merger Agreement.” In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our associates, consultants and directors under our stock option and equity incentive plans. See “Dilution.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We do not expect to pay any cash dividends for the foreseeable future.

We do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Additionally, our operating subsidiaries are currently restricted from paying cash dividends by the agreements governing their indebtedness, and we expect these restrictions to continue in the future. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

We will incur increased costs as a result of becoming a public company.

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the Securities and Exchange Commission (“SEC”) and the Nasdaq Global Select Market. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could

 

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also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 will require significant expenditures and effort by management, and if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, our stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations and beginning with our Annual Report on Form 10-K for the year ending January 28, 2012, our management will be required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and our stock price could decline.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, or strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

changes in consumer spending and general economic conditions;

 

   

our ability to identify and respond to new and changing fashion trends, guest preferences and other related factors;

 

   

fluctuations in our sales and results of operations on a seasonal basis;

 

   

intense competition from other retailers;

 

   

our ability to maintain or improve levels of comparable store sales;

 

   

our successful implementation of advertising, marketing and promotional strategies;

 

   

termination of our license agreements;

 

   

our ability to obtain merchandise at acceptable prices;

 

   

shortages of inventory and harm to our reputation due to difficulties or shut-down of our distribution facilities;

 

   

our reliance upon independent third-party transportation providers for substantially all of our merchandise shipments;

 

   

our growth strategy;

 

   

our dependence on a strong brand image;

 

   

our leasing of substantial amounts of space;

 

   

the failure to find store associates that reflect our brand image and embody our culture;

 

   

our dependence upon key executive management;

 

   

our reliance on information systems;

 

   

system security risk issues that could disrupt our internal operations or information technology services;

 

   

changes in laws and regulations applicable to our business;

 

   

our inability to protect our trademarks or other intellectual property rights;

 

   

fluctuations in energy costs;

 

   

claims made against us resulting in litigation;

 

   

impairment on our long-lived assets;

 

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our substantial lease obligations;

 

   

restrictions imposed by our indebtedness on our current and future operations; and

 

   

increased costs as a result of being a public company.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

We estimate based upon an assumed initial public offering price of $14.00 per share, the midpoint of the range set forth on the cover of this prospectus, we will receive net proceeds from the offering of approximately $38.6 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including any shares sold by the selling stockholders in connection with the exercise of the underwriters’ option to purchase additional shares.

We currently intend to use the net proceeds to us from this offering for the following purposes and in the following amounts:

 

   

Approximately $7.5 million of the net proceeds to us from this offering will be used to pay a termination fee to affiliates of Sun Capital for termination of the consulting agreement with them (See “Certain Relationships and Related Party Transactions—Sun Capital Consulting Agreement”).

 

   

Approximately $16.0 million of the net proceeds to us from this offering will be used to pay down borrowings under our revolving credit facility, which bear interest at a rate equal to LIBOR plus an applicable margin (as further described in “Description of Certain Indebtedness” elsewhere in this prospectus) and is scheduled to expire on February 20, 2013. Such borrowings were used primarily to pay a portion of the $20 million special dividend that we issued in June 2010.

 

   

The remaining net proceeds to us from this offering will be used for working capital and general corporate purposes, including the payment of bonus agreements with certain of our executive officers. See “Executive Compensation—Compensation Discussion and Analysis—Bonus Agreements.” We do not have any specific plans with respect to this portion of the net proceeds. Accordingly, our management will have broad discretion in the application of these proceeds. We believe that retaining these net proceeds will afford us significant flexibility to pursue our business strategies, including our planned growth through new store openings.

A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease the net proceeds we receive from this offering by approximately $3.0 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness, and therefore we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness. See “Description of Certain Indebtedness.” Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our results of operations, financial condition, capital requirements and other factors that our Board of Directors deems relevant.

In December 2009, we issued a special dividend of $0.97 per share of common stock on all of our issued and outstanding shares in an amount equal to, in the aggregate, $15.0 million. In June 2010, we issued a special dividend of $1.29 per share of common stock on all of our issued and outstanding shares in an amount equal to, in the aggregate, $20.0 million.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of May 1, 2010:

 

   

on an actual basis; and

 

   

on an as adjusted basis to reflect (i) the closing of this offering and the receipt by us of the estimated net proceeds from the sale of 3,214,286 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) our payment in June 2010 of a special dividend of $1.29 per share of common stock on all of our issued and outstanding shares of common stock in an amount equal to, in the aggregate, $20.0 million and (iii) certain additional adjustments, as set forth in all the footnotes to the table below.

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of May 1, 2010  
     Actual    As  adjusted(1)  
    

(unaudited)

(dollars in thousands, except share data)

 

Cash and cash equivalents

   $ 13,055    $ 20,745 (2)  
               

Debt, including current portion:

     

Revolving line of credit

     —        —     

Notes payable

     1,278      1,278   

Capital lease obligations

     48      48   
               

Total long-term debt, including current portion

   $ 1,326    $ 1,326   
               

Stockholders’ equity:

     

Common stock, $0.001 par value per share, 44,917,520 authorized and 15,488,800 issued and outstanding, actual; $0.001 par value per share, 50,000,000 authorized, 18,703,086 shares issued and outstanding, on an as adjusted basis

     15      19 (3)  

Additional paid-in capital

     20,452      40,120 (4)  

Retained Earnings

     11,982        
               

Total stockholders’ equity

   $ 32,449    $ 40,139   
               

Total capitalization

   $ 33,775    $ 41,465   
               

 

(1)

A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds from this offering available to us and correspondingly increase or decrease the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $3.0 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. See “Use of Proceeds.”

(2)

Cash and cash equivalents, as adjusted, includes an increase of $38.6 million related to net proceeds in connection with this offering. Cash and cash equivalents, as adjusted, includes decreases of $7.1 million for the non-financed portion of the $20.0 million dividend paid in June 2010, cash outflows of $13.4 million to pay down the draw on the revolving line of credit facility related to the $20.0 million dividend (which amount is the pro forma pay down as of May 1, 2010; whereas the expected pay down upon receipt of actual proceeds from this offering is approximately $16.0 million as of the date of this offering, and is higher than the May 1, 2010 amount due to increased working capital needs primarily resulting from our seasonality, as discussed elsewhere in this prospectus), a payment to affiliates of Sun Capital of $7.5 million to terminate the consulting agreement, a payment of $2.7 million to certain executive officers for bonuses related to the $20.0 million dividend and $250,000 for a bank amendment fee related to our revolving line of credit facility.

(3)

Common stock, as adjusted, is 18,703,086 shares, at a par value of $0.001 per share.

(4)

Additional paid-in capital, as adjusted, includes an increase of $38. 6 million related to the net proceeds in connection with this offering. Decreases to additional paid-in capital, as adjusted, includes a re-classification of the net debit balance in retained earnings of $19.0 million, which consists of the May 1, 2010 retained earnings credit balance of $12.0 million, $20.5 million to affiliates of Sun Capital for the June 2010 dividend and related fees, a $7.5 million payment to affiliates of Sun Capital for the termination of the consulting agreement, a $2.7 million payment to certain executive officers for bonuses related to the $20.0 million dividend and $250,000 for a bank amendment fee related to our revolving line of credit facility.

 

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DILUTION

Our net tangible book value as of May 1, 2010, before giving effect to our sale of 3,214,286 shares of common stock offered in this offering, was approximately $30.2 million, or approximately $1.95 per pro forma share. Net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding at May 1, 2010, prior to our sale of 3,214,286 shares of common stock in this offering. Dilution in net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of our common stock outstanding immediately after this offering.

On September 17, 2008, Sun Capital acquired 100% of the equity interests of Gordmans, Inc. for aggregate consideration of $55.7 million (or approximately $3.60 per pro forma share, as compared to an initial public offering price of $14.00 per share based on the midpoint of the range set forth on the cover page of this prospectus), mainly consisting of $32.5 million of proceeds from debt issuance and a $20.0 million capital contribution from Sun Capital. See “Certain Relationships and Related Party Transactions—Merger Agreement.”

After giving effect to our sale of 3,214,286 shares of common stock in this offering, based upon an assumed initial public offering price of $14.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering, our pro forma net tangible book value as of May 1, 2010 would have been approximately $68.8 million, or $3.68 per share of common stock. This represents an immediate increase in net tangible book value of $1.73 per share to existing stockholders and immediate dilution of $10.32 per share to new investors purchasing shares of common stock in this offering at the initial public offering price.

The following table illustrates this dilution in net tangible book value per share to new investors:

 

Assumed initial public offering price per share

      $ 14.00
         

Net tangible book value per share as of May 1, 2010

   $ 1.95   

Increase in pro forma net tangible book value per share attributable to this offering

     1.73   
         

Pro forma net tangible book value per share as of May 1, 2010 (after giving effect to this offering)

        3.68
         

Dilution per share to new investors(1)

      $ 10.32
         

 

(1)

Dilution is determined by subtracting pro forma net tangible book value per share after giving effect to the offering from the initial public offering price paid by a new investor.

Each $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) our pro forma net tangible book value by $3.0 million, or $0.16 per share, and the dilution in net tangible book value per share to investors in this offering by $0.84 per share, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same. The as adjusted information is illustrative only, and following the completion of this offering, will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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The following table summarizes, as of May 1, 2010, on a pro forma basis, the number of shares of our common stock purchased, the aggregate cash consideration paid and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of our common stock from us in this offering. The table assumes an initial public offering price of $14.00 per share, the midpoint of the range set forth on the cover of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
     Number    Percentage     Amount    Percentage    
                (in millions)           

Existing stockholders

   15,488,800    82.8   $ 55.7    55.3   $ 3.60

New investors

   3,214,286    17.2        45.0    44.7        14.00
                              

Total

   18,703,086    100   $ 100.7    100   $ 5.38
                              

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares, no exercise of any outstanding options and no sale of common stock by the selling stockholders. The sale of 2,142,857 shares of common stock to be sold by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 13,345,943, or 71.4% of the total shares outstanding, and will increase the number of shares held by investors participating in this offering to 5,357,143, or 28.6% of the total shares outstanding. In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by existing stockholders will be further reduced to 12,542,372, or 67.1% of the total number of shares of common stock to be outstanding upon the closing of this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 6,160,714 shares or 32.9% of the total number of shares of common stock to be outstanding upon the closing of this offering.

The tables and calculations above are based on 15,488,800 shares of common stock issued and outstanding as of May 1, 2010, and excludes an aggregate of 573,086 shares of common stock reserved for issuance under our equity compensation plan, which we plan to adopt in connection with this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table summarizes our consolidated financial and operating data as of the dates and for the periods indicated. The statement of operations and cash flows data for the fiscal years or periods, as applicable, ended February 2, 2008, September 17, 2008, January 31, 2009 and January 30, 2010 and the balance sheet data as of January 31, 2009 and January 30, 2010 have been derived from our audited consolidated financial statements for such fiscal years or periods included elsewhere in this prospectus, which were audited by Grant Thornton LLP, an independent registered public accounting firm. The statement of operations and cash flows data for the fiscal years ended January 28, 2006 and February 3, 2007 and the balance sheet data as of January 28, 2006, February 3, 2007 and February 2, 2008 are derived from our audited consolidated financial statements not included in this prospectus. The summary consolidated selected financial data for the thirteen week periods ended May 1, 2010 and May 2, 2009 was derived from the unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The unaudited condensed consolidated interim financial information set forth below was prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of our financial position and operating results for such periods. The interim results set forth below are not necessarily indicative of results for the fiscal year ending January 29, 2011 or for any other period.

On September 17, 2008, Midwest Shoppes Intermediate Holding Corp. (“Midwest Shoppes”), an affiliate of Sun Capital acquired 100% of the outstanding common shares of Gordmans, Inc., through a merger of Gordmans, Inc. with Midwest Shoppes Integrated, Inc., a direct wholly owned subsidiary of Midwest Shoppes. Gordmans, Inc. was the surviving entity of the merger. Midwest Shoppes subsequently changed its name to Gordmans Intermediate Holding Corp, and is owned by Gordmans Stores, Inc., which we refer to as the “Successor.” The Successor was formed as a Delaware corporation in 2008 for the sole purpose of acquiring Gordmans, Inc. and had no prior operations. As a result of the acquisition (the “Sun Capital Acquisition”) a new basis of accounting was created effective September 18, 2008. We refer to the Company prior to the Sun Capital Acquisition as the “Predecessor.” The periods prior to the Sun Capital Acquisition are referred to as the “Predecessor periods” and the periods following the Sun Capital Acquisition are referred to as the “Successor periods.” Our 2008 fiscal year is therefore divided into a Predecessor period from February 3, 2008 through September 17, 2008 and a Successor period from September 18, 2008 through January 31, 2009. Due to the significance of the Sun Capital Acquisition and related transactions, our capitalization and cost structure changed. Therefore, the financial information, other than net sales, license fees, cost of sales, and gross profit, for all Successor periods are not comparable to that of the Predecessor periods presented in the following table.

The selected historical consolidated data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto and other financial data included elsewhere in this prospectus. Our historical results are not necessarily indicative of our operating results or financial position to be expected in the future.

 

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    Predecessor          Successor  
    Year Ended
January 28,
2006
    Year Ended
February 3,
2007
    Year Ended
February 2,
2008
    228 Days
Ended
September 17,
2008
         136 Days
Ended
January 31,
2009
    Year Ended
January 30,
2010
    13 Weeks
Ended
May 2,
2009
    13 Weeks
Ended
May 1,
2010
 
    (dollars in thousands, except store count and share data)  

Statement of Operations Data:

                   

Net sales

  $ 381,211      $ 420,512      $ 437,070      $     244,212          $     188,458      $     457,533      $ 93,472      $ 111,891   

License fees from leased departments

    4,828        4,893        5,433        3,362            2,103        5,679        1,347        1,596   

Cost of sales

    (237,853     (256,471     (268,086     (145,668         (116,410     (269,177     (52,503 )     (60,938 )
                                                                   

Gross profit

    148,186        168,934        174,417        101,906            74,151        194,035        42,316        52,549   

Selling, general and administrative expenses

    (145,834     (162,760     (169,195     (104,433         (66,100     (167,842     (36,292 )     (42,248 )
                                                                   

Income / (loss) from operations

    2,352        6,174        5,222        (2,527         8,051        26,193        6,024        10,301   

Interest expense

    (1,303     (1,882     (1,937     (822         (697     (1,052     (267 )     (179 )
                                                                   

Income / (loss) before taxes

    1,049        4,292        3,285        (3,349         7,354        25,141        5,757        10,122   

Income tax (expense) / benefit

    20        (1,385     (1,168     998            (2,616     (9,273     (2,123 )     (3,745 )
                                                                   

Net income / (loss)

  $ 1,069      $ 2,907      $ 2,117      $ (2,351       $ 4,738      $ 15,868      $ 3,634      $ 6,377   
                                                                   

Net income / (loss) per share:

                   

Basic

  $ 0.06      $ 0.17      $ 0.13      $ (0.14       $ .31      $ 1.02      $ .23      $ .41   

Diluted

    0.06        0.17        0.13        (0.14         .31        .99        .23        .39   

Weighted average shares:

                   

Basic

    16,813,350        16,642,800        16,610,300        16,597,100            15,488,800        15,488,800        15,488,800        15,488,800   

Diluted

    17,145,548        16,908,315        16,703,342        16,611,040            15,488,800        16,036,422        15,488,800        16,167,302   

Other Financial and Operating Data:

                   

Comparable store sales growth(1)

    (0.2 )%      (2.3 )%      1.4     —   (2)          —   (2)      4.6     2.8 %     15.4 %

Store count, end of period

    55        62        63        65            65        66        65        67   

Average store sales(3)

  $ 6,931      $ 6,689      $ 6,938      $ 3,757          $ 2,899      $ 6,932      $ 1,438      $ 1,670   

Capital expenditures

    18,308        15,833        11,576        8,528            1,883        3,865        406        2,708   

Dividends per share

    —          —          —          —              —          0.97        —         —     

Balance Sheet Data (at period end):

                   

Cash and cash equivalents

  $ 4,393      $ 5,906      $ 5,222            $ 5,218      $ 16,601      $ 6,876      $ 13,055   

Working capital

    17,931        21,528        21,152              11,791        16,163        14,812        21,053   

Total assets

    104,269        116,213        109,075              77,859        92,118        94,107        100,001   

Total long-term obligations(4)

    12,170        11,208        13,576              —          1,513        1,889       1,326   

Total stockholders’ equity

    35,686        38,391        40,440              24,738        25,949        28,371        32,449   

 

(1)

We consider all stores opened for more than 16 months as of the end of the reporting period as comparable stores. Fiscal year 2006 was a 53-week year. Comparable store sales growth presented represents 52 weeks of operations to be comparable to the other years presented. The 53 weeks of fiscal year 2006 resulted in a comparable store sales decrease of 0.9%.

(2)

The Sun Capital Acquisition did not impact net sales. Therefore, comparable store sales decreased 4.5% for the combined periods ending January 31, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Unaudited Pro Forma Condensed Consolidated Financial Information.”

(3)

Average store sales is calculated by dividing net sales by the store count at the end of the reporting period. Fiscal year 2006 was a 53-week year. Average store sales presented represents 52 weeks of operations to be comparable to the other years presented. The 53 weeks of fiscal year 2006 resulted in average store sales of $6,782.

(4)

Consists of current and noncurrent portions of long-term debt and capital leases.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”

Our Company

Gordmans is an everyday low price retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel for all ages, accessories, footwear and home fashions. The origins of Gordmans date back to 1915, and as of June 4, 2010, we operated 68 stores in 16 primarily Midwestern states situated in a variety of shopping center developments, including regional enclosed shopping malls, lifestyle centers and power centers.

