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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended January 29, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ___________________
Commission file number 1-7288
THE BOMBAY COMPANY, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 75-1475223
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
550 Bailey Avenue
Fort Worth, Texas 76107
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
(817) 347-8200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value, $1 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No __
The aggregate market value of the voting and non-voting stock held by
nonaffiliates of the registrant based on the closing price of the stock on July
31, 2004 was approximately $207,587,787.
Shares outstanding at April 2, 2005: Common Stock, $1 Par Value: 35,930,783
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement for the Annual Meeting to be held
June 9, 2005 (as expressly incorporated by reference in Parts II and III).
Page 1 of 52
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FORM 10-K
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
The Bombay Company, Inc. and its wholly-owned subsidiaries design, source and
market a line of proprietary home furnishings that includes large furniture,
occasional furniture, wall decor and decorative accessories that is timeless,
transitional and classic in its styling through a network of retail locations
throughout the United States and Canada, through specialty catalogs, the
Internet and international licensing arrangements. We also have a small
wholesale operation that distributes a separate line of occasional furniture.
Throughout this report, the terms "our," "we," "us", "Bombay" and "Company"
refer to The Bombay Company, Inc., including its subsidiaries.
The Company has a retail (52-53 week) fiscal year, which ends on the Saturday
nearest January 31. The periods ended January 29, 2005 ("Fiscal 2004"),
January 31, 2004 ("Fiscal 2003") and February 1, 2003 ("Fiscal 2002") reflect
52 weeks.
Bombay's unique position in the market place is a result of our core
competencies in design, sourcing and importing. We are a global importer,
sourcing product from approximately 20 countries worldwide. Over 90% of the
product has been designed or styled to Bombay's specifications.
Bombay has three distinct retail concepts leveraging the Bombay brand: Bombay,
BombayKIDS and Bombay Outlet. Bombay stores feature timeless and classically
styled home furnishings including accessories, wall decor and furniture
focusing on the bedroom, the home office, the dining room and the living room.
We entered the children's furnishings business in 2001 with the introduction of
BombayKIDS, which features a line of children's furniture, textiles and
accessories for children's bedrooms and bathrooms. Bombay Outlet stores, which
are located primarily in major outlet centers across the United States and in
Canada, feature an assortment of home furnishings similar to the Bombay store
offering at lower price points. Additionally, Bombay Outlet stores provide a
channel to liquidate overstocks of Bombay and BombayKIDS product as well as
merchandise produced for our wholesale operation.
In addition to our primary retail operations, Bombay has other operating
enterprises which contributed incrementally to profitability but which were not
significant to our operations in Fiscal 2004. Unless specified otherwise, the
discussions in this Annual Report on Form 10-K relate to the Bombay retail
operations, including BombayKIDS, outlets, Internet and catalog.
(b) Financial Information About Segments
Bombay operates primarily in one business segment as a multi-channel retailer
selling decorative home furnishings, furniture and related items.
(c) Narrative Description of Business
Merchandise Sales, Purchasing and Distribution
Bombay operates stores located in regional shopping malls, certain secondary
malls, open-air lifestyle centers, high-end strip centers and selected urban
and suburban locations. As of January 29, 2005, there were 446 stores in 42
states in the United States and 56 stores in nine Canadian provinces. We also
market our products through our mail order operations in the United States and
Canada and over the Internet at www.bombaycompany.com, www.bombaykids.com,
www.bombayoutlet.com and www.bombay.ca.
We offer a diverse selection of products consisting of approximately 6,500
stock keeping units ("SKUs") of which over 90% of the product has been designed
or styled to our specifications. Bombay's proprietary product offers unique
design, quality and exceptional value to a wide audience of consumers. We
regularly update our merchandise assortment by introducing new products while
discontinuing others. Our product offerings have a fashion component,
primarily in the accessory and wall decor areas, which are introduced
seasonally. Other products with longer lives are discontinued as they approach
the end of their life cycles. Approximately 3,500 and 2,600 new SKUs were
introduced in Fiscal 2004 and Fiscal 2003, respectively. Typically, new
product introductions have been concentrated during our spring, fall and
Christmas selling periods. The principal categories of merchandise include the
following:
Furniture - We sell two broad categories of furniture as described
below. Our furniture is manufactured by third party vendors located
principally in China, Vietnam, Malaysia, Taiwan, India and Indonesia.
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Large Furniture - This category includes both wood and metal
furniture focusing on the bedroom, home office, dining room and
living room. Many of the larger items are displayed in store and
stocked in our distribution centers and are available for store
delivery typically within ten days. Large furniture represented
29%, 30% and 26% of total sales in Fiscal 2004, Fiscal 2003 and
Fiscal 2002, respectively.
Occasional Furniture - This category includes wood and metal
hall tables, end and coffee tables, plant stands and other small
accent tables, stands and curios that are ready-to-assemble, take
home products. Occasional furniture represented 19% of total sales
in Fiscal 2004, Fiscal 2003 and Fiscal 2002.
Accessories - This is the broadest category and represented 40%,
39%, and 42% of total sales in Fiscal 2004, Fiscal 2003, and Fiscal 2002.
This category includes both functional and decorative accessories
including lamps, jewelry and memorabilia boxes, crystal, ceramics, frames
and desktop items, textiles, florals, candles and holiday items. The
items are sourced from over 20 countries in Asia, North America and
Europe.
Wall Decor - This category includes prints, mirrors and wall
accessories that represented 12%, 12% and 13% of total sales in Fiscal
2004, Fiscal 2003 and Fiscal 2002, respectively. This merchandise is
sourced primarily from the United States and various countries in Asia.
