Build-A-Bear Workshop 2009 Annual Report Download - page 43

BUILD-A-BEAR WORKSHOP, INC. 2009 FORM 10-K
declaring dividends without the bank’s prior consent, unless
such payment of dividends would not violate any terms of the
credit agreement. Borrowings bear interest at LIBOR plus
2.05%. Financial covenants include maintaining a minimum
tangible net worth, maintaining a minimum fixed charge
coverage ratio (as defined in the credit agreement) and not
exceeding a maximum funded debt to earnings before
interest, depreciation and amortization ratio. As of January 2,
2010: (i) we were in compliance with these covenants;
(ii) there were no borrowings under our line of credit;
(iii) there was a standby letter of credit of approximately $1.1
million outstanding under the credit agreement and (iv) there
was approximately $38.9 million available for borrowing
under the line of credit.
Most of our retail stores are located within shopping
malls and all are operated under leases classified as
operating leases. Our leases in North America typically have
a ten-year term and contain provisions for base rent plus
percentage rent based on defined sales levels. Many of the
leases contain a provision whereby either we or the landlord
may terminate the lease after a certain time, typically in the
third to fourth year of the lease, if a certain minimum sales
volume is not achieved. Many leases contain incentives to
help defray the cost of construction of a new store. Typically,
a portion of the incentive must be repaid to the landlord if we
choose to terminate the lease. In addition, some of these
leases contain various restrictions relating to change of control
of our company. Our leases also subject us to risks relating to
compliance with changing mall rules and the exercise of
discretion by our landlords on various matters, including rights
of termination in some cases.
Our leases in the United Kingdom and Ireland typically
have terms of 10 to 15 years and generally contain a
provision whereby every fifth year the rental rate can be
adjusted to reflect the current market rates. The leases
typically provide the lessee with the first right for renewal at
the end of the lease. We may also be required to make
deposits and rent guarantees to secure new leases as we
expand. Real estate taxes also change according to
government time schedules to reflect current market rental
rates for the locations we lease. Rents are charged quarterly
and paid in advance.
Our French leases each have terms of 10 years. French
leases for premier retail properties frequently have entry fees
and/or key money payments required to be made in
conjunction with signature of the leases. Such entry fees or
key money payments may be recovered, in whole or in part,
upon disposal of the leases. The leases typically provide the
lessee with the first right for renewal at the end of the lease.
Rent deposits consisting of three months rent are also required
to be paid on execution of the leases. Rents are negotiated on
a fixed basis, but are reviewed annually in relation to an
inflation index and therefore also have a variable rent
component. Rents are charged quarterly and paid in
advance.
In fiscal 2010, we expect to spend approximately $12
million on capital expenditures. Capital spending in fiscal
2009 totaled $8.1 million. Capital spending in fiscal 2009
was primarily for the continued installation and upgrades of
central office information technology systems, acquisition of
intangible assets, repurposing existing Friends 2B Made
locations to Build-A-Bear Workshop stores, the opening of one
new store and the relocation of one store.
On February 20, 2007, we announced a $25 million
share repurchase program of our outstanding common stock
over the following twelve months. The program was authorized
by our board of directors. On March 10, 2008, we
announced an expansion of our share repurchase program to
$50 million for an additional twelve months. On March 3,
2009, we announced a twelve month extension of our share
repurchase program. On March 3, 2010, we announced that
our share repurchase program had been extended to
March 31, 2011. We currently intend to purchase up to an
aggregate of $50 million of our common stock in the open
market (including through 10b5-1 plans), through privately
negotiated transactions or through an accelerated repurchase
transaction. The primary source of funding for the program is
expected to be cash on hand. The timing and amount of share
repurchases, if any, will depend on price, market conditions,
applicable regulatory requirements, and other factors. The
program does not require us to repurchase any specific
number of shares and may be modified, suspended or
terminated at any time without prior notice. Shares
repurchased under the program will be subsequently
retired. As of March 15, 2010, approximately 2,072,000
shares at an average price of $9.83 per share have been
repurchased under this program for an aggregate amount of
$20.4 million.
We believe that cash generated from operations and
borrowings under our credit agreement will be sufficient to
fund our working capital and other cash flow requirements for
the near future. Our credit agreement expires on
December 31, 2011.
Off-Balance Sheet Arrangements
We hold a minority interest in Ridemakerz, which is accounted
for under the equity method. We purchased a call option from
a group of other Ridemakerz investors for $150,000 for
1.25 million Ridemakerz common units at an exercise price of
$1.25 per unit. The call option was immediately exercisable
and expires April 30, 2012. Simultaneously, we granted a put
option to the same group of investors for 1.25 million common
units at an exercise price of $0.50 per unit. The put option
was exercisable on April 30, 2008 and expires on April 30,
2012. As of January 2, 2010, the book value of our
investment in Ridemakerz had been reduced to zero. We still
retained an ownership interest of approximately 25%. Under
the current agreements, we could own up to approximately
33% of fully diluted equity in Ridemakerz. See Note 16 —
Investment in Affiliate to the Consolidated Financial Statements
for additional information.
33