From 2004 to 2008, we expanded our store base by approximately 55%, opening 23 stores including two relocations and three closures. Due in part to the uncertain economic environment, in fiscal year 2009 we opened only one store and focused the majority of our efforts on several business plan initiatives to position us for sustainable long-term growth. These initiatives included:

 

   

strengthening the talent level throughout the organization, particularly within the senior management, merchandising and stores teams;

 

   

executing several merchandising strategies, including: the acquisition and expansion of a significant number of national brands, the augmentation of our Juniors’ Apparel, Young Men’s Apparel and Décor destination businesses (defined as categories with a broad and deep selection of brands and styles such that we believe Gordmans becomes a destination of choice for these categories) and the expansion of several underdeveloped, high growth niche merchandise categories;

 

   

improving our inventory planning and management to maximize both gross profit and inventory utilization efficiency; and

 

   

reengineering our marketing strategy to focus on branding Gordmans as a fun, unique and energetic shopping experience.

As a result of these initiatives, in conjunction with more efficiently leveraging our cost infrastructure through a reduction in selling, general and administrative expenses, including a reduction in force in our Corporate office, restructuring of our store management teams, implementation of a wage freeze and a significant reduction in our advertising expense, we were able to significantly enhance our profitability in fiscal year 2009. In particular, we generated a comparable store sales increase of 4.6% and 9.3% for fiscal year 2009 and the fourth quarter of fiscal year 2009, respectively. In addition, we improved our gross profit margin by 170 basis points over fiscal year 2008, while our net income increased 565% to $15.9 million. During the first quarter of fiscal year 2010, we opened one store and experienced a comparable store sales increase of 15.4%. Additionally, our gross profit margin increased 170 basis points to 47.0% when compared to the first quarter of fiscal year 2009. Our net income for the first quarter of fiscal year 2010 was $6.4 million, an increase of 75.5% over the first quarter of fiscal year 2009.

We believe we are well positioned to leverage our unique selling proposition, scalable infrastructure and portable retail model to continue to capture market share and drive increased revenue and profitability.

 

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With a current store base of only 68 stores, we anticipate being able to increase our store base by approximately 10% annually for the next several years. We believe that we can capitalize on both new market opportunities that are primarily contiguous to our current markets, as well as on selected opportunities to fill in existing markets for which we have not achieved an economies-of-scale presence. We believe that comparable store sales can be maximized by continuing to execute on a number of recent initiatives such as:

 

   

expanding our destination businesses,

 

   

achieving parity between sales of our Women’s and Juniors’ Apparel,

 

   

developing selected high growth potential niche businesses that we believe are underserved by the market,

 

   

acquiring targeted brands desired by our guests, and

 

   

leveraging inventory optimization opportunities.

We intend to enhance our profit margins by leveraging economies of scale with respect to our cost infrastructure. In particular, a significant portion of our corporate overhead and distribution center costs will not increase at a rate proportionate with new and comparable store sales growth.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales and comparable store sales and other individual store performance factors, gross profit and selling, general and administrative expenses.

Net Sales.    Net sales reflects our revenues from the sale of our merchandise less returns and discounts and exclusive of sales tax.

Comparable Store Sales.    Comparable store sales have been calculated based upon stores that were open at least 16 months as of the end of the reporting period. We also review average sales per transaction and comparable store transactions.

Gross Profit.    Gross profit is equal to our net sales minus cost of sales, plus license fee income generated from sales of footwear and maternity apparel in our leased departments. Costs of sales includes the direct cost of purchased merchandise, inventory shrinkage, inventory write-downs and inbound freight to our distribution center. Gross margin measures gross profit as a percentage of our net sales. Our gross profit may not be comparable to other retailers, as some companies include all of the costs related to their distribution network in cost of sales while others, like us, exclude a portion of these costs from cost of sales and include those costs in selling, general and administrative expenses.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses include all operating costs not included in cost of sales. These expenses include payroll and other expenses related to operations at our corporate office, store expenses, occupancy costs, certain distribution and warehousing costs, depreciation and amortization and advertising expense. These expenses generally do not vary proportionally with net sales. As a result, selling general and administrative expenses as a percentage of net sales is usually higher in lower volume periods and lower in higher volume periods.

 

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Purchase Accounting Impact of Sun Capital Acquisition

On September 17, 2008, we were acquired by investment funds managed by affiliates of Sun Capital. The purchase price was allocated to state our assets and liabilities at fair value on the acquisition date. The allocation of the purchase price had the effect of increasing (decreasing) the carrying amounts of property and equipment by $(32.0) million, amortizable intangible assets by $0.6 million and unamortizable intangible assets by $1.8 million. The $32.0 million decrease in property and equipment had the effect of decreasing annual depreciation and increasing operating income by approximately $7.1 million and $2.7 million in the year ended January 30, 2010 and the 136 days ended January 31, 2009, respectively. The $0.6 million increase in amortizable intangible assets had the effect of increasing annual amortization and decreasing operating income by $0.1 million and $22,000 in the year ended January 30, 2010 and the 136 days ended January 31, 2009, respectively.

Basis of Presentation and Results of Operations

Basis of Presentation

The consolidated financial statements include the accounts of Gordmans Stores, Inc. and its subsidiaries, Gordmans Intermediate Holding Corp., Gordmans, Inc., Gordmans Management Company, Inc. and Gordmans Distribution Company, Inc. All intercompany transactions and balances have been eliminated in consolidation. We utilize a typical retail 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest January 31. All references in these financial statements to fiscal years are to the calendar year in which the fiscal year begins. Fiscal years 2007, 2008 and 2009 represent fifty-two week years ended February 2, 2008, January 31, 2009 and January 30, 2010, respectively.

 

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The following discussion of our financial performance also includes supplemental unaudited pro forma condensed consolidated financial information for fiscal years 2007 and 2008. Because the Sun Capital Acquisition occurred during the third quarter of 2008, we believe this information aids in the comparison between periods presented. The pro forma information does not purport to represent what our results of operations would have been had the Sun Capital Acquisition and related transactions actually occurred at the beginning of the years indicated, and they do not purport to project our results of operations or financial condition for any future period. The following table contains results of operations data for fiscal year 2009 compared to pro forma results of operations for fiscal year 2007 and 2008. See “—Unaudited Pro Forma Condensed Consolidated Financial Information” below.

 

    Predecessor          Successor          Pro Forma          Successor  
    Year Ended
February 2,
2008
    228 Days
ended

September 17,
2008
         136 Days
Ended
January 31,
2009
         Year Ended
February 2,
2008
    Year Ended
January 31,
2009
         Year Ended
January 30,
2010
    13 Weeks
Ended
May 2,
2009
    13 Weeks
Ended
May 1,
2010
 
    (dollars in thousands)  

Statements of Operation Data:

                           

Net sales

  $ 437,070      $ 244,212          $ 188,458          $ 437,070      $  432,670          $  457,533      $ 93,472      $ 111,891   

License fees from leased departments

    5,433        3,362            2,103            5,433        5,465            5,679        1,347        1,596   

Cost of sales

    (268,086     (145,668         (116,410         (268,086     (262,078         (269,177     (52,503 )     (60,938
                                                                           

Gross profit

    174,417        101,906            74,151            174,417        176,057            194,035        42,316        52,549   

Selling, general and administrative expenses

    (169,195     (104,433         (66,100         (163,995     (166,965         (167,842     (36,292 )     (42,248
                                                                           

Income / (loss) from operations

    5,222        (2,527         8,051            10,422        9,092            26,193        6,024        10,301   

Interest expense

    (1,937     (822         (697         (1,974     (1,837         (1,052     (267 )     (179
                                                                           

Income / (loss) before taxes

    3,285        (3,349         7,354            8,448        7,255            25,141        5,757        10,122   

Income tax (expense) / benefit

    (1,168     998            (2,616         (3,083     (2,824         (9,273     (2,123 )     (3,745
                                                                           

Net income / (loss)

  $ 2,117      $ (2,351     $ 4,738        $ 5,365      $ 4,431        $ 15,868      $ 3,634      $ 6,377   
                                                                           

 

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The table below sets forth the components of the consolidated statements of income as a percentage of net sales:

 

    Predecessor          Successor          Pro Forma          Successor  
    Year Ended
February 2,
2008
    228 Days
Ended
September 17,
2008
         136 Days
Ended
January 31,
2009
         Year Ended
February 2,
2008
    Year Ended
January 31,
2009
         Year Ended
January 30,
2010
    13 Weeks
Ended
May 2,
2009
    13 Weeks
Ended
May 1,
2010
 

Net sales

  100.0   100.0       100.0       100.0   100.0       100.0   100.0   100.0

License fees from leased departments

  1.2      1.3          1.1          1.2      1.3          1.2      1.4      1. 4   

Cost of sales

  (61.3   (59.6       (61.8       (61.3   (60.6       (58.8   (56.1   (54.4
                                                           

Gross profit

  39.9      41.7          39.3          39.9      40.7          42.4      45.3      47.0   

Selling, general and administrative expenses

  (38.7   (42.8       (35.0       (37.5   (38.6       (36.7   (38.8   (37.8
                                                           

Income / (loss) from operations

  1.2      (1.1       4.3          2.4      2.1          5.7      6.5      9.2   

Interest expense

  (0.4   (0.3       (0.4       (0.5   (0.4       (0.2   (0.3   (0.2
                                                           

Income / (loss) before taxes

  0.8      (1.4       3.9          1.9      1.7          5.5      6.2      9.0   

Income tax (expense) / benefit

  (0.3   0.4          (1.4       (0.7   (0.7       (2.0   (2.3   (3.3
                                                           

Net income / (loss)

  0.5   (1.0 )%        2.5       1.2   1.0       3.5   3.9   5.7
                                                           

Unaudited Pro Forma Condensed Consolidated Financial Information

The following supplemental unaudited pro forma condensed consolidated statements of operations data have been developed by applying pro forma adjustments to our historical consolidated statements of operations. We were acquired on September 17, 2008. Accordingly, we applied purchase accounting standards which required a new basis of accounting resulting in assets and liabilities being recorded at their respective fair values at the Sun Capital Acquisition date. Although our operations did not change as a result of the Sun Capital Acquisition, the accompanying unaudited pro forma consolidated financial data is presented for the Predecessor and Successor relating to the periods preceding and succeeding the Sun Capital Acquisition, respectively. The unaudited pro forma condensed consolidated statements of operations for the years ended February 2, 2008 and January 31, 2009 give effect to the Sun Capital Acquisition as if it had occurred on February 4, 2007 and February 3, 2008, respectively. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited pro forma condensed consolidated financial data.

The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The unaudited pro forma consolidated financial data is presented for supplemental informational purposes only. The unaudited pro forma consolidated financial data does not purport to represent what our results of operations would have been had the Sun Capital Acquisition actually occurred on February 4, 2007 and February 3, 2008, and they do not project our results of operations or financial condition for any future period. The unaudited pro forma condensed consolidated statements of operations should be read in conjunction with other sections of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as “Selected Historical Consolidated Financial and Other Data” and our audited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated statements of operations.

 

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Table of Contents
     Fiscal Year Ended January 31, 2009  
     Predecessor     Successor     Adjustments    Pro Forma  
     (dollars in thousands)  

Net sales

   $ 244,212      $ 188,458      $           $   432,670   

License fees

     3,362        2,103             5,465   

Cost of sales

     (145,668     (116,410          (262,078
                             

Gross profit

     101,906        74,151             176,057   

Selling, general and administrative expenses

     (104,433     (66,100    

 

 

     4,327

(84

(675

  

 

(1)

(2)

(3)

     (166,965
                                   

Income (loss) from operations

     (2,527     8,051        3,568           9,092   

Interest expense

     (822     (697     (318   (4)      (1,837
                                   

Income (loss) before income taxes

     (3,349     7,354        3,250           7,255   

Income tax (expense) benefit

     998        (2,616     (1,206 )(5)          (2,824
                                   

Net income (loss)

   $ (2,351   $ 4,738      $ 2,044         $ 4,431   
                                   

 

     Fiscal Year Ended February 2, 2008  
     Predecessor     Adjustments    Pro Forma  
     (dollars in thousands)  

Net sales

   $ 437,070      $           $  437,070   

License fees

     5,433             5,433   

Cost of sales

     (268,086          (268,086
                     

Gross profit

     174,417             174,417   

Selling, general and administrative expenses

     (169,195     6,806      (1)      (163,995
                     
       (106   (2)   
       (1,500   (3)   
               

Income from operations

     5,222        5,200           10,422   

Interest expense

     (1,937     (37   (4)      (1,974
                           

Income before income taxes

     3,285        5,163           8,448   

Income tax expense

     (1,168     (1,915   (5)      (3,083
                           

Net income

   $ 2,117      $      3,248         $ 5,365   
                           

 

 

(1)

Represents the estimated impact on selling, general and administrative expenses related to the adjustment to fair value of property, buildings and equipment and the resulting change in depreciation expense.

(2)

Represents the amortization of the fair value adjustments related to intangible long-lived assets. Identifiable intangible assets with a determinable life have been amortized on a straight line basis in the unaudited pro forma consolidated statement of operations over periods ranging from 3 to 7 years.

(3)

Represents estimated consulting fee of $1.5 million per year to affiliates of Sun Capital.

footnotes continued on following page

 

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Table of Contents
(4)

Reflects pro forma interest expense resulting from our new capital structure as follows:

 

     Predecessor     Predecessor  
     Year ended
February 2, 2008
    228 days ended
September 17, 2008
 
     (in thousands)  

Pro forma interest expense on revolving line of credit facility(a)

   $ 1,625      $   1,011   

Less historical debt related costs

     (193     (135

Less historical interest expense related to debt arrangements

     (1,395     (558
                

Net adjustment to interest expense

   $ 37      $ 318   
                

 

  (a)

Reflects the revolving line of credit facility entered into with Wells Fargo Retail Finance, LLC, at the time of the Sun Capital Acquisition. Borrowings under this agreement initially bore interest at the prime interest rate minus 0.25% (4.75% at acquisition). Reflects assumed borrowings of $34.2 million, the initial amount borrowed at acquisition date. The Successor subsequently replaced this credit arrangement with a combination of a revolving line of credit facility and term loan. The level of borrowings will fluctuate in future periods dependent upon short term cash needs. Changes in the levels of borrowings would impact interest expense.

 

(5)

Represents tax effect of the above adjustments at a 37.1% effective tax rate, including 34% federal rate plus 3.1% state rate, net of federal benefit.

Thirteen Weeks Ended May 1, 2010 Compared to Thirteen Weeks Ended May 2, 2009

Net Sales

Net sales for the thirteen weeks ended May 1, 2010 increased $18.4 million, or 19.7%, to $111.9 million as compared to $93.5 million for the thirteen weeks ended May 2, 2009. This increase was a direct result of a $14.3 million or 15.4% comparable store sales increase and $4.1 million in sales due to the addition of one new store during fiscal year 2009, one new store opening in the thirteen weeks ended May 1, 2010 and an increase in noncomparable store sales. Comparable store sales increased due to a 12.0% increase in the number of transactions combined with a 3.5% increase in the average dollars spent per transaction.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for the thirteen weeks ended May 1, 2010 increased $0.2 million, or 18.5%, to $1.6 million as compared to $1.4 million for the thirteen weeks ended May 2, 2009. This increase was driven by increased sales of merchandise in the leased departments.

Gross Profit

Gross profit, which includes license fee income, for the thirteen weeks ended May 1, 2010 increased $10.2 million, or 24.2%, to $52.5 million as compared to $42.3 million for the thirteen weeks ended May 2, 2009. Approximately $9.6 million of the increase is due to the increase in sales volume. The remaining increase is due to a $0.4 million increase in initial mark-up on merchandise, a $0.4 million decrease in markdowns, partially offset by a $0.2 million increase in freight to our distribution center. Gross profit margin for the thirteen weeks ended May 1, 2010 increased to 47.0% as compared to 45.3% for the thirteen weeks ended May 2, 2009.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the thirteen weeks ended May 1, 2010 increased $6.0 million, or 16.4%, to $42.3 million as compared to $36.3 million for the thirteen weeks ended May 2, 2009. This increase was the result of increases in corporate expenses of $1.2 million, advertising expenses of $0.4 million, store expenses of $2.3 million, distribution center expenses of $0.7 million, depreciation and amortization of $0.1 million, management fees of $0.8 million and store pre-opening

 

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expenses of $0.5 million. Corporate expenses increased primarily due to an increase of $0.5 million in bonuses associated with our improved financial performance, $0.4 million in financial consulting and audit fees and $0.2 million in information technology costs. The increase in advertising expenses is a result of increases in all categories of advertising including print, television and direct mail. The $0.5 million increase in store pre-opening expenses for the thirteen weeks ended May 1, 2010 compared to the thirteen weeks ended May 2, 2009 is due to opening one new store during the first quarter of fiscal year 2010 and preparing for one new store opening in the second quarter of fiscal year 2010 as compared to no new store openings during the first quarter of fiscal year 2009. The increase in distribution center expenses is primarily related to increased payroll and benefits associated with the higher sales volume. Management fees increased as a result of our improved financial performance compared to the prior year. The increase in store expenses is primarily related to payroll and benefits associated with the higher sales volume in the first quarter of 2010 compared to 2009. As a percentage of sales, selling, general and administrative expenses for the thirteen weeks ended May 1, 2010 decreased to 37.8% as compared to 38.8% for the thirteen weeks ended May 2, 2009.

Interest Expense

Interest expense for the thirteen weeks ended May 1, 2010 decreased $88 thousand to $0.2 million as compared to $0.3 million for the thirteen weeks ended May 2, 2009. This decrease was primarily due to decreases in average borrowings outstanding under the revolving line of credit facility and the equipment term notes.

Income / (Loss) before Taxes

Income before taxes for the thirteen weeks ended May 1, 2010 increased $4.4 million, or 75.8%, to $10.1 million as compared to $5.7 million for the thirteen weeks ended May 2, 2009 primarily due to the increase in net sales and gross profit margin during the period. As a percentage of sales, income before taxes increased to 9.0% of net sales for first quarter of fiscal year 2010 as compared to 6.2% of net sales for the first quarter of fiscal year 2009.

Income Tax (Expense) / Benefit

Income tax expense for the thirteen weeks ended May 1, 2010 increased $1.6 million to $3.7 million as compared to $2.1 million for the thirteen weeks ended May 2, 2009. The effective income tax rate for the first quarter of fiscal year 2010 was 37.0% compared to an effective rate of 36.9% for the first quarter of fiscal year 2009. The effective rate differed from the federal enacted rate of 34% primarily due to state taxes, net of federal benefits.

Net Income / (Loss)

Net income for the thirteen weeks ended May 1, 2010 increased $2.7 million, or 75.5%, to $6.4 million as compared to $3.6 million in thirteen weeks ended May 2, 2009. This increase was primarily due to increases in net sales and gross profit margin and decreases in interest expense, which more than offset increases in selling, general and administrative expenses and income tax expense during the first quarter of fiscal year 2010 as compared to the first quarter of fiscal year 2009.

Fiscal Year 2009 Compared to Fiscal Year 2008 and Fiscal Year 2009 Compared to Pro Forma Fiscal Year 2008

Net Sales

Net sales for fiscal year 2009 increased $24.9 million, or 5.7%, to $457.5 million as compared to $432.7 million for fiscal year 2008 including $244.2 million in the 2008 Predecessor period and $188.5 million in the 2008 Successor period. This increase was a direct result of a $19.0 million or 4.6% comparable store sales increase, and a $5.9 million increase due to the addition of one new store during fiscal year 2009 and non-comparable store sales. Comparable store sales increased primarily due to a

 

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6.0% increase in the number of transactions partially offset by a 1.5% decrease in the average dollars spent per transaction.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for fiscal year 2009 increased $0.2 million, or 3.9%, to $5.7 million as compared to $5.5 million for fiscal year 2008, including $3.4 million in the 2008 Predecessor period and $2.1 million in the 2008 Successor period. This increase was driven by increased sales of merchandise in the leased departments.

Gross Profit

Gross profit, which includes license fee income, for fiscal year 2009 increased $18.0 million, or 10.2%, to $194.0 million as compared to $101.9 million in the 2008 Predecessor period and $74.2 million in the 2008 Successor period or $176.1 million for fiscal year 2008. Approximately $11.6 million of this increase is due to the increase in sales volume. The remaining increase is the result of a $3.3 million increase in initial mark-up on merchandise, a $1.4 million decrease in markdowns, a $1.6 million reduction in freight charges to our distribution center and a $0.2 million increase in license fees offset slightly by a $0.1 million increase in shrinkage. Gross profit margin for fiscal year 2009 increased to 42.4% as compared to 40.7% for fiscal year 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2009 were $167.9 million, compared to $104.4 million in the 2008 Predecessor period and $66.1 million in the 2008 Successor period. This change was primarily the result of increases in corporate expenses of $4.4 million, primarily due to bonuses associated with our improved financial performance and an increase in rent for our distribution center as a result of a sale leaseback of the primary distribution center during fiscal year 2008. These increases were offset primarily by decreases of $2.6 million in advertising expenses as a result of a shift in our advertising strategy. Additionally, store pre-opening and closing expenses for fiscal year 2009 decreased $1.2 million compared to fiscal year 2008, which was due to only one new store opening during fiscal year 2009 as compared to four new store openings and two store closings in fiscal year 2008. In connection with the Sun Acquisition in fiscal 2008, our assets were adjusted to fair value, resulting in a $3.7 million decrease in depreciation expense offset by additional management fees of $0.7 million in fiscal 2009.

On a pro forma basis, selling, general and administrative expenses for fiscal year 2009 increased $0.9 million, or 0.5%, to $167.9 million as compared to $167.0 million for pro forma fiscal year 2008. As a percentage of sales, selling, general and administrative expenses for fiscal year 2009 decreased to 36.7% as compared to 38.6% for pro forma fiscal year 2008.

Interest Expense

Interest expense for fiscal year 2009 was $1.0 million compared to $0.8 million in the 2008 Predecessor period and $0.7 million in the 2008 Successor period. On a pro forma basis, interest expense for fiscal year 2009 decreased $0.8 million to $1.0 million as compared to $1.8 million for pro forma fiscal year 2008. The decrease was primarily due to decreases in average borrowings outstanding under the revolving line of credit facility in fiscal year 2009, partially offset by an increase in interest rates.

Income / (Loss) before Taxes

Income (loss) before taxes for fiscal year 2009 was $25.1 million, compared to ($3.3) million in the 2008 Predecessor period and $7.4 million in the 2008 Successor period. On a pro forma basis, income before taxes for fiscal year 2009 increased $17.9 million, or 246.6%, to $25.1 million as compared to $7.3 million for pro forma fiscal year 2008 primarily due to the increase in net sales and gross profit margin during fiscal year 2009. As a percentage of sales, income before taxes increased to 5.5% of net sales for fiscal year 2009 as compared to 1.7% of net sales for pro forma fiscal year 2008.

 

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Income Tax (Expense) / Benefit

Income tax (expense) benefit for fiscal 2009 was ($9.3) million compared to $1.0 million in the 2008 Predecessor period and ($2.6) million in the 2008 Successor period. The effective income tax rate for fiscal 2009 was 36.9% compared to 29.8% and 35.6% in the 2008 Predecessor and 2008 Successor periods, respectively. The effective rate for the 2008 Predecessor period, which had a net operating loss, is lower due to the expiration of certain state net operating loss carryforwards for the Predecessor that resulted from the filing of short period tax returns for that period due to the Sun Capital Acquisition which partially offset the tax benefit of the operating loss for the period. The effective rate differed from the federal enacted rate of 34% primarily due to state taxes, net of federal benefits.

On a pro forma basis, income tax expense for fiscal year 2009 increased $6.4 million to $9.3 million as compared to $2.8 million for pro forma fiscal year 2008. The effective income tax rate for fiscal year 2009 was 36.9% compared to an effective rate of 38.9% for pro forma fiscal year 2008.

Net Income / (Loss)

Net income (loss) for fiscal 2009 was $15.9 million compared to ($2.4) million in the 2008 Predecessor period and $4.7 million in the 2008 Successor period. On a pro forma basis, net income for fiscal year 2009 increased $11.4 million, or 258.1%, to $15.9 million as compared to $4.4 million in pro forma fiscal year 2008. This increase was primarily due to increases in net sales and gross profit margin during fiscal year 2009 as compared to pro forma fiscal year 2008.

Fiscal Year 2008 Compared to Fiscal Year 2007 and Pro Forma Fiscal Year 2008 Compared to Pro Forma Fiscal Year 2007

Net Sales

Net sales for fiscal year 2008 decreased $4.4 million, or 1.0%, to $432.7 million, including $244.2 million in the 2008 Predecessor period and $188.5 million in the 2008 Successor period, as compared to $437.1 million for fiscal year 2007. This was a direct result of a $19.2 million or 4.5% comparable store sales decrease and a $3.5 million reduction in sales due to the closure of two stores, partially offset by an increase of $18.3 million in sales related to the addition of four new stores and non-comparable stores. Comparable store sales decreased primarily due to a 3.8% decrease in the number of transactions combined with a 0.7% decline in the average dollars spent per transaction.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments was $3.4 million in the 2008 Predecessor period and $2.1 million in the 2008 Successor period or $5.5 million for fiscal year 2008, an increase of $32 thousand, or 0.6%, as compared to $5.4 million for fiscal year 2007. This increase was driven by increased sales of merchandise in the leased departments.

Gross Profit

Gross profit, which includes license fee income, was $101.9 million in the 2008 Predecessor period and $74.2 million in the 2008 Successor period or $176.1 million for fiscal year 2008. This represents an increase of $1.6 million, or 0.9%, compared to $174.4 million for fiscal year 2007. Approximately $0.3 million of this decrease is due to the reduced sales volume in fiscal 2008 combined with a $0.6 million increase in markdowns and a $0.4 million increase in freight charges to our distribution center. These charges were partially offset by a $2.7 million increase in initial mark-up on merchandise and a $0.2 million reduction in shrinkage. Gross profit margin for fiscal year 2008 increased to 40.7% as compared to 39.9% for fiscal year 2007.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses were $104.4 million and $66.1 million in the 2008 Predecessor period and 2008 Successor period, respectively, compared to $169.2 million in fiscal year 2007. Corporate expenses increased $1.3 million primarily related increases in to payroll and benefits of $0.8 million, depreciation on new assets of $0.4 million and information technology spending of $0.1 million. Distribution center expenses increased $0.5 million related to outbound delivery to stores and $0.3 million in rent. Store operating expenses increased $0.7 million due to a $2.7 million increase in rent related to new stores, partially offset by a $2.0 million reduction in store payroll. Additionally, store pre-opening and closing expenses for fiscal year 2008 increased $0.9 million due to four new store openings and two store closings in fiscal year 2008 as compared to only one new store opening and one store relocation in fiscal year 2007. Additionally, the 2008 Successor period includes $0.8 million in management fees due to the Sun Capital acquisition. These increases were offset by a decrease in advertising expenses of $0.8 million and a $2.5 million decrease in depreciation and amortization as a result of adjusting asset values in connection with the Sun Capital acquisition.

On a pro forma basis, selling, general and administrative expenses for pro forma fiscal year 2008 increased $3.0 million, or 1.8%, to $167.0 million as compared to $164.0 million for pro forma fiscal year 2007.

Interest Expense

Interest expense was $0.8 million and $0.7 million in the 2008 Predecessor period and 2008 Successor period, respectively, compared to $1.9 million in fiscal year 2007. On a pro forma basis, interest expense for pro forma fiscal year 2008 decreased $0.1 million to $1.8 million. This decrease was primarily due to lower weighted average borrowings on our revolving line of credit facility.

Income / (Loss) before Taxes

Income (loss) before taxes was ($3.3) million in the 2008 Predecessor period and $7.4 million in the 2008 Successor period compared to $3.3 million in fiscal year 2007. On a pro forma basis, income before taxes for pro forma fiscal year 2008 decreased $1.2 million, or 14.1% to $7.3 million as compared to $8.5 million for pro forma fiscal year 2007 primarily due to decreased net sales, increased pre-opening costs and additional operating expenses associated with new stores during pro forma fiscal year 2008. As a percentage of sales, income before taxes decreased to 1.7% for pro forma fiscal year 2008 as compared to 1.9% for pro forma fiscal year 2007.

Income Tax (Expense) / Benefit

Income tax (expense) benefit was $1.0 million in the 2008 Predecessor period and ($2.6) million in the 2008 Successor period compared to ($1.2) million in fiscal year 2007. The effective income tax rate was 29.8% and 35.6% in the 2008 Predecessor and 2008 Successor periods, respectively and 35.6% in fiscal year 2007. The effective rate for the 2008 Predecessor period, which had a net operating loss, is lower due to the expiration of certain state net operating loss carryforwards for the Predecessor that resulted from the filing of short period tax returns due to the Sun Capital Acquisition which partially offset the tax benefit of the operating loss for the period. The effective rate differed from the federal enacted rate of 34% for all periods primarily due to state taxes, net of federal tax benefit.

On a pro forma basis, income tax expense for pro forma fiscal year 2008 decreased $0.3 million to $2.8 million as compared to $3.1 million for pro forma fiscal year 2007. The effective income tax rate for pro forma fiscal year 2008 was 38.9% compared to 36.5% for pro forma fiscal year 2007.

Net Income / (Loss)

Net income (loss) for the 2008 Predecessor period and 2008 Successor period was ($2.4) million and $4.7 million, respectively, compared to $2.1 million for fiscal year 2007. This decrease was primarily due

 

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to decreased net sales, increased pre-opening expenses, management fees and additional operating expenses associated with new stores during fiscal year 2008.

On a pro forma basis, net income for pro forma fiscal year 2008 decreased $0.9 million, or 17.4%, to $4.4 million as compared to $5.4 million for pro forma fiscal year 2007.

Quarterly Results and Seasonality

Unaudited Quarterly Financial Data

The results of operations for any quarter are not necessarily indicative of the results of operations for any future periods. Our business is seasonal and, historically, we have realized a higher portion of our net sales and net income in the fourth fiscal quarters due primarily to the impact of the holiday season. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays. As such, results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of our business may affect comparisons between periods.

The following table presents our unaudited quarterly consolidated results of operations for each of the full quarters of the Successor since the Sun Capital Acquisition on September 17, 2008. As a result of the Sun Capital Acquisition, our capital and cost structure changed. Therefore, all periods prior to September 18, 2008 are not comparable or meaningful and therefore financial data other than net sales have not been presented. Net sales, license fees, cost of sales, and gross profit, are presented to show the impact of seasonality on our business on a quarterly basis. This unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements, and, in the opinion of management, the statement of operations data includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. Each of the quarters presented below are comprised of 13 weeks.

 

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You should read this table in conjunction with our financial statements and the related notes located elsewhere in this prospectus.

 

    Fiscal Year 2008     Fiscal Year 2009     Fiscal
Year
2010
 
    Predecessor     (1)     Successor     Successor     Successor  
    13 Weeks
Ended
5/3/2008
    13 Weeks
Ended
8/2/2008
    13 Weeks
Ended
11/1/2008
    13 Weeks
Ended
1/31/2009
    13 Weeks
Ended
5/2/2009
    13 Weeks
Ended
8/1/2009
    13 Weeks
Ended
10/31/09
    13 Weeks
Ended
1/30/2010
    13 Weeks
Ended
5/1/2010
 
    (dollars in thousands except per share data)  

Net sales

  $ 89,942      $ 99,680      $ 104,519      $ 138,529      $ 93,472      $ 98,631      $ 111,396      $ 154,034      $ 111,891   

License fees

    1,329        1,300        1,465        1,371        1,347        1,231        1,481        1,620        1,596   

Cost of sales

    (52,698     (59,255     (62,639     (87,486     (52,503     (56,707     (64,394     (95,573     (60,938
                                                                       

Gross profit

    38,573        41,725        43,345        52,414        42,316        43,155        48,483        60,081        52,549   

Selling, general and administrative expenses

          (45,161     (36,292     (39,431     (42,038     (50,081     (42,248
                                                     

Income from operations

          7,253        6,024        3,724        6,445        10,000        10,301   

Interest expenses

          (449     (267     (267     (326     (192     (179
                                                     

Income before taxes

          6,804        5,757        3,457        6,119        9,808        10,122   

Income tax expense

          (2,421     (2,123     (1,275     (2,257     (3,618     (3,745
                                                     

Net income

        $ 4,383      $ 3,634      $ 2,182      $ 3,862      $ 6,190      $ 6,377   
                                                     

Earnings per share:

                 

Basic

        $ 0.28      $ 0.23      $ 0.14      $ 0.25      $ 0.40      $ 0.41   

Diluted

          0.28        0.23        0.14        0.24        0.38        0.39   

 

 

(1)

The quarter ended November 1, 2008, includes the Predecessor period from July 3, 2008 to September 17, 2008 and the Successor period from September 18, 2008 to November 1, 2008. Since the merger did not impact net sales, license fees, cost of sales, and gross profit the Predecessor & Successor periods have been combined for the quarter ended November 1, 2008 to provide seasonality trends by quarter.

Seasonality

Our business is subject to seasonal fluctuations, which are typical of retailers that carry a similar merchandise offering. A disproportionate amount of our sales and net income are realized during the fourth quarter, which includes the holiday selling season. In fiscal year 2009, 33.7% of our net sales were generated in the fourth quarter. Operating cash flows are typically higher in the second and fourth fiscal quarters due to inventory related working capital requirements in the first and third fiscal quarters. Based on results over the past five years, approximately 34% of comparable store sales and more than 100% of the net income is realized in the fourth quarter, making up for a net loss historically incurred through the first nine months. However, financial performance in fiscal year 2009 represented a break from the historical trend. During fiscal year 2009, we generated net income during the first nine months of $9.7 million and 39.0% of net income was realized in the fourth quarter. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas and regional fluctuations for events such as sales tax holidays.

Liquidity and Capital Resources

Our working capital at May 1, 2010 increased $6.2 million, or 42.1% to $21.1 million compared to May 2, 2009. Working capital also increased $4.4 million, or 37.1%, to $16.2 million at January 30, 2010 compared to January 31, 2009. Our primary ongoing cash requirements are for operating expenses, inventory and new store capital investment. Our typical investment in a new store is approximately $1.3 million which represents pre-opening expenses of $0.4 million and inventory of $0.9 million (of which $0.3 million is typically financed through trade payables). The fixed assets and leasehold improvements associated with a new store opening of approximately $1.0 million have typically been financed by landlords through favorable tenant improvement

 

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allowances. Our primary sources of funds for our business activities are cash from operations, borrowings under our revolving line of credit facility, tenant improvement allowances and the use of operating leases for new stores.

We had no borrowings under our revolving line of credit facility at May 1, 2010 and the end of fiscal year 2009 and had cash and cash equivalents of $13.1 million and $16.6 million respectively, compared to $9.7 million in borrowings and $5.2 million in cash and cash equivalents at the end of fiscal year 2008. Net cash provided by operating activities was $40.1 million for fiscal year 2009 versus $15.8 million in fiscal year 2008. Average borrowings under our revolving line of credit facility decreased to $10.2 million in fiscal year 2009 from $19.0 million in fiscal year 2008 primarily due to the sales and gross profit margin increases and the overall reduction in selling, general and administrative expenses compared to the prior year. The largest amount drawn at one time during fiscal year 2009 was $29.6 million. We paid a $15.0 million dividend to stockholders on December 23, 2009. Average availability under our revolving line of credit facility increased 14.9% over last year to $32.3 million in fiscal year 2009. The improvement in our cash and debt position as compared to the end of fiscal year 2008 was primarily due to earnings generated in fiscal year 2009, inventory turnover improvement and an increase in certain current liabilities compared to the end of fiscal year 2008. Stockholders’ equity was $25.9 million as of January 30, 2010, compared to $24.7 million as of January 31, 2009.

During the course of our seasonal business cycle, working capital is needed to support inventory for existing stores, particularly during peak selling seasons. Historically, our working capital needs are lowest in the first quarter and peak late in the third quarter or early in the fourth quarter in anticipation of the Holiday selling season. Management believes that the net cash provided by operating activities, bank borrowings, vendor trade terms, tenant improvement allowances and the use of operating leases for new stores will be sufficient to fund anticipated current and long-term capital expenditures and working capital requirements.

 

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Capital Expenditures

Net capital expenditures (proceeds) during fiscal year 2007, 2008 Predecessor period, 2008 Successor period and fiscal year 2009 were $9.8 million, $8.5 million, $(7.6) million and $3.6 million respectively. Net capital expenditures during the 13 weeks ended May 2, 2009 and May 1, 2010 were $0.4 million and $2.7 million, respectively. Net capital expenditures were comprised of the following:

 

    Predecessor        Successor
    Year Ended
February  2,

2008
  228 Days Ended
September  17,

2008
       136 Days Ended
January  31,

2009
    Year Ended
January  30,

2010
  13 Weeks
Ended May  2,

2009
  13 Weeks
Ended May 1,
2010
    (dollars in thousands)

New and existing stores

  $ 6,188   $ 7,413       $ 1,220      $ 2,408   $ 204   $ 2,558

Technology-related investments

    4,745     699         366        684    
115
   
143

Distribution center improvements

    643     416         297        773    
87
 

 

7

                                         

Gross capital expenditures

    11,576     8,528         1,883        3,865  

 

406

 

 

2,708

Less: Proceeds from sale of equipment

    1,750     21         9,534        222    
—  
   
—  
                                         

Net capital expenditures (proceeds)

  $ 9,826   $ 8,507       $ (7,651   $ 3,643   $ 406   $ 2,708
                                         

We lease all of our stores. In certain cases, we negotiate leases whereby we take responsibility for construction of a new store and are reimbursed for our costs from the landlord. When this situation occurs, we report the construction costs as part of our capital expenditures and, at the commencement of the lease, report the proceeds from the sale of the assets to the landlord. In November 2008, we had $9.5 million in proceeds from the sale of our distribution center in a sale-leaseback transaction.

 

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Cash Flow Analysis

A summary of operating, investing, and financing activities are shown in the following table:

 

     Predecessor     Successor  
     Year Ended
February  2,

2008
    228 Days Ended
September  17,

2008
    136 Days Ended
January  31,

2009
    Year Ended
January  30,

2010
    13 Weeks  Ended
May 2,
2009
    13 Weeks  Ended
May 1,
2010
 
     (dollars in thousands)  

Provided by (used in) operating activities

   $ 13,466      $ (3,148   $ 18,922      $ 40,070      $  1,423      $ (651

Used in investing activities

     (9,826     (8,507     (44,855     (3,474     (406     (2,708

Provided by (used in) financing activities

     (4,324     9,588        27,996        (25,213     641        (187
                                                

Increase (decrease) in cash and cash equivalents

     (684     (2,067     2,063        11,383        1,658        (3,546
                                                

Cash and cash equivalents at end of period

   $ 5,222      $ 3,155      $ 5,218      $ 16,601      $ 6,876      $  13,055   
                                                

Cash Flows from Operating Activities

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred taxes, and the effect of working capital changes.

Net cash used in operating activities during the thirteen weeks ended May 1, 2010 was $0.7 million, which included net income of $6.4 million, plus net noncash charges (benefit) for deferred tax expense, depreciation and amortization expense, and share-based compensation totaling ($0.2) million. Operating cash flows in the thirteen weeks ended May 1, 2010 of $4.7 million were generated from increases in accounts payable related to inventory purchases, income taxes payable and deferred rent, as well as decreases in accounts receivables and other assets. Cash of $11.6 million was used to increase inventory and prepaid expenses, and to reduce accrued expenses compared to January 30, 2010.

Net cash provided by operating activities in the thirteen weeks ended May 2, 2009 was $1.4 million, which included net income of $3.6 million, plus noncash charges for depreciation and amortization expense totaling $0.5 million. Operating cash flows in the thirteen weeks ended May 2, 2009 were favorably impacted by increases in accounts payable related to inventory purchases, income taxes payable and deferred rent and decreases in prepaid expenses totaling $12.9 million. Increases of accounts receivable, inventory and other assets and decreases in accrued expenses totaling $15.6 million reduced operating cash flows.

Net cash provided by operating activities in fiscal year 2009 was $40.1 million, which included net income of $15.9 million, plus noncash charges for deferred tax expense, depreciation and amortization expense, and share-based compensation totaling $5.7 million. Operating cash flows in 2009 of $23.6 million were generated from increases in accounts payable related to inventory purchases, income taxes payable, deferred rent and other accrued expenses, primarily driven by increases in accrued bonuses as well as decreases in prepaid expenses and accounts receivable. Cash of $5.1 million was used to increase inventory compared to the prior year.

 

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Net cash provided by (used in) operating activities for the 2008 Successor and Predecessor periods totaled $15.8 million. Operating cash flows were influenced by net income (loss) of $4.7 million and ($2.4) million, in the 2008 Successor and Predecessor periods, respectively. However, noncash charges in the 2008 periods totaled $5.7 million. Operating cash flows in the 2008 Successor and Predecessor periods were also favorably impacted by decreases in merchandise inventories, prepaid expenses and other assets of $4.7 million and increases in deferred rents, accounts payable and accrued expenses of $8.7 million. Increases in accounts receivables and income tax receivables totaling $5.2 million during the 2008 periods reduced operating cash.

Net cash provided by operating activities for fiscal 2007 was $13.5 million. Fiscal year 2007 operating cash flows resulted from $2.1 million of net income and noncash charges of $8.3 million. Operating cash flows for 2007 were also favorably impacted by decreases in receivables and merchandise inventories of $8.1 million and an increase in accrued expenses of $0.6 million. Decreases in accounts payable, deferred rent and income taxes payable of $5.3 million and increases in prepaid expenses and other assets of $0.4 million decreased operating cash flows in fiscal 2007.

Cash Flows from Investing Activities

Cash of $2.7 million was used for investing activities in the thirteen weeks ended May 1, 2010 for purchases of property and equipment. Of this amount, $2.0 million was related to the one new store opened during the thirteen weeks ended May 1, 2010 and one store which was being prepared to be opened shortly after May 1, 2010.

Cash of $0.4 million was used for investing activities in the thirteen weeks ended May 2, 2009 for purchases of property and equipment.

Cash of $3.5 million was used for investing activities in fiscal year 2009. Cash of $3.9 million was used for property, building and equipment purchases in 2009 and was partially offset by proceeds from the sale of property and equipment of $0.2 million.

Cash used for investing activities was $44.9 million and $8.5 million in the 2008 Successor and Predecessor periods, respectively. Cash of $10.4 million was used to purchase property, buildings and equipment in the 2008 periods, primarily relating to four new store openings during the periods. The sale of property and equipment generated cash of $9.5 million in the 2008 Successor period due primarily to the sale leaseback of our distribution center.

Cash used by investing activities was $9.8 million in fiscal year 2007. Cash of $11.6 million was used to purchase property, buildings and equipment in fiscal year 2007, including equipment related to one new store and $4.7 million for information technology related equipment. $1.8 million was generated from the sale of property, buildings and equipment.

Cash Flows from Financing Activities

Cash of $0.2 million was used in financing activities for the thirteen weeks ended May 1, 2010, including payments of $0.2 million to reduce our equipment loan and capitalized leases.

Cash of $0.6 million was provided by financing activities for the thirteen weeks ended May 2, 2009. In the first quarter of fiscal year 2009, cash was generated from increased borrowings under our revolving line of credit facility of $0.6 million and proceeds received from a new equipment loan of $2.0 million. Cash was used for debt issuance costs of $1.9 million and payments on our term debt of $0.1 million.

 

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Cash of $25.2 million was used in financing activities for fiscal year 2009. In fiscal year 2009, cash was used to pay $15.0 million in dividends, pay down our revolving line of credit facility by $9.7 million, reduce capital leases by $0.6 million and pay $1.9 million for debt issuance costs. In fiscal year 2009, we received proceeds from a new equipment loan of $2.0 million.

Cash provided by financing activities in the 2008 Successor period and Predecessor period was $28.0 million and $9.6 million, respectively. The net cash used to pay down our revolving line of credit facility was $7.4 million in the 2008 periods. As a result of the Sun Acquisition in the 2008 Successor period, cash of $32.5 million was generated from borrowings under the revolving line of credit facility and $20.0 million was generated from the issuance of common stock. Payments on capital leases, mortgages and other financing agreements used cash of $7.5 million in the 2008 Predecessor period.

Cash of $4.3 million was used in financing activities in fiscal 2007. Net cash was used to reduce borrowings under our revolving line of credit facility by $6.6 million. Proceeds from financing activities of $5.0 million favorably impacted cash flows, which were partially offset by payments on capital leases and mortgage payments of $2.7 million. Additionally, $0.1 million in cash was used to purchase treasury stock.

Existing Credit Facilities

Gordmans, Inc. is the borrower under a loan, guaranty and security agreement dated as of February 20, 2009, as amended from time to time thereafter, with Wells Fargo Retail Finance, LLC as agent and a lender and certain other lenders party thereto from time to time. Gordmans Distribution Company, Inc., Gordmans Management Company, Inc., Gordmans Stores, Inc. and Gordmans Intermediate Holdings Corp. are all guarantors under the loan agreement. The loan agreement provides an equipment term loan in the original principal amount of $2.0 million, which was used to refinance existing indebtedness. In addition, the loan agreement originally provided a revolving line of credit facility for general working capital needs of up to $63.0 million, which was increased to $78.0 million on March 31, 2009. The description below includes the terms of the fourth amendment to the loan agreement, which will be effective upon the successful completion of this offering.

The revolving line of credit facility is available for working capital and other general corporate purposes and is scheduled to expire on February 20, 2013. At January 30, 2010, we had no borrowings outstanding under our revolving line of credit facility and excess availability of $22.9 million, including letters of credit issued with an aggregate face amount of $5.4 million.

Interest is payable on borrowings under the revolving line of credit facility monthly at a rate equal to LIBOR or the base rate, plus an applicable margin which ranges from 2.75% to 4.75% set quarterly dependent upon average net availability under the revolving line of credit facility during the previous quarter, as selected by management.

An unused line fee is payable quarterly in an amount equal to 0.50% of the sum of the average daily unused revolving commitment plus the average daily unused letter of credit commitment. A customary fee is also payable to the administrative agent under the Loan Agreement on an annual basis.

The availability of the revolving line of credit facility is subject to a borrowing base, which is comprised of eligible credit card receivables, the liquidation value of eligible landed inventory, eligible distribution center inventory and the liquidation value of eligible in-transit inventory. See “Description of Certain Indebtedness.” The equipment term loan was fully drawn in a single draw on the closing date and was used to refinance existing indebtedness. It matures on February 20, 2012 and amortizes in 36 equal monthly installments. Interest is payable on the equipment term loan monthly at a per annum rate equal to the base rate plus 4.00%.

 

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Off-Balance Sheet Arrangements

As of May 1, 2010, we had no off-balance sheet arrangements.

Contractual Obligations

 

     Payments Due by Period
     Total    <1 Year    1-3 Years    3-5 Years    >5 Years
     (dollars in thousands)

Contractual Obligations:

              

Existing Debt Facilities(1)

   $ 1,562    $ 749    $ 813    $    $

Capital Leases

     70      70               

Operating Leases(2)(3)

     231,982      34,278      65,679      55,777      76,248

Letters of Credit

     5,364      5,364               

Consulting obligation(4)

     6,469      750      1,500      1,500      2,719
                                  

Total

   $ 245,447    $ 41,211    $ 67,992    $ 57,277    $ 78,967
                                  

 

(1)

Represents obligations on our existing variable rate note payable including projected interest, based upon the January 30, 2010 rate.

(2)

Certain retail store leases contain provisions for additional rent based on varying percentages of sales when sales reach certain thresholds. No retail stores with provisions for additional percentage rent exceeded the applicable sales thresholds in fiscal 2009, nor are any expected to exceed the applicable sales thresholds during the remainder of their lease terms.

(3)

Real estate taxes, common area maintenance charges and insurance are expenses considered additional rent that can vary from year to year, but are not included in operating lease obligations. These costs represented approximately 37% of lease expense for our retail stores in fiscal 2009.

(4)

Represents our obligation for consulting services provided by Sun Capital Partners Management V, LLC. The minimum annual obligation is $750,000 per year through September 2018, payable in quarterly installments, with automatic one-year extensions thereafter. The consulting fee is equal to the greater of (a) $750,000 per fiscal year and (b) the lesser of (i) 8% of our EBITDA (adjusted for certain non-recurring and unusual items) and (ii) $1.5 million per fiscal year. The consulting agreement will terminate in connection with this initial public offering. See “Certain Relationships and Related Party Transactions—Sun Capital Consulting Agreement.”

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may cause actual results to differ from reported amounts.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting its results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of the Company’s consolidated financial statements. In addition to the policies presented below, there are other items within the Company’s financial statements that require estimation, but are not deemed critical. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Note A, “Summary of Significant Accounting Policies,” to the consolidated financial statements.

 

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Revenue Recognition

Revenue is recognized at the point-of-sale, net of estimated returns and allowances and exclusive of sales tax. License fees from licensed departments represent a percentage of total footwear and maternity sales due to the licensing of the footwear and maternity businesses to third parties. Footwear and maternity sales under these licensing arrangements are not included in net sales, but are included separately on the statement of operations. Layaway sales are deferred until the final sales transaction has been completed. Sales of gift cards are deferred until they are redeemed for the purchase of our merchandise. The Company reserves for estimated merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender of the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are not included in the population when calculating the sales returns reserve. Income from unredeemed gift cards is recorded when the likelihood of redemption becomes remote, which has been determined to be three years after the date of last use, based on historical redemption patterns. We similarly reverse revenue and record deferred revenue on our balance sheet for merchandise credits issued related to guest returns and recognize this revenue upon the redemption of the merchandise credits.

Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market, using the conventional retail method with last-in, first-out (LIFO) for the Predecessor and the conventional retail method with first-in, first-out (FIFO) for the Successor. Under the retail method, the cost value of inventory and gross margins are determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. This method is widely used in the retail industry and involves management estimates with regard to such things as markdowns and inventory shrinkage. A significant factor involves the recording and timing of permanent markdowns. Under the retail method, permanent markdowns are reflected in inventory valuation when the price of an item is reduced. Inventory shortage involves estimating a shrinkage rate for interim periods, but is based on a full physical inventory near the fiscal year end. Thus, the difference between actual and estimated amounts of shrinkage may cause fluctuations in quarterly results, but is not a significant factor in full year results. All inventories are in one class and are classified as finished goods. Inventories in possession of our carrier are included in merchandise inventories as legal title and risk of loss had passed.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Significant judgment is involved in projecting the cash flows of individual stores, as well as our business units, which involve a number of factors including historical trends, recent performance and general economic assumptions. If such a review indicates that the carrying amounts of long-lived assets are not recoverable, we reduce the carrying amounts of such assets to their fair values.

Operating Leases

We lease retail stores under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin the pre-opening merchandising process, approximately seven weeks prior to opening the store to the public.

For tenant improvement allowances and rent holidays, we record a deferred rent liability in “Deferred Rent” on the consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of operations.

 

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For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated statements of operations.

Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability in “Accrued Expenses” on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

Self-Insurance

We are self-insured for certain losses related to health, dental, workers’ compensation and general liability insurance, although we maintain stop-loss coverage with third-party insurers to limit liability exposure. Liabilities associated with these losses are estimated, in part, by considering historical claims experience, industry factors and other assumptions. Although management believes adequate reserves have been provided for expected liabilities arising from our self-insured obligations, projections of future losses are inherently uncertain, and it is reasonably possible that estimates of these liabilities will change over the near term as circumstances develop.

Employee Stock-Based Compensation

We recognized all share-based payments to employees in the income statement based on the grant date fair value of the award for those awards that are expected to vest. Forfeitures of awards are estimated at the time of grant based on historical experience and revised appropriately in subsequent periods if actual forfeitures differ from those estimates. We utilize the Black-Scholes option valuation model to calculate the value of each stock option. Expected volatility was based on historical volatility of the common stock for a peer group of other companies within the retail industry. The expected term of the options represents the period of time until exercise or termination and is based on the historical experience of similar awards. The risk free rate is based on the U.S. Treasury rate at the time of the grants for instruments of a comparable life. The dividend yield of the index was assumed to be 2.0% in fiscal year 2009, and 0.0% in the 136 days ended January 31, 2009 and 228 days ended September 17, 2008 and 2007.

Determining the Fair Value of our Common Stock

We believe it is appropriate to discuss the determination of the fair value of our common stock only for the Successor periods because on September 17, 2008 an affiliate of Sun Capital acquired 100% of the outstanding common shares of the Predecessor. In connection with that purchase, all outstanding options issued during the Predecessor periods were re-purchased for $0.10 per option and cancelled in connection with that acquisition.

The fair value of our common stock at the date of each option grant is determined by our Board of Directors. Given the absence of an active market for our common stock prior to this offering, our Board of Directors used a market approach for the grants on May 7, 2009 and March 30, 2010. Our Board of Directors considered numerous objective and subjective factors in valuing our common stock in accordance with the guidance in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, which we refer to as the “AICPA Practice Aid.” These objective and subjective factors included:

 

   

changes to our business plan;

 

   

our operating and financial performance;

 

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our revenue growth;

 

   

the lack of an active public market for our common stock; and

 

   

the risks inherent in the retail industry.

In determining the fair value of our common stock at each valuation date, we used a market approach, as further described below. The significant input assumptions used in the valuation models are based on subjective future expectations combined with management judgment. Assumptions utilized in the market approach are:

 

   

our expected revenue, operating performance, and cash flows and earnings before interest, taxes, depreciation and amortization (EBITDA) for the current and future years, determined as of the valuation date based on our estimates;

 

   

multiples of market value compared to the trailing 12 months revenue, determined as of the valuation date, based on a group of comparable public companies we identified; and

 

   

multiples of market value to expected future revenue, determined as of the valuation date, based on the same group of comparable public companies.

In determining the most appropriate comparable companies, we considered several factors, including the other companies’ industry, size and their specific products and services.

May 7, 2009 valuation

In determining our enterprise value at May 7, 2009, we used a market approach. Significant assumptions used in the market approach included the following: a multiple of 4.5 times trailing twelve months’ EBITDA. We also applied a discount for lack of marketability of 30% in arriving at the value of our common stock, which reflected the assessment in May 2009 that an IPO was very unlikely.

In determining our enterprise value at May 7, 2009, we used the Probability-Weighted Expected Return, or PWER, method as described in the AICPA Practice Aid. We determined that a strategic sale would be 100% likelihood due to our shareholders historical experience of selling companies after 4 to 6 years of ownership. We determined the probability of an IPO at that time to be unlikely, based on management’s and the Board of Directors’ best estimate of the probability at that time. This probability reflects the fact that we had not begun any discussions with underwriters regarding a potential IPO and our Board of Directors had not considered an IPO as a potential monetization event for our shareholders.

March 30, 2010 valuation

In determining our enterprise value at March 30, 2010, we used a market approach. Significant assumptions used in the market approach included the following: a multiple of 5.5 to 6.0 times trailing twelve months’ EBITDA. We did not apply a discount for lack of marketability in arriving at the value of common stock, which reflected the assessment in March 2010 that an IPO was very likely. We determined that an IPO would be 95% likely due to our planned timeline to complete an IPO by August 2010. We determined the probability of a strategic sale to be 5%.

 

   

March 30, 2010 grants. The increase from the May 7, 2009 value of $2.81 per share to $12.99 per share at March 30, 2010 was due primarily to the following factors:

 

   

In early December, our Board of Directors authorized us to retain investment bankers to prepare for an IPO. As of March 30, 2010 our Board of Directors increased the probability of completing a successful IPO to 95% due to the planned timeline to complete an IPO by August 2010.

 

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The market value of our comparable companies increased, thus increasing the EBITDA multiples we used in our valuation, which increased our aggregate equity value and the value attributable to common stock in our valuation.

 

   

Our trailing twelve months’ EBITDA as a percentage of revenue as of May 7, 2009 was 4.2% compared to 7.5% as of March 30, 2010.

The main reason our common stock increased from our March 30, 2010 valuation of $12.99 per share to our anticipated price per share of this offering is that our trailing twelve months’ EBITDA as a percentage of revenue continues to improve and was 8.4% as of June 30, 2010.

We believe consideration by our Board of Directors of the factors described above was a reasonable approach to estimating the fair value of our common stock for those periods. The assumptions that we have made about the fair value of our common stock represent our Board of Directors’ and management’s best estimate, but they are highly subjective and inherently uncertain. If different assumptions were made, our calculation of the fair value of common stock and the resulting stock-based compensation expense could have materially differed from the amounts recognized in our financial statements.

Income Taxes

We calculate our current and deferred tax provision for the fiscal year based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the applicable year. Adjustments based on filed returns are recorded in the appropriate periods when identified. We file a consolidated federal tax return, generally in the third fiscal quarter of the subsequent fiscal year.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered taxable income in carry-back periods, historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and tax planning strategies in determining the need for a valuation allowance against our deferred tax assets. Determination of a valuation allowance for deferred tax assets requires that we make judgments about future matters that are not certain, including projections of future taxable income and evaluating potential tax-planning strategies. To the extent that actual results differ from our current assumptions, the valuation allowance will increase or decrease. In the event we were to determine we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination. Likewise, if we later determine it is more likely than not that the deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.

The income tax laws of jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and applicable government taxing authorities. Income tax returns filed by us are based on our interpretation of these rules. The amount of income taxes we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments, including assessments of interest and/or penalties. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and based on our best judgments. Actual results may differ from our current judgments due to a variety of factors, including changes in law, interpretations of law by taxing authorities that differ from our assessments, changes in the jurisdictions in which we operate and results of routine tax examinations. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate.

 

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Quantitative and Qualitative Disclosure of Market Risks

Interest Rate Risk

We are exposed to interest rate risk primarily through borrowings under our revolving line of credit facility and equipment note payable (see footnotes to the Company’s Consolidated Financial Statements included elsewhere in this Prospectus). Borrowings under the revolving line of credit facility bear interest at the base rate plus 3.00% (6.25% at January 30, 2010) with an option to bear interest at the LIBOR interest rate plus 4.00%. See “Description of Certain Indebtedness—Revolving Line of Credit Facility.” Borrowings under the revolving line of credit facility may not exceed the lesser of a calculated borrowing base or $78.0 million. There were no borrowings outstanding at January 30, 2010. The equipment note payable bears interest at the LIBOR interest rate plus 4.00% (7.25% at January 30, 2010). The balance of the equipment note payable at January 30, 2010 was $1.4 million.

We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average daily borrowings of the revolving line of credit facility. As of January 30, 2010, the analysis indicated that such a movement would not have a material effect on our consolidated financial position, results of operations or cash flows.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.

 

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BUSINESS

Our Company

Gordmans is an everyday low price retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel for all ages, accessories, footwear and home fashions. We operate 68 stores in 16 primarily Midwestern states situated in a variety of shopping center developments, including regional enclosed shopping malls, lifestyle center and power centers.

Our History

The origins of Gordmans date back to 1915, and over the next 60 years evolved into a moderately-priced promotional department store concept. In 1975, entrepreneur Dan Gordman started the ½ Price Stores, the concept of which was to sell department store quality merchandise at half of department store regular prices as a vehicle to clear end-of-season product. More than twenty years later in 1996 we commenced an initiative to reposition the Company in an effort to better communicate its unique selling proposition, which went far beyond merely low prices. The repositioning included strengthening the portfolio of name brands, developing a new prototype store format, and significantly upgrading the store presentation in response to the evolving preferences of our guests.

On September 17, 2008, an affiliate of Sun Capital acquired 100% of the outstanding common shares of Gordmans, Inc. Gordmans, Inc. is an indirect wholly owned subsidiary of Gordmans Stores, Inc.

Our Business Strategy

Gordmans is a uniquely positioned business model built to capitalize on what we believe is an underserved need in the marketplace. While we technically compete within the off-price segment of the industry, we are actually a unique hybrid of specialty, department store, big box and off-price retailers. Our mission, “We will delight our guests with big savings, big selection and fun, friendly associates!” reflects our differentiated selling proposition, which is comprised of three elements: (i) savings of up to 60% off department and specialty store regular prices; (ii) a broad selection of fashion-oriented department and specialty store quality apparel, footwear, accessories and home fashions; and (iii) a shopping experience that is designed to be infused with fun and entertainment and characterized by outstanding guest service in addition to well-organized, easy-to-shop stores. We believe that while other retailers may fare better than us on any one of our key elements of savings, selection or shopping experience, few, if any, attempt to optimize all three simultaneously to the same degree as we do.

We believe that pursuing a product differentiation and cost leadership strategy concurrently sets us apart from our competitors and has been critical to our success. Fashion-infused, name brand apparel, footwear and accessories synthesized with unique home fashions merchandise form the foundation of our merchandise differentiation strategy. The goal of delivering everyday low prices that are below the lowest sale prices of department and specialty stores drives our cost leadership strategy. The key aspects of our business strategy are as follows:

 

   

Unique Merchandise Offering.    We synthesize our fashion-oriented, name brand apparel and accessories with an expansive Home Fashion selection. Certain segments of home fashions make up our destination business of “Décor,” such as wall art, floral and garden, and accent furniture and lighting. In addition to Décor, we have developed our Juniors’ and Young Men’s Apparel categories into destination businesses (defined as categories with a broad and deep selection of brands and styles such that we believe Gordmans becomes a destination of choice for these categories), which combined represented approximately 39% of our average inventory for fiscal 2009. Our goal is to dedicate a greater proportion of inventory resources to these businesses than any other off-price, mid-tier or department store retailer.

 

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Outstanding Value Proposition.    From a cost leadership standpoint, it is our goal to offer everyday savings of up to 60% off department and specialty store regular ticketed prices. We believe we are able to achieve this goal because we procure merchandise from our vendors at a low up-front price, i.e., without asking for various reimbursements and discounts. We then pass those savings along to our customers by selling our merchandise at a low everyday price. Many other retailers, including many of our competitors, agree to pay a higher initial price to their vendors, but then seek to offset that higher price by demanding various reimbursements and discounts. Such retailers carry their products at a higher ticketed retail price, but then sell the majority of their merchandise at a discount under various promotions and sales. Thus, while our all-in cost of merchandise, and the ultimate sale price to our customers, may be similar to that of our competitors, we offer our vendors and customers greater certainty of pricing, which we believe is attractive to both vendors and customers. Finally, opportunistic merchandise procurement strategies, which in conjunction with everyday low prices define the off-price segment of the retailing industry, further enhance our value proposition. We undergo a due diligence process to validate our savings that includes verifying manufacturers’ suggested retail prices, retail prices provided by our vendor partners, examining retail prices on a variety of ecommerce sites and examining retail prices in competitor store locations.

 

   

Fun and Energetic Store Environment.    Our store shopping experience is a critical component of our holistic selling proposition. The stores feature Gordmans Giggles, a children’s theater seating area, Gordmans Grandstand, a sports-themed television viewing seating area, exterior and interior racetracks designed to facilitate easy navigation throughout the store as well as to maximize aisle real estate, and visual punctuation points identified by unique fixtures, overhead elements and flooring that articulate specialized merchandise presentations. Our 50,000 square foot store model is designed to be a fun and easy-to-shop store experience, to optimize both sales productivity and operational efficiency, and finally, to serve as an economical, scalable expansion vehicle.

We compete, to some degree, with all other retail formats: traditional department stores such as Macy’s and Dillard’s, national mid-tier chains including Kohl’s and J.C. Penney, discount stores including Target and Wal-Mart and specialty stores such as Old Navy. We differentiate ourselves from discount stores (such as Target and Wal-Mart, who generally offer discount store brands and private label merchandise at similar prices) primarily by offering department and specialty store name brands, by providing a more upscale shopping environment, and finally by emphasizing apparel and apparel-related accessories within our assortments. Our everyday low price strategy and smaller, better-organized store layouts set us apart from the majority of department stores (such as Macy’s and Dillard’s, who offer a broad selection in a multi-department, multi-level, large store format).

Compared to most off-price retailers (such as T.J. Maxx, Ross Stores and Stein Mart, who offer branded merchandise at discount prices), our stores are significantly larger, which enables us to present a much broader assortment of merchandise. Moreover, unlike most off-price stores, a Gordmans store is visually appealing and well-organized, utilizing merchandising techniques, visual displays, a departmental floor layout, fixture systems, signing and graphics similar to that of department and specialty stores. Finally, we do not carry imperfect merchandise and we offer complete assortments achieved through the negotiation of up-front discounts augmented by opportunistic buying strategies.

We believe our differentiated selling proposition has enabled us to operate successfully in the same markets as our primary off-price, discount and department store competitors. For example, as of January 30, 2010, approximately 47% of our stores operate within one mile of a Kohl’s, and 59% operate within one mile of a Wal-Mart. Moreover, a Wal-Mart operates within five miles of 100% of our stores, and a Kohl’s is located within five miles of 87% of our locations.

 

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Our primary target shopper is a 25 to 49-year-old mother with children living at home with household incomes from $50,000 to $100,000. However, given our strength in Juniors’ Apparel, females between the ages of 12 and 24 also are an important target market. We believe that the broad appeal of our mission has enabled us to capture both discount store shoppers that desire to trade up as well as department and specialty store shoppers that desire better value every day.

Recent Initiatives and Accomplishments

From 2004 to 2008, we expanded our store base by approximately 55%, adding a total of 23 stores after taking into account two relocations and three store closures. Due in part to the difficult economic environment, in fiscal year 2009 we opened only one store and focused the majority of our efforts on several business plan initiatives to position us for sustainable long-term growth. These initiatives included:

 

   

Management.    We strengthened the talent level throughout the organization, particularly within the senior management, merchandising and stores teams. Several talent strategies involving the selection process, assessment tools, succession planning and engagement have facilitated our success in this arena.

 

   

Merchandising.    Over the last three years we have executed several merchandising strategies, including: the acquisition and expansion of a significant number of national brands, the augmentation of our Juniors’ Apparel, Young Men’s Apparel and Décor destination businesses, and the expansion of several underdeveloped, high growth business categories. In general, these businesses leverage our sourcing and design expertise, and seek to capitalize on perceived voids in the marketplace.

 

   

Marketing.    We have reengineered our marketing strategy to focus on branding Gordmans as a fun, unique energetic shopping experience that clearly articulates our unique selling proposition in a humorous, memorable manner. In order to accomplish this objective, we adjusted our media mix to more heavily weight television advertising, which we believe is the most efficacious branding vehicle. Our in-house advertising capabilities provide flexibility to dynamically deliver creative collateral.

 

   

Inventory Management.    Over the last three years, we developed, implemented and refined an innovative pricing optimization technology and process that utilizes pattern recognition technology to determine the appropriate time to mark down merchandise in order to maximize both gross profit and inventory utilization efficiency. We also developed a tool to repurchase high performing items utilizing this same technology. Finally, we have refined our location planning process to build and maintain merchandise plans by store, an approach that translates into assortments tailored to the individual needs of each store.

As a result of these initiatives, in conjunction with more efficiently leveraging our cost infrastructure, we were able to significantly enhance our profitability in fiscal year 2009. In particular, we generated a comparable store sales increase of 4.6% and 9.3% for fiscal year 2009 and the fourth quarter of fiscal year 2009 respectively. In addition, we improved our gross profit margin in fiscal year 2009 by 170 basis points over fiscal year 2008, while our net income increased 565% to $15.9 million.

During the first quarter of fiscal year 2010, we opened one store and experienced a comparable store sales increase of 15.4%. Additionally, our gross profit margin increased 170 basis points to 47.0% when compared to the first quarter of fiscal year 2009. Our net income for the first quarter of fiscal year 2010 was $6.4 million, an increase of 75.5% over the first quarter of fiscal year 2009.

 

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Our Growth Strategy

We believe we are well positioned to leverage our unique selling proposition, scalable infrastructure and portable retail model to continue to capture market share and drive increased revenue and profitability. Our multi-pronged growth strategy is as follows:

 

   

Expand Store Base.    With a current store base of only 68 stores, our objective is to increase our store base by approximately 10% annually over the next several years. We believe that we can capitalize on both new market opportunities that are primarily contiguous to our current markets, as well as on selected opportunities to fill in existing markets. Therefore, in the near term, we intend to focus our expansion within a 750 mile radius of our corporate headquarters in Omaha. Within this geography, we have identified over 60 markets in 16 states that we believe can support up to 150 additional stores by targeting all existing and new markets with a minimum trade area population of 100,000.

Our flexible store model is adaptable to a variety of shopping center developments, including enclosed regional shopping malls, lifestyle centers, power centers and redeveloped big boxes formerly occupied by other retailers. As part of our new store due diligence process, we employ a site selection methodology that typically evaluates, among other factors, population densities and growth rates, co-tenancy dynamics, retail sales per capita and household income.

We operate an efficient store model that allows us to pursue both new and refurbished retail locations that produce strong cash flow. We expect our new stores to generate net sales volumes between $6.5 million and $7.5 million. We seek to achieve a payback on investment from new stores, which includes our build-out costs (net of landlord contributions), initial inventory (net of payables) and pre-opening expenses, within one to two years.

 

   

Drive Comparable Store Sales.    We seek to maximize our comparable store sales by continuing to execute on a number of recent initiatives, such as:

 

   

Expanding Our Destination Businesses.    We will continue to focus on our strategic points of differentiation, including Juniors’ Apparel, Young Men’s Apparel, and Décor, which have developed into significant destination businesses. We believe these businesses continue to have significant growth potential through a combination of adding targeted brands and expanding certain existing ones, strengthening and increasing selected product categories, and finally by allocating additional inventory dollars and space for their development.

 

   

Achieving Parity between Sales of Our Women’s and Juniors’ Apparel.    Although the overall size of the Women’s Apparel industry is significantly larger than that of Juniors’ Apparel, our Women’s Apparel sales for fiscal year 2009 were almost 40% less than that of Juniors’ Apparel. We believe that by achieving parity between Women’s and Juniors’ Apparel, we would experience a noticeable increase in our comparable store sales performance at a total Company level. The management team for this business unit was recently restructured, at which time the strategy was streamlined and refocused on the Young Misses consumer, leveraging the strength of the Juniors’ Apparel business in a strategically contiguous manner.

 

   

Developing Selected High Growth Potential Niche Businesses.    There are several niche businesses that we have been able to develop that we believe are underserved by the market, particularly by a majority of the other value-oriented retailers. These businesses include team apparel and related accessories, pampered pet accessories, intimate apparel, junior fashion plus apparel, fashion jewelry, designer fragrances and handbags. We believe that these categories have meaningful unrealized comparable store growth potential over the next few years, and that by employing the same

 

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expansion strategies that have generated success within our existing destination businesses, we can significantly expand these targeted categories as well.

 

   

Augmenting Our Brand Portfolio.    We have had tremendous success adding a significant number of national labels to our brands portfolio across all merchandise divisions. In conjunction with the continued consolidation of the industry, our increasing market leverage should enable us to continue to acquire targeted brands desired by our guests, as well as to satisfy guest demand with respect to underdeveloped existing brands.

 

   

Leveraging Our Inventory Optimization Opportunities.    We will seek to increase the productivity of our stores by leveraging our investments in location planning, re-buying, replenishment and price optimization technologies and processes. By understanding the individual characteristics of each store, merchandise purchases can be adjusted to accommodate the stores that truly have a need rather than allocating merchandise into every store irrespective of inventory need. This approach translates into better merchandise assortments tailored to the needs of each store, faster turnover and stronger sell-through performance.

 

   

Leverage Cost Infrastructure.    We intend to enhance our profit margins by leveraging economies of scale with respect to our cost infrastructure. We believe that a significant portion of our corporate overhead and distribution center costs will not increase at a rate proportionate with new and comparable store sales growth.

Merchandising and Sourcing

Strategy

Our merchandising strategy is to offer the same recognizable brands, current season fashions, and styles carried by major department and specialty store chains at prices of up to 60% below their regular ticketed prices every day. To accomplish this strategy, our buyers seek to negotiate the best up-front net pricing in lieu of end-of-season markdowns, advertising and return allowances, as well as other extraneous chargebacks. A variety of opportunistic buying strategies are also employed, including capitalizing on merchandise closeouts, cancelled orders, excess production capacity and excess finished or piece goods inventories.

We have a separate planning and allocation function that seeks to maximize the return on our investment in merchandise inventory. Systems and processes are in place to enable us to capitalize on emerging trends in the business while simultaneously seeking to optimize inventory efficiencies.

Assortment

Our merchandise selection includes a broad range of apparel, footwear, accessories and home fashions products. Within Apparel, we offer young men’s, men’s, juniors’, women’s, plus size, maternity and children’s clothing, which includes offerings for infants, toddlers, boys and girls. Our Accessories business includes designer fragrances, intimate apparel, handbags, sunglasses, fashion jewelry, legwear and sleepwear. Our stores also feature a large Home Fashions section, which includes wall art, frames, accent furniture, accent lighting, home fragrances, ceramics, vases, Christmas décor, floral and garden, gourmet food and candy, toys, pampered pet, housewares, decorative pillows, fashion rugs, bedding and bath.

 

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The following table reflects the percentage of our revenues by major merchandise category for fiscal year 2009:

 

     Percentage of
Total Revenue
 

Apparel

   53

Home Fashions

   29   

Accessories

   18   
      

Total

   100
      

Licensing Agreements

Destination Maternity Corporation.    In 2006, we executed a license agreement with Destination Maternity Corporation (“Destination Maternity”), the top maternity retailer in the country, to operate a maternity business in each of our stores. The license agreement expires March 1, 2011, then continues on a month-to-month basis thereafter and includes a six month notice period to cancel. The license agreement is for Destination Maternity’s flagship Motherhood Maternity® brand. The brand is positioned in the value segment of the industry, representing a broad selection of fashion-oriented merchandise at low prices, and is therefore an ideal fit for us. Following a very successful pilot, the rollout across all of our stores was completed in February 2007.

DSW, Inc.    We have outsourced our footwear business since 1997, and in mid-2004 entered into a license agreement with DSW, Inc., a $1.6 billion specialty footwear retailer that sells a wide selection of designer and name brand footwear at everyday low prices. The license agreement expires January 31, 2013 and contains three year automatic renewal periods and a six month notice period to cancel prior to the renewal periods.

Our footwear and maternity departments are staffed by our associates but are supported by operations personnel provided by our licensees who travel to our stores to work with and provide recommendations regarding merchandise presentation and other operations-related issues. Our licensees own the inventory and have total authority over all aspects of the merchandise procurement process. We receive a license fee equal to a specified percentage of net footwear and maternity sales, respectively.

Sourcing

We maintain long-term, mutually beneficial sourcing relationships with a large group of suppliers. In 2009, we purchased merchandise from nearly 1,300 vendors, the largest of which comprised only 2.3% of total purchases. This diversification in our supplier base provides us with flexibility and negotiating leverage. We are able to obtain favorable prices from our vendor partners by not requiring advertising and markdown allowances or return privileges that are typical in the industry, by making timely payments and by our ability to take advantage of opportunistic buys. Consequently, we have become a preferred partner to the vendor community due to our transparent, streamlined and mutually profitable approach to the business.

Private Label Credit Card

In 2002, we entered into an agreement with Alliance Data Systems (“ADS”) to create, administer and process the Gordmans credit card. The Gordmans credit card program enhances guest loyalty and allows us to identify and regularly communicate with some of our best guests, as well as serves to augment our guest database. ADS approves all applicants for the Gordmans credit card, carries the receivables for charges made to the card, bears all risk of loss associated with the credit that is extended to our guests, and receives all fees associated with the cards. We recognize sales charged to the Gordmans credit card at the time the charge is approved at the point of sale in the same manner as other credit cards.

 

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Our Stores

As of June 4, 2010, we operated 68 stores in 16 primarily Midwestern states with a total of 4.0 million square feet and an average store size of 59,100 square feet. The stores are comprised of 50 prototype locations with an average age and size of six years and 55,000 square feet, respectively, and 18 legacy locations with an average age and size of 22 years and 70,200 square feet, respectively. Of our 68 locations, 64 are comparable stores, which we define as stores that have been open at least 16 months.

Our stores are located in large, medium, and small metropolitan statistical areas throughout our 16 state trade area. We believe that we are a preferred retailer among a broad base of commercial real estate developers, as our distinctive big box, fashion-oriented apparel and home fashions format provides a strong primary or secondary anchor with the ability to attract significant complementary co-tenants. Our stores are located in a wide variety of shopping center developments including enclosed regional shopping malls, lifestyle centers, power centers and redeveloped big boxes formerly occupied by other retailers. The table below sets forth the number of stores in each of these 16 states.

 

State

   Stores  

State

   Stores  

State

   Stores

Arkansas

   2  

Kentucky

   2  

Nebraska

   7

Colorado

   5  

Minnesota

   1  

Oklahoma

   5

Iowa

   9  

Missouri

   10  

South Dakota

   2

Illinois

   8  

Mississippi

   1  

Tennessee

   2

Indiana

   4  

North Dakota

   2  

Wisconsin

   4

Kansas

   4          

Our large, 50,000 square foot store model features an easy-to-shop, dual racetrack layout designed to facilitate easy navigation throughout the store as well as to maximize aisle real estate. The open, contemporary floor plan provides a visual roadmap of the entire store from the entrance and provides us with the flexibility to easily expand and contract departments in response to consumer demand and preferences, seasonality and merchandise availability. Other features of the store model include unique entertainment elements such as Gordmans Giggles, a children’s theater, and Gordmans Grandstand, a sports-themed seating area and punctuation points identified by unique fixtures, overhead elements and flooring accentuate specialized merchandise, lifestyle presentations and key items. Virtually our entire inventory is displayed on the selling floor.

Marketing Message and Creative Strategy

The foundation of our marketing message is a ‘Theirs vs. Ours’ comparative pricing strategy, designed to significantly elevate the pricing dimension of our unique selling proposition and communicate it in a clear and compelling fashion. ‘Theirs vs. Ours’ is leveraged across all media, particularly through in-store collateral such as fixture signing, price tags and receipt messaging as well as print advertising. Our prices are clearly marked and always have the comparative retail selling price noted on the price tag.

Both television and print advertising are characterized by our fun, unique and energetic brand personality. Our multi-year television campaign, which was launched at the beginning of fiscal year 2009, emphasizes the Gordmans shopping experience in juxtaposition with that of traditional department and specialty stores. Using unexpected humor and a visual hook to grab the viewers’ attention, the campaign delivers an institutional branding message that aggressively emphasizes our everyday savings.

The television commercials are deployed in an ongoing continuity strategy in excess of 30 weeks per year, which represents a dramatic departure from our own traditional retail event strategies of the last decade. The creative messaging strategy for fiscal year 2010 continues to build upon the existing branding campaign to leverage viewer recall and further reinforce our savings message. Due to the dramatic shift in advertising dollars from print to broadcast, these branding spots are supplemented with merchandise-driven spots to enhance key retail selling periods as well as to showcase our broad merchandise selection.

 

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In fiscal year 2010, we initiated a social and mobile media strategy to work synergistically with our television, print, direct mail and email collateral. Through various promotions, dynamic content and exclusive offers, we are engaging our guests in a more targeted and personal fashion. In addition, we are working with digital vendors to create a mobile campaign that will allow us to offer promotions and contact guests directly on their mobile phones.

Information Technology

We believe that use of technology is extremely important to our business and have made a significant number of technology investments over the last several years, integrating business processes and technology to facilitate growth, efficiency and risk mitigation. We acquire perpetual licenses to use this technology and do not own any proprietary software applications. We generally pay annual maintenance fees in order to maintain the most current versions of the software and to receive technical support.

We recently implemented a new point-of-sale system in all locations that has enhanced the guest experience by increasing the speed and ease of the checkout process. The system makes extensive use of smart barcodes to eliminate the need for cashier intervention in the processing of promotions. These barcodes also facilitate the tracking of promotional effectiveness, ensuring compliance and reducing fraud. We also make significant use of wireless handheld terminals in its retail locations to expedite the processing of markdowns and measure markdown compliance. To better optimize store payroll, we implemented a time and attendance system in all locations. This year, we will build upon this platform with a store labor scheduling system to more efficiently align payroll resources with both work flow and store traffic patterns by day part.

Advanced planning and allocation applications have allowed us to better control inventory and ensure a consistent merchandise receipt flow. Systems also facilitate the creation of location-specific sales, inventory and receipt plans at a detailed level, which seamlessly integrate with our allocation system. Of particular note are a suite of applications and processes pertaining to markdown optimization as well as re-buying and replenishment. These applications use sophisticated pattern recognition algorithms to dynamically simulate multiple pricing and sales scenarios, automatically generating price changes to maximize profitability. Where it calculates that demand will outstrip supply, the system generates repurchase recommendations by item by store.

A new warehouse management system, now in the final stages of implementation, has already increased the efficiency of our supply chain. Whereas the legacy application required extensive paper-based processing and manual key-entry, the new radio frequency-based system allows us to shorten the time it takes merchandise to reach the sales floor and to monitor the flow of goods more granularly and accurately. Together with other systems, our warehouse management system allows us to track items continuously from the time of purchase order generation, through shipping, receiving, processing and store delivery, and also has detailed truck manifesting capabilities that will improve the efficiency with which we plan store labor.

We have also made considerable investments in business intelligence capabilities. Dashboards provide ready access to key performance indicators, and ad-hoc capabilities allow users to tailor reports to their individual needs. Mobilization of information has recently been added and our field staff now has access to real-time sales information.

Having achieved compliance with the Payment Card Industry (PCI) Data Security Specification (DSS), we have demonstrated our commitment to keeping guest information secure. We have segmented sensitive network traffic as well as encrypted and truncated specific data elements. In addition, we have increased application security and implemented change control procedures. Physical security prevents unauthorized access to in-scope equipment in the stores and at the corporate office. Extensive intrusion detection measures and periodic vulnerability scans significantly reduce the risk of a breach.

 

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To help reduce shrink and control theft, we employ technology that integrates video surveillance with transaction data. The system scans transactions logs for signs of improper activity and alerts Asset Protection associates. A migration to internet protocol-based cameras has begun and has already increased our remote monitoring and apprehension capabilities. Centrally located associates may now assist in-store agents as they track and pursue subjects.

Distribution & Logistics

We centrally distribute the majority of our merchandise from two facilities situated in Omaha, Nebraska. Through the use of a third party national freight and logistics company, we coordinate pick-up of merchandise from our vendors for delivery to our distribution center where it is received, inspected, processed and distributed to our retail stores. We utilize the services of several third party carriers for delivery of merchandise from our distribution centers to our stores.

Our primary distribution center is a 380,000 square foot (26% of which is mezzanine space) flow through facility that operates with a leading edge distribution center management system that utilizes radio frequency technology to monitor and manage the movement of merchandise. We believe that our innovative put-to-light merchandise packing technology is a unique feature of this system.

Our secondary distribution center is a 140,000 square foot warehouse located approximately four miles from our primary distribution center. This facility relieved the shipping and hardlines staging limitations we faced in our primary distribution center and will support our planned growth through 2015. This facility enables us serve up to 43 additional stores and will support chain-wide expansion to approximately 110 stores.

Our combined distribution centers processed 49.1 million units in 2009, which represented a 6.5% increase from the previous year.

Industry

The retail industry is one of the largest in the U.S., generating revenues of $3.2 trillion in 2008 (excluding food and auto sales) per the U.S. Department of Commerce, representing a compounded annual growth rate of 4.7% since 2000. Disposable income is an important sales driver for the retailing industry. From 2000 to 2009, per capita disposable income in the U.S. averaged approximately $30,997, posting consistent annual growth of approximately 3.6% over this timeframe. For 2009, real per capita disposable income increased 0.22% to $35,581.

U.S. Average Annual Disposable Income

For the Years Ended December 31, 2000 to 2009

LOGO

Source: U.S. Bureau of Economic Analysis.

 

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The retail industry is comprised of several segments, including department stores such as Nordstrom and Macy’s; mid-tier retailers such as Kohl’s and J.C. Penney; specialty stores like Forever 21, Williams-Sonoma and Ann Taylor; discount stores such as Wal-Mart and Target; off-price concepts like Ross Stores and T.J. Maxx; and warehouse clubs such as Costco and BJ’s Wholesale Club. Retailers compete on a number of dimensions, including selection, in-stock position, pricing, quality, service, location and store environment. We believe that our competitive position is positive with respect to selection (compared to specialty, off-price and warehouse club retailers), price (compared to specialty, department store and mid-tier retailers), store environment (compared to off price, warehouse club and discount store retailers) and in-stock position (compared to off-price and warehouse club retailers). Our competitive position is negative with respect to in-stock position compared to department store, discount store and mid-tier retailers. However, in-stock position is not an inherent dimension of our business model. Our competitive position is positive with respect to quality (compared to off-price and discount retailers). Our competitive position is neutral with respect to location (compared to department store, specialty store and mid-tier retailers).

Intellectual Property

We currently own six trademarks. The table below lists our registered trademarks.

 

Registered Trademark

 

Date of Expiration

Brands You Want. Savings You Deserve!

  9/11/2011

LOGO

   

3/12/2012

 

LOGO

 

Something Unexpected

 

 

10/22/2012

 

Something Unexpected

  6/3/2013

Give the Unexpected

  1/17/2016

Gordmans

  8/22/2020

Regulation and Legislation

We are subject to labor and employment laws, including minimum wage requirements, laws governing advertising and promotions, privacy laws, safety regulations and other laws, such as consumer protection regulations that govern product standards and regulations with respect to the operation of our stores and warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

Associates

We employ approximately 400 salaried associates and 3,600 hourly associates, the latter of which includes approximately 2,700 part-time associates. None of our associates are unionized, nor have we ever suffered from a work stoppage. We offer competitive compensation and attractive benefit plans to our full-time associates who meet eligibility requirements. Our benefits include medical insurance; dental insurance; basic and supplemental life insurance; short-term and long-term disability insurance; medical and dependent care flexible spending accounts; a 401(k) savings plus plan; two to four weeks of vacation; six paid holidays; and a 20% associate discount on purchases in our stores.

In order to enhance the talent pool of our associates, our management instituted a talent-based hiring process that utilizes a structured interview tool to assess an individual’s natural talent for their respective role in the organization.

Seasonality

Our business is subject to the seasonal fluctuations typical of the retail industry. A disproportionate amount of our sales and net income are realized during the fourth quarter, which includes the holiday

 

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selling season. In fiscal year 2009, 33.7% of our net sales was generated in the fourth quarter. In addition, 39.0% of our net income was produced in the fourth quarter last year. Operating cash flows are typically higher in the second and fourth fiscal quarters due to inventory related working capital requirements in the first and third fiscal quarters. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas and regional fluctuations for events such as sales tax holidays.

Legal Proceedings

We are subject to various legal claims and proceedings which arise in the ordinary course of our business, including employment related claims, involving routine claims incidental to our business. Although the outcome of these routine claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these claims will have a material adverse effect on our results of operations, financial condition or cash flow.

Properties

We do not own any real property. Our 78,000 square foot corporate headquarters building is located in Omaha, Nebraska and is leased under an agreement expiring in 2014, with an option to renew for an additional five years. Our 380,000 square foot distribution center also is located in Omaha and is leased under an agreement expiring in 2028, with options to renew for four additional five year periods. We also operate a 140,000 square foot secondary distribution center located in Omaha, Nebraska approximately four miles from our primary distribution center. This facility is leased under an agreement expiring in May 2016.

As of April 30, 2010, we operated 67 stores in 16 primarily Midwestern states. All of our stores are leased from third parties and the leases typically have base lease terms of 10 years with one or more renewal options.

 

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MANAGEMENT

Below is a list of the names and ages (as of April 30, 2010) of our directors and executive officers and a brief account of the business experience of each of them.

 

Name

   Age   

Position

Directors

     

Thomas V. Taylor

   44    Chairman

Jeffrey J. Gordman

   46    Director, President, Chief Executive Officer and Secretary

Donald V. Roach

   52    Director

Kenneth I. Tuchman

   59    Director

Brian J. Urbanek

   38    Director

Executive Officers

     

Gary G. Crump

   61    Vice President—Operations

Richard H. Heyman

   49    Vice President and Chief Information Officer

Michael D. James

   48    Vice President, Chief Financial Officer and Treasurer

Debra A. Kouba

   47    Vice President—Stores

Johanna K. Lewis

   52    Vice President and Chief Merchandising Officer

Michael S. Morand

   52    Vice President—Planning, Allocation and Analysis

Our Directors

We believe that our Board of Directors should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe experience, qualifications, or skills in a combination of the following areas are the most important: retail merchandising; marketing and advertising; apparel and consumer goods; sales and distribution; accounting, finance, and capital structure; strategic planning and leadership of complex organizations; legal/regulatory and government affairs; people management; and board practices of other major corporations. We believe that all of our current board members possess the professional and personal qualifications necessary for board service, and have highlighted the specific experience, qualifications, attributes, and skills that led to the conclusion that each board member should serve as a director in the individual biographies below.

Thomas V. Taylor, Chairman.    Mr. Taylor has been a director of Gordmans since 2008. Mr. Taylor, a Managing Director at Sun Capital Partners, Inc., has had extensive operating and merchandising experience, having spent 23 years with The Home Depot Companies, most recently serving as Executive Vice President, Merchandising and CMO. Mr. Taylor was a director of Accuride Corporation, a public company, between 2009 and 2010. As a result of these and other professional experiences, Mr. Taylor possesses particular knowledge and experience in retail merchandising; marketing, finance, and capital structure; and strategic planning and leadership of complex organizations that strengthen the board’s collective qualifications, skills, and experience.

Jeffrey J. Gordman, Director, President, CEO and Secretary.    Mr. Gordman joined Gordmans in 1990 and held positions in merchandising, store operations and information technology. Prior to assuming his current position in 1996, Mr. Gordman led the conceptualization and implementation of the merchandise planning and allocation function, after which he was responsible for directing this business function. Prior to joining the Company, Mr. Gordman worked as an investment banking analyst at Lehman Brothers. Mr. Gordman serves as a director for Regency Beauty Institute, a private equity-backed high growth chain of cosmetology schools as well as for Hayneedle, Inc., a venture capital-backed internet retailer recognized by Inc. Magazine as one of America’s fastest growing companies. Mr. Gordman graduated cum laude from the Wharton School at the University of Pennsylvania in 1986 with a B.S. in Economics, and earned an M.S. in Management from the Sloan School at the Massachusetts Institute of Technology in 1990. As a result of these and other professional experiences,

 

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Mr. Gordman possesses particular knowledge and experience in retail merchandising; accounting, finance, and capital structure; and apparel and consumer goods that strengthen the board’s collective qualifications, skills, and experience.

Donald V. Roach, Director.    Mr. Roach has been a director of Gordmans since 2008. Mr. Roach has been a vice president at Sun Capital Partners, Inc. since 2009 and has over 29 years’ experience in senior finance and operations management, including: Senior Vice President, Operations, The Bombay Company, a home décor retailer, from 2002 to 2008; Acting Chief Financial Officer of Guess? Inc. from 2001 to 2002; and Executive Vice President, Chief Operating Officer of eFanShop.com, a start-up internet business, from 2000 to 2001. As a result of these and other professional experiences, Mr. Roach possesses particular knowledge and experience in retail merchandising; marketing, finance, and capital structure; apparel and consumer goods; and strategic planning and leadership of complex organizations that strengthen the board’s collective qualifications, skills, and experience.

Kenneth I. Tuchman, Director.    Mr. Tuchman has been a director of Gordmans since July 2010. Mr. Tuchman has been a Vice Chairman in the investment and corporate banking practice at BMO Capital Markets, a financial services provider, since 2010 and has over 30 years’ experience in investment banking, with a focus on mergers and acquisitions, in the retail and consumer industries. Prior to serving as a Vice Chairman at BMO, Mr. Tuchman was an independent business advisor to several privately held businesses, which included retail and non-retail companies, from 2009 to 2010. Mr. Tuchman served as a Vice Chairman in the investment and corporate banking practice at BofA Merrill Lynch, a financial services provider, from 2007 to 2009 and as Vice Chairman of Wasserstein Perella & Co. (including its successor firms, Dresdner, Kleinwort Wasserstein and Dresdner Kleinwort), an investment banking and financial services provider, from 1997 to 2007. As a result of these and other professional experiences, Mr. Tuchman possesses particular knowledge and experience in the retail industry and accounting, finance and capital structure that strengthens the Board’s collective qualifications, skills and experience.

Brian J. Urbanek, Director.    Mr. Urbanek has been a director of Gordmans since April 2010. Mr. Urbanek, a Principal at Sun Capital Partners, Inc. since 2006, and has over ten years of experience in mergers and acquisitions and corporate finance, including corporate acquisitions and divestitures, strategic rollups, leveraged finance issuances and public and private equity offerings. Prior to joining Sun Capital Partners in February 2006, Mr. Urbanek served as Vice President in the Investment Banking Group with Stephens, Inc. from May 2004 to February 2006, and Vice President, Investment Banking with Bear Stearns & Co. Inc from January 2002 to April 2004. Mr. Urbanek was a director of Accuride Corporation, a public company, between 2009 and 2010. As a result of these and other professional experiences, Mr. Urbanek possesses particular knowledge and experience in corporate finance and capital structure; and strategic planning and leadership of complex organizations across multiple industries that strengthens the board’s collective qualifications, skills, and experience.

Our Executive Officers

Gary G. Crump, Vice PresidentOperations.     Mr. Crump joined Gordmans in 2010 as Vice President of Operations. Prior to joining Gordmans, Mr. Crump was Chief Operating Officer and Senior Vice President for Services for Election Systems and Software from 2003 to 2010. Prior to working for Election Systems and Software, Mr. Crump was employed with IBM from 1991 to 2003 where he held various leadership positions.

Richard H. Heyman, Vice President and Chief Information Officer.    Mr. Heyman joined Gordmans in 2009 as Vice President and Chief Information Officer. Prior to joining Gordmans, Mr. Heyman was Vice President of Information Technology for Pamida Stores from 2007 to 2008, Project Director at Distributed Intelligence Systems, Inc. from 2004 to 2007 and Vice President of Information Technology and Strategic Planning for Baker’s Supermarkets. Mr. Heyman also founded a retail systems and consulting company, Sirius Retail, and served as its President and Chief Executive Officer.

Michael D. James, Vice President, Chief Financial Officer and Treasurer.    Mr. James joined the Company in 2006 as Vice President, Chief Financial Officer and Treasurer. Prior to joining Gordmans,

 

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Mr. James was the Chief Financial Officer of AMCON Distributing Company from 1994 to 2006. His work experience also includes various positions at the firm now known as PriceWaterhouseCoopers where he practiced as a Certified Public Accountant from 1984 to 1994.

Debra A. Kouba, Vice PresidentStores.    Ms. Kouba joined Gordmans in 1987 and has been Vice President of Stores since 2006. Previously, Ms. Kouba served the Company in positions of increasing responsibility including a buyer, store manager, divisional merchandise manager, regional director of stores, and director of store support.

Johanna K. Lewis, Vice President and Chief Merchandising Officer.    Ms. Lewis joined Gordmans in 2009 as Vice President and Chief Merchandising Officer. Ms. Lewis has over 20 years of retail experience including experience with Marshall Fields and Macy’s from 2004 to 2009 where she held positions as Regional Vice President of North Home Stores, Vice President—General Merchandise Manager Soft Home, Divisional Merchandise Manager, Home and Ready-To-Wear. Ms. Lewis’s other past experience includes merchandising and stores positions at Belk Department Stores, Sears and Dillard’s.

Michael S. Morand, Vice PresidentPlanning, Allocation and Analysis.    Mr. Morand joined Gordmans in 2007 as Director of Planning, Allocation and Analysis and was promoted to Vice President of Planning, Allocation and Analysis in 2008. Between 2000 and 2006, Mr. Morand held senior level positions in merchandising, planning (both strategic and merchandising), allocation and marketing for the May Merchandising Company and Lord & Taylor (both now known as Macy’s) in Los Angeles, St. Louis and New York.

Family Relationships

There are no family relationships between any of our executive officers or directors.

Corporate Governance

Board Composition

Our amended and restated certificate of incorporation, which will be in effect prior to the completion of this offering, will provide that our Board of Directors shall consist of such number of directors as determined from time to time by resolution adopted by a majority of the total number of directors then in office. Initially, our Board of Directors will consist of five members. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors then in office. For so long as affiliates of Sun Capital own 30% or more of our outstanding shares of common stock, they will have the right to designate a majority of our Board of Directors, provided that, at such time as we are not a “controlled company” under the Nasdaq Global Select Market corporate governance standards, a majority of our Board of Directors will be “independent directors,” as defined under the rules of the Nasdaq Global Select Market.

Our Board of Directors will be divided into three classes, with one class being elected at each year’s annual meeting of stockholders. Mr. Gordman will serve as the Class I director with an initial term expiring in 2011. Messrs. Tuchman and Urbanek will serve as Class II directors with an initial term expiring in 2012. Messrs. Taylor and Roach will serve as Class III directors with an initial term expiring in 2013. Following the expiration of the initial term of a class of directors, each class of directors will serve a three-year term. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

Controlled Company

Upon completion of this offering, affiliates of Sun Capital will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” under

 

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the Nasdaq Global Select Market corporate governance standards. As a controlled company, exemptions under the standards will free us from the obligation to comply with certain corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consists of “independent directors,” as defined under the rules of the Nasdaq Global Select Market;

 

   

that we have a nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

that we conduct annual performance evaluations of the nominating committee and compensation committee.

These exemptions do not modify the independence requirements for our Audit Committee, and we intend to comply with the applicable requirements of the Sarbanes-Oxley Act and rules with respect to our Audit Committee within the applicable time frame.

The rules of the Nasdaq Global Select Market permit the composition of our Audit Committee to be phased-in as follows: (1) one independent committee member at the time of our initial public offering; (2) a majority of independent committee members within 90 days of our initial public offering; and (3) all independent committee members within one year of our initial public offering.

Similarly, once we are no longer a “controlled company,” we must comply with the independent board committee requirements as they relate to the nominating and compensation committees, on the same phase-in schedule as set forth above, with the trigger date being the date we are no longer a “controlled company” as opposed to our initial public offering date. Additionally, we will have 12 months from the date we cease to be a “controlled company” to have a majority of independent directors on our Board of Directors.

Board Committees

Prior to the completion of this offering, our Board of Directors will establish an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The directors designated by affiliates of Sun Capital are expected to constitute a majority of each committee of our Board of Directors (other than the Audit Committee) and the chairman of each of the committees (other than the Audit Committee) is expected to be a director serving on such committee who is selected by affiliates of Sun Capital, provided that, at such time as we are not a “controlled company” under the Nasdaq Global Select Market corporate governance standards, our committee membership will comply with all applicable requirements of those standards. The composition, duties and responsibilities of these committees are as set forth below. In the future, our board may establish other committees, as it deems appropriate, to assist it with its responsibilities.

Audit Committee

The Audit Committee will be responsible for, among other matters: (1) appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm; (2) discussing with our independent registered public accounting firm their independence from management; (3) reviewing with our independent registered public accounting firm the scope and results of their audit; (4) approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; (5) overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the Securities and Exchange Commission; (6) reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and

 

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compliance with legal and regulatory requirements; (7) establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters; and (8) reviewing and approving related person transactions.

Upon completion of this offering, our Audit Committee will consist of Messrs. Roach, Tuchman and Urbanek. Our Board of Directors has determined that Mr. Tuchman will qualify as an “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K. Our Board of Directors will adopt a new written charter for the Audit Committee, which will be available on our corporate website at Gordmans.com upon the completion of this offering. Our website is not part of this prospectus.

Compensation Committee

The Compensation Committee will be responsible for, among other matters: (1) reviewing key associate compensation goals, policies, plans and programs; (2) reviewing and approving the compensation of our directors, chief executive officer and other executive officers; (3) reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and (4) administrating of stock plans and other incentive compensation plans.

Upon completion of this offering, our Compensation Committee will consist of Messrs. Taylor, Roach and Urbanek. Our Board of Directors will adopt a written charter for the Compensation Committee, which will be available on our corporate website at Gordmans.com upon the completion of this offering. Our website is not part of this prospectus.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee will be responsible for, among other matters: (1) identifying individuals qualified to become members of our Board of Directors, consistent with criteria approved by our Board of Directors; (2) overseeing the organization of our Board of Directors to discharge the Board of Director’s duties and responsibilities properly and efficiently; (3) identifying best practices and recommending corporate governance principles; and (4) developing and recommending to our Board of Directors a set of corporate governance guidelines and principles applicable to us.

Upon completion of this offering, our Nominating and Corporate Governance Committee will consist of Messrs. Taylor, Gordman and Roach. Our Board of Directors will adopt a written charter for the Nominating and Corporate Governance Committee, which will be available on our corporate website at Gordmans.com upon the completion of this offering. Our website is not part of this prospectus.

Compensation Committee Interlocks and Insider Participation

In fiscal year 2009, we did not have a Compensation Committee. All compensation decisions were made by our Board of Directors at the time, Mr. Taylor (Chairman), Mr. Gordman (Director, Chief Executive Officer and President) and Mr. Roach (Director).

No interlocking relationships existed between the members of our Board of Directors and the board of directors or compensation committee of any other company.

Code of Business Conduct and Ethics

We will adopt a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code will be available on our corporate website at Gordmans.com upon completion of this offering. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website. Our website is not part of this prospectus.

Director Compensation

None of the four directors currently serving on our Board of Directors as of April 30, 2010 received compensation as a director during fiscal year 2009. All directors receive reimbursement for reasonable out-of-pocket expenses incurred in connection with meetings of the board.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis describes the compensation arrangements we have with our named executive officers as required under the rules of the SEC. The SEC rules require disclosure for the principal executive officer (our Chief Executive Officer or CEO) and principal financial officer (our Chief Financial Officer or CFO), regardless of compensation level, and the three most highly compensated executive officers in our last completed fiscal year, other than the CEO and CFO. All of these named executive officers are referred to in this Compensation Discussion and Analysis as our “NEOs.”

Our NEOs for fiscal year 2009 were:

 

Name

  

Title

Jeffrey J. Gordman

   Director, President, Chief Executive Officer and Secretary

Michael D. James

   Vice President, Chief Financial Officer and Treasurer

Ronald K. Hall

   Executive Vice President—Operations

Debra A. Kouba

   Vice President—Stores

Johanna K. Lewis

   Vice President and Chief Merchandising Officer

In April 2010, Mr. Hall retired and Mr. Gary G. Crump succeeded to his position as Vice President—Operations.

Historical Compensation Decisions

Prior to our initial public offering, we were a privately-held company almost solely owned by an investment fund managed by Sun Capital Partners, Inc. As a result, we were not subject to any stock exchange listing or SEC rules requiring a majority of our Board of Directors to be independent or relating to the formation and functioning of board committees, including audit, compensation and nominating committees. However, prior to the Sun Capital Acquisition, the Compensation Committee of our independent Board of Directors, in conjunction with the President and Chief Executive Officer, was responsible for the oversight of the compensation program of our NEOs.

Executive Compensation Objectives and Philosophy

For fiscal year 2011, the Compensation Committee of our Board of Directors will review and approve the compensation of our NEOs and oversee and administer our executive compensation programs and initiatives. As we gain experience as a public company, we expect that the specific philosophy and components of our executive compensation program will continue to evolve. Accordingly, the compensation paid to our NEOs for fiscal year 2009 is not necessarily indicative of how we will compensate our NEOs following this offering.

Our executive compensation program is designed to:

 

   

attract and retain talented and experienced executives in our industry;

 

   

reward executives whose knowledge, skills and performance are critical to our success;

 

   

ensure fairness among the executive management team by recognizing the contributions each executive officer makes to our success;

 

   

foster a shared commitment among executives by aligning their individual goals with the goals of the executive management team and our company; and

 

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compensate our executives in a manner that incentivizes them to manage our business to meet our long-range objectives.

The Compensation Committee will meet outside the presence of all of our NEOs to consider appropriate compensation for our President and Chief Executive Officer. For all other NEOs, the Compensation Committee will meet outside the presence of all NEOs except our President and Chief Executive Officer. Going forward, our President and Chief Executive Officer will review annually each other NEO’s performance with the Compensation Committee and recommend appropriate base salary, cash performance awards and grants of long-term equity incentive awards for all other NEOs. Based upon the recommendations from our President and Chief Executive Officer and in consideration of the objectives described above and the principles described below, the Compensation Committee will approve the annual compensation packages of our NEOs other than our President and Chief Executive Officer. The Compensation Committee also will annually analyze our President and Chief Executive Officer’s performance and determine his base salary, cash performance awards and grants of long-term equity incentive awards based on its assessment of his performance with input from any consultants engaged by the Compensation Committee.

Elements of Compensation

Our current executive compensation program, which was set by our President and Chief Executive Officer in consultation with our Board of Directors prior to the establishment of our Compensation Committee, consists of the following components:

 

   

base salary;

 

   

annual cash incentive awards linked to corporate financial and individual performance objectives;

 

   

long-term equity based compensation; and

 

   

other executive benefits.

Historically, base salary and performance-based cash incentives have been the most significant elements of our executive compensation program. Following this offering, we expect that will also include long-term equity based compensation. These elements, on an aggregate basis, are intended to substantially satisfy the overall objectives of our executive compensation program. Typically, we have established each of these elements of compensation at the same time to enable the President and Chief Executive Officer (with respect to all other NEOs) and the Board of Directors to simultaneously consider all of the significant elements of compensation and their impact on total compensation; and, the extent to which the determinations made will reflect the principles of our compensation philosophy with respect to allocation of compensation among certain of these elements and total compensation. We strive to achieve an appropriate mix between the various elements of our executive compensation program to meet our compensation objectives and philosophy; however, we do not apply any rigid allocation formula in setting our executive compensation, and we may make adjustments to this approach for various positions after giving due consideration to prevailing circumstances. Generally, the amount of our performance-based cash incentives are determined as a percentage of the recipient’s base salary, as reflected in the performance grids set forth below. See “—Performance-Based Cash Incentive Awards.” Our long-term equity based compensation is designed such that approximately 9% of the total equity of the Company is available for allocation among our executive officers (including our NEOs), with the amount awarded to each recipient determined based on such executive officer’s position and total compensation.

Base Salary

Base salary amounts historically have been highly individualized, resulting from arm’s length negotiations and have been based on a variety of factors including, in addition to the factors listed above, our financial condition and available resources, our need for that particular position to be filled and the

 

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existing internal compensation structure for each position, each as of the time of the applicable compensation decision. In addition, we considered the competitive market for corresponding positions within our industry. Each NEO’s base salary is set within a range based on the position, the NEO’s experience level and market conditions at the time of hire.

An evaluation of each NEO’s performance is conducted annually by the President and Chief Executive Officer and their annual increase in base pay is determined based on various factors which include our company-wide merit increase guideline for the year, the Company’s financial performance, the NEO’s overall individual performance rating and the NEO’s current salary in relation to the salary range established for the NEO’s position. The Board of Directors reviews and approves all base salary adjustments recommended by the President and Chief Executive Officer.

The base salary of our President and Chief Executive Officer was set by our Board of Directors and is set forth in his employment letter agreement. See “—Compensation Tables—Agreements with, and Potential Payments to, Named Executive Officers.”

The fiscal year 2009 annual base salary for each of our NEOs is set forth below.

 

Name

   Base Salary

Jeffrey J. Gordman

   $ 575,000

Michael D. James

   $ 200,000

Ronald K. Hall

   $ 185,000

Debra A. Kouba

   $ 188,000

Johanna K. Lewis

   $ 250,000

In the future, we expect that salaries for our NEOs will continue to be reviewed and adjusted annually, as well as at the time of a promotion or other change in level of responsibilities, or when competitive circumstances or business needs may require. As noted above, we expect that the Compensation Committee of our Board of Directors will recommend a compensation package (including base salary) that is consistent with our compensation philosophies.

Retention Bonus Agreements

In connection with the Sun Capital Acquisition, we entered into retention bonus agreements with Messrs. James, Hall and Ms. Kouba. The purpose of the retention bonus agreement was to reward the executive for his or her loyalty to the Company as well as to incentivize the executive not to voluntarily terminate his or her employment with us. The retention bonus agreement provided the executive with a one-time cash bonus on the condition that the Sun Capital Acquisition was consummated by November 1, 2008 and that the executive remained continuously employed with us for one year after the consummation of the Sun Capital Acquisition. Each of Messrs. James, Hall and Ms. Kouba received a retention bonus in the amount set forth in the Summary Compensation Table. See “—Summary Compensation Table.”

Performance-Based Cash Incentive Awards

Our President and Chief Executive Officer and Board of Directors have authority to award annual cash bonuses to our executive officers. On an annual basis, or at the commencement of an executive officer’s employment with us, our President and Chief Executive Officer and Board of Directors typically set a target level of bonus compensation that is structured as a percentage of annual base salary for all NEOs other than the President and Chief Executive Officer. This target is tied to our annual profit plan as well as individual performance objectives. The corporate financial and individual performance objectives, while separately evaluated, were aggregated for purposes of determining the amount of cash incentive awards payable to an NEO. In calculating the total cash incentive award payable to an NEO, the corporate financial performance component was assigned a weight of 65% and the individual performance component was assigned a weight of 35%.

 

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The target annual incentive award for our President and Chief Executive Officer is established by the Board of Directors and is tied to our annual profit plan.

The actual bonuses awarded in any year, if any, may be more or less than the target, depending on individual performance and the achievement of corporate financial objectives but may vary based on other factors at the discretion of our President and Chief Executive Officer and/or Board of Directors. We believe that establishing cash bonus opportunities helps us attract and retain qualified and highly skilled executives. These annual bonuses are intended to reward executive officers who have a positive impact on our financial performance.

For fiscal year 2009, the corporate financial performance component of the cash incentive award was linked to achievement of a target EBITDA (adjusted for certain non-recurring and unusual items) of $15.1 million. Upon attaining the target EBITDA, all NEOs other than our President and Chief Executive Officer would have earned a cash incentive award equal to 22.8% of his or her fiscal year 2009 base salary. The corporate financial performance component of the cash incentive award was able to be increased or decreased, in each case on a pro-rata basis, provided that no cash incentive would have been awarded for the corporate financial performance component unless an EBITDA of at least $12.3 million was attained. However, discretionary bonuses of up to $200,000 may be awarded by the Board of Directors. EBITDA, for the purposes of the corporate financial performance objective, is defined as earnings before interest, taxes, depreciation and amortization, and is adjusted for certain holding company charges and certain extraordinary gains and losses. We use our audited financial statements as the official source for determining the EBITDA achieved by the Company. Going forward, we expect the corporate financial performance component of the cash incentive award will be linked to performance metrics related to net income.

Any awarded incentive may be revoked at any time if subsequent audits detect any discrepancies in accounting or inventory practices. Associates, including our NEOs, involved in these types of discrepancies may also face disciplinary actions up to, and including, termination of employment.

For fiscal year 2009, the individual performance component of the cash incentive award was linked to achievement of a target performance rating of 90% under our performance management system. Under this system, each NEO works with our President and Chief Executive Officer to establish objectives specific to the function for which such NEO is responsible as well as for enterprise-wide business plan initiatives that involve the function led by such NEO. These objectives are generally measurable by either sales or profit metrics or, in some instances, may be more project-oriented. The quality of execution of an NEO’s general job responsibilities is also assessed as part of the performance management system. Our performance management system is designed to allow the flexibility to change with the needs of our business. As such, each NEO meets with our President and Chief Executive Officer for a mid-year evaluation of his or her performance as well as the continued applicability of the previously determined performance goals. Based on the mid-year evaluation, performance goals may be modified as the NEO and President and Chief Executive Officer see fit in order to best meet our strategic goals. At year end, each NEO again meets with our President and Chief Executive Officer to rate his or her performance under this system. Our President and Chief Executive Officer makes the final determination as to each NEO’s performance rating.

Upon attaining the target individual performance rating, an executive would have earned a cash incentive award equal to 14% of his or her fiscal year 2009 base salary. Where an executive’s performance rating exceeded 90%, the individual performance component of the cash incentive award was increased on a pro-rata basis up to a maximum of 19.6% of the executive’s fiscal year 2009 base salary. No cash incentive would have been awarded for the individual performance component unless an executive achieved a performance rating of at least 75%.

 

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The following table sets forth, for all of our executive officers (including our NEOs) other than our President and Chief Executive Officer, the fiscal year 2009 EBITDA targets as well as the corresponding weight and the aggregate available bonus pool for purposes of the corporate financial performance component of the bonus calculation.

 

Company Performance

    Bonus Potential
    EBITDA as
a % of
Plan
    EBITDA(1)   Target
Bonus
Multiplier
    Bonus
Target(2)
    Bonus as
a % of Base
Salary
    Weighting
for Company
Performance
    Financial
Performance
Bonus %
    Financial
Performance
Bonus Pool
          (in thousands)                                  

Maximum

  157   $ 19,315   230   35   81   65   52.3   $ 595,459

Target

  123     15,112   100     35     22.8     258,895

Threshold(3)

  100     12,310   0     0     0.0     —  

 

(1)

EBITDA, for the purpose of the corporate financial performance objective, is defined as earnings before interest, taxes, depreciation and amortization, and is adjusted for certain holding company charges and certain extraordinary gains and losses.

(2)

Targeted bonus percentage increased from 30% to 35% to replace deferred compensation.

(3)

No company performance bonus for EBITDA below plan of $12.3 million.

The following table sets forth, for all of our executive officers (including our NEOs) other than our President and Chief Executive Officer, the fiscal year 2009 individual performance targets as well as the corresponding weight and the aggregate available bonus pool for purposes of the individual performance component of the bonus calculation.

 

Individual Performance

    Bonus Potential
     Percent of
Attainment
    Target
Bonus
Multiplier
    Bonus
Target
    Bonus as
a % of Base
Salary
    Weighting
for Company
Performance
    Individual
Performance
Bonus %
    Individual
Performance
Bonus Pool

Maximum

   100   140   40   56   35   19.6   $ 223,048

Target

   90   100     40     14.0     159,320

Threshold(1)

   75   40     16     5.6     63,728

 

(1)

If EBITDA falls below $12.3 million, no bonus will be earned for individual performance. However, discretionary bonuses may be awarded by the President and Chief Executive Officer based upon individual performance to a pooled limit of $200,000.

The following table sets forth, for the President and Chief Executive Officer, the fiscal year 2009 EBITDA targets as well as the corresponding weight and the aggregate available bonus for purposes of the corporate financial performance component of the bonus calculation.

 

Company Performance

    Bonus Potential
    EBITDA as
a % of
Plan
    EBITDA(1)   Target
Bonus
Multiplier
    Bonus
Target(2)
    Bonus as
a % of Base
Salary
    Weighting
for Company
Performance
    Financial
Performance
Bonus %
    Financial
Performance
Bonus(1)
          (in thousands)                                  

Maximum

  157   $ 19,315   285   70   200   100   199.5   $ 1,147,125

Target

  123     15,112   100     70     70.0     402,500

Threshold  (3)

  100     12,310   0     0     0.0     —  

 

(1)

EBITDA, for the purpose of the corporate financial performance objective, is defined as earnings before interest, taxes, depreciation and amortization, and is adjusted for certain holding company charges and certain extraordinary gains and losses.

(2)

Targeted bonus percentage increased from 65% to 70% to replace deferred compensation.

(3)

No company performance bonus for EBITDA below plan of $12.3 million.

Because our actual EBITDA achieved in fiscal year 2009 exceeded the maximum corporate financial performance objective established for the year by approximately 68%, our Board of Directors, upon the

 

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request of the President and Chief Financial Officer, approved bonus payments of $700,221 to our executive officers ($564,145 to our NEOs) in excess of the corporate financial performance grid. No specific formula was used to determine the amount of the increase in bonus payments. In making its analysis, our Board of Directors considered that actual EBITDA exceeded the maximum target EBITDA contemplated under the existing corporate financial performance grid by approximately $12.0 million or 68%, and concluded that the increased cash awards, which represented a 37% increase over the maximum target award linked to our corporate financial performance, were in line with our compensation philosophies of recognizing the contributions that each NEO makes to our success and incentivizing corporate financial performance. Each of our NEOs received a cash incentive bonus in the amount set forth in the Summary Compensation Table below. See “—Summary Compensation Table.” As we evolve as a public company, we expect that our President and Chief Executive Officer together with our Board of Directors will analyze instances where our company performance exceeds the maximum target on a case by case basis, and will develop a methodology for determining any corresponding increases in bonus awards.

Equity Incentives—Gordmans Stores, Inc. 2009 Stock Option Plan

On May 7, 2009, each NEO other than Mr. Hall was granted a stock option grant (Mr. Hall had already expressed his intent to retire prior to the execution of the stock option grants) in connection with the Sun Capital Acquisition. All of these option grants vest 20% annually over the course of five years. The vested options become exercisable on the earlier of May 7, 2019, a change in control or the date on which the NEO’s employment terminates.

In connection with this offering, we expect that each NEO with a stock option grant under the 2009 Stock Option Plan will enter into an option termination agreement. Under the option termination agreement, a participant’s existing options will be terminated and in exchange the participant will receive the following awards under the 2010 Omnibus Incentive Compensation Plan (described below): (1) 12 months from the date of the option termination agreement, vested restricted stock to replace the value of the participant’s vested options under the 2009 Stock Option Plan and unvested restricted stock to replace the value of the participant’s unvested options under the 2009 Stock Option Plan, with the same vesting schedule as that of the existing options; and (2) options in an amount to be determined by our Compensation Committee, with an exercise price equal to our initial public offering price, subject to time vesting at a rate of 20% per year over five years. We do not expect to record additional compensation expense as a result of the option termination agreements.

Equity Incentives—Gordmans Stores, Inc. 2010 Omnibus Incentive Compensation Plan

We intend to adopt the Gordmans Stores, Inc. 2010 Omnibus Incentive Compensation Plan, or the 2010 Plan, in connection with our initial public offering. The 2010 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents and other stock-based awards. Directors, officers and other associates of us and our subsidiaries, as well as others performing consulting or advisory services for us, will be eligible for grants under the 2010 Plan. The purpose of the 2010 Plan is to provide incentives that will attract, retain and motivate highly competent officers, directors, associates and consultants by providing them with appropriate incentives and rewards either through a proprietary interest in our long-term success or compensation based on their performance in fulfilling their personal responsibilities. The following is a summary of the material terms of the 2010 Plan, but does not include all of the provisions of the 2010 Plan. For further information about the 2010 Plan, we refer you to the complete copy of the 2010 Plan, which we have filed as an exhibit to the registration statement, of which this prospectus is a part.

Administration.    The 2010 Plan provides for its administration by the Compensation Committee of our Board of Directors, any committee designated by our Board of Directors to administer the 2010 Plan or our Board of Directors. Among the committee’s powers are to determine the form, amount and other

 

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terms and conditions of awards, clarify, construe or resolve any ambiguity in any provision of the 2010 Plan or any award agreement, amend the terms of outstanding awards and adopt such rules, forms, instruments and guidelines for administering the 2010 Plan as it deems necessary or proper. All actions, interpretations and determinations by the committee or by our Board of Directors are final and binding.

Shares Available.    The 2010 Plan makes available an aggregate of 573,086 shares of our common stock, subject to adjustments. In the event that any outstanding award expires, is forfeited, cancelled or otherwise terminated without consideration, shares of our common stock allocable to such award, including the unexercised portion of such award, shall again be available for purposes of the 2010 Plan. If any award is exercised by tendering shares of our common stock to us, either as full or partial payment, in connection with the exercise of such award under the 2010 Plan or to satisfy our withholding obligation with respect to an award, only the number of shares of our common stock issued net of such shares tendered will be deemed delivered for purposes of determining the maximum number of shares of our common stock then available for delivery under the 2010 Plan.

Eligibility for Participation.    Members of our Board of Directors, as well as associates of, and consultants to, us or any of our subsidiaries and affiliates are eligible to receive awards under the 2010 Plan. The selection of participants is within the sole discretion of the committee.

Types of Awards.    The 2010 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, collectively, the options, stock appreciation rights, shares of restricted stock, or the restricted stock, restricted stock units, rights to dividend equivalents and other stock-based awards, collectively, the awards. The committee will, with regard to each award, determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by us or our affiliates, or a company acquired by us or with which we combine.

Award Agreement.    Awards granted under the 2010 Plan shall be evidenced by award agreements, which need not be identical, that provide additional terms, conditions, restrictions and/or limitations covering the grant of the award, including, without limitation, terms providing for the acceleration of exercisability or vesting of awards in the event of a change in control or conditions regarding the participant’s employment, as determined by the committee in its sole discretion; provided, however, that in the event of any conflict between the provisions of the 2010 Plan and any such award agreement, the provisions of the 2010 Plan shall prevail.

Options.    An option granted under the 2010 Plan will enable the holder to purchase a number of shares of our common stock on set terms. Options shall be designated as either a nonqualified stock option or an incentive stock option. An option granted as an incentive stock option shall, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. None of us, including any of our affiliates or the committee, shall be liable to any participant or to any other person if it is determined that an option intended to be an incentive stock option does not qualify as an incentive stock option. Each option shall be subject to terms and conditions, including exercise price, vesting and conditions and timing of exercise, consistent with the 2010 Plan and as the committee may impose from time to time.

The exercise price of an option granted under the 2010 Plan will be determined by the committee and it is expected that the exercise price will not be less than 100% of the fair value of a share of our common stock on the date of grant, provided the exercise price of an incentive stock option granted to a person holding greater than 10% of our voting power may not be less than 110% of such fair value on such date. The committee will determine the term of each option at the time of grant in its discretion; however, the term may not exceed ten years or, in the case of an incentive stock option granted to a ten percent stockholder, five years.

 

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Stock Appreciation Rights.    A stock appreciation right entitles the holder to receive, upon its exercise, the excess of the fair value of a specified number of shares of our common stock on the date of exercise over the grant price of the stock appreciation right. The payment of the value may be in the form of cash, shares of our common stock, other property or any combination thereof, as the committee determines in its sole discretion. Stock appreciation rights may be granted alone or in tandem with any option at the same time such option is granted, or a tandem SAR. A tandem SAR is only exercisable to the extent that the related option is exercisable and expires no later than the expiration of the related option. Upon the exercise of all or a portion of a tandem SAR, a participant is required to forfeit the right to purchase an equivalent portion of the related option, and vice versa. Subject to the terms of the 2010 Plan and any applicable award agreement, the grant price, which is not expected to be less than 100% of the fair value of a share of our common stock on the date of grant, term, methods of exercise, methods of settlement, and any other terms and conditions of any stock appreciation right shall be determined by the committee. The committee may impose such other conditions or restrictions on the exercise of any stock appreciation right as it may deem appropriate.

Restricted Stock.    The committee may, in its discretion, grant awards of restricted stock. Restricted stock may be subject to such terms and conditions, including vesting, as the committee determines appropriate, including, without limitation, restrictions on the sale or other disposition of such shares of our common stock. The committee may require the participant to deliver a duly signed stock power, endorsed in blank, relating to shares of our common stock covered by such an award. The committee may also require that the stock certificates evidencing such shares be held in custody or bear restrictive legends until the restrictions thereon shall have lapsed. Unless otherwise determined by the committee and set forth in the award agreement, a participant holding restricted stock will have the right to vote and receive dividends with respect to such restricted stock.

Restricted Stock Units.    The committee may, in its discretion, grant awards of restricted stock units, or RSUs. RSUs are awards that provide for the deferred delivery of a specified number of shares of our common stock. RSUs may be subject to such terms and conditions, including vesting, as the committee determines appropriate.

Dividend Equivalents.    The committee may, in its discretion, grant dividend equivalents based on the dividends declared on shares that are subject to any award. The grant of dividend equivalents shall be treated as a separate award. Such dividend equivalents shall be converted to cash or shares by such formula and at such time and subject to such limitations as may be determined by the committee. As determined by the committee, dividend equivalents granted with respect to any option or stock appreciation right may be payable regardless of whether such option or stock appreciation right is subsequently exercised.

Other Share-Based Awards.    The committee, in its discretion, may grant awards of shares of our common stock and awards that are valued, in whole or in part, by reference to, or are otherwise based on the fair market value of such shares—the other share-based awards. Such other share-based awards shall be in such form, and dependent on such conditions, as the committee shall determine, including, without limitation, the right to receive one or more shares of our common stock, or the equivalent cash value of such stock, upon completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Subject to the provisions of the 2010 Plan, the committee shall determine to whom and when other share-based awards will be made, the number of shares of our common stock to be awarded under, or otherwise related to, such other share-based awards, whether such other share-based awards shall be settled in cash, shares of our common stock or a combination of cash and such shares, and all other terms and conditions of such awards.

Transferability.    Except as otherwise determined by the committee, an award shall not be transferable or assignable by a participant except in the event of his death, subject to the applicable laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or

 

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encumbrance shall be void and unenforceable against us or any of our subsidiaries or affiliates. Any permitted transfer of the awards to heirs or legatees of a participant shall not be effective to bind us unless the committee has been furnished with written notice thereof and a copy of such evidence as the committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of the 2010 Plan and any award agreement.