Merchandise is manufactured to Bombay's specifications through a network of
third party vendors principally located in Asia and North America. More than
90% of production needs are sourced from foreign countries. We have branch
offices in Taiwan, Malaysia, China, Vietnam and India, and utilize agents in
various countries to locate prospective vendors, coordinate production
requirements with manufacturers and provide technical expertise and quality
control.
We are not dependent on any particular supplier and have had long standing
relationships with many of our vendors. Forty manufacturers in eight countries
supply almost 70% of our merchandise requirements. Bombay has no long-term
production agreements; however, we generally have agreements with major
manufacturers that prohibit the production of our proprietary product for other
parties. Additional manufacturing capacity and alternative sources, both
domestic and international, continue to be added through new vendors and plant
expansions by existing vendors. We transact business with our vendors
principally in United States currency, and historically have not experienced
any material disruptions as a result of any foreign political, economic or
social instability.
The product development process takes between three and twelve months,
beginning with the original idea and concluding with the final product received
at regional distribution centers in the United States and Canada. Depending on
the category, the source country and whether an item is new or reordered, lead
times generally vary from two to six months from order placement until arrival
at the stores. Order times are slightly less for North American manufacturers
principally due to shorter shipping times. Lead times may also be impacted by
seasonality factors, especially in months when manufacturers are producing at,
or near, peak capacity to meet seasonal demands. As a result, we strive to
maintain an adequate inventory position in our distribution centers to ensure a
sufficient supply of products to our customers.
We have regional distribution centers in Fort Worth, Texas; McDonough, Georgia;
Breinigsville, Pennsylvania; Gilbertsville, Pennsylvania; Mira Loma,
California; Plainfield, Indiana and Mississauga, Ontario. The distribution
centers are strategically located to provide the capability to replenish the
majority of store inventories within 48 hours of when the order is processed.
We use dedicated trucks and less-than-truckload carriers to transport product
from our distribution centers to the stores.
Channels of Distribution
RETAIL
Stores and Real Estate
Historically, we have located our stores primarily in regional shopping malls,
certain secondary malls and selected urban and suburban locations that
satisfied our demographic and financial return criteria. Over the past two
years, as many of those leases came up for renewal, we began aggressively
pursuing an off-mall strategy for new and relocated stores focusing on open-air
lifestyle centers and high-end strip centers (especially those with a
concentration of home furnishings retailers). Such locations offer us the
opportunity to lower occupancy costs, improve operating efficiencies and
provide a more convenient shopping experience for our customer. Our preference
is to identify locations where we can operate a combined Bombay and BombayKIDS
store, thereby realizing economies that come with a larger location while
attracting a new and younger customer to Bombay. As of January 29, 2005,
approximately 37% of our stores, excluding outlets, were in off-mall locations.
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In selecting store locations, our real estate department conducts extensive
analyses of potential store sites. We base our selection on the existing or
planned co-tenancy of the center, the size of the market and the demographics
of the surrounding area. In evaluating a store location, placement of the
store relative to retail traffic patterns and customer base of other retailers
in the nearby vicinity are important considerations. Significant attention is
given to visual merchandising opportunities to maximize the ability to display
product in the most attractive setting. We seek out the most potentially
profitable locations for the opening of new stores regardless of the venue. We
are currently targeting 8,500 to 9,000 square foot locations where we can
construct a Bombay store of approximately 4,500 square feet with an adjacent
BombayKIDS store of approximately 4,000 square feet. Bombay mall stores are
slightly smaller in size, currently averaging approximately 3,600 square feet.
New Bombay off-mall locations are expected to be in the 4,000 to 5,000 square
foot range. In addition to building new stores, we continue to selectively
convert our existing regular stores, which average approximately 2,000 square
feet, to the larger format. As of January 29, 2005, there were 20 regular
stores remaining in the chain.
At January 29, 2005, the store chain included a total of 47 outlet stores. We
view the use of outlets as an opportunity to increase sales to a different
customer base, to assist in the orderly clearance of merchandise and to further
leverage our design and sourcing capabilities.
Following is a table summarizing our store activity and composition:
January 29, January 31, February 1,
2005 2004 2003
Number of stores:
Beginning of year. 471 422 419
Opened............ 66 84 28
Closed............ 35 35 25
End of year....... 502 471 422
Store composition:
Large format..... 384 365 334
Regular.......... 20 25 37
Outlet........... 47 46 46
BombayKIDS....... 51 35 5
Store location:
Mall............ 272 302 328
Off-mall........ 183 123 48
Outlet.......... 47 46 46
Retail square footage (in thousands):
Large format..... 1,570 1,459 1,297
Regular.......... 38 46 68
Outlet........... 200 198 193
BombayKIDS....... 212 144 20
Total............ 2,020 1,847 1,578
During Fiscal 2005, we plan to open approximately 45 to 50 new stores,
including approximately 12-13 BombayKIDS stores. We plan to close
approximately 42 stores, ending the year with approximately 505 to 510 stores.
For store count purposes, a combined Bombay and BombayKIDS location represents
two stores.
Our average cost of leasehold improvements, furniture, fixtures and machinery
for Bombay stores opened in Fiscal 2004, net of landlord construction
allowances, was approximately $175,000 per store, or $37 per square foot. In
addition, other investments, which consist primarily of inventory in the store
location, averaged approximately $90,000 per large format store. The average
net cost of a BombayKIDS store is approximately $220,000 but, at $53 per square
foot, is higher than a Bombay large format store on a per square foot basis due
to higher fixturing costs. Inventory investment averaged $85,000 for a
BombayKIDS store. During Fiscal 2004, average inventory physically in store
was approximately 43% of the total inventory investment. Our mall-based stores
typically achieve store level operating profitability during their first full
year of operations and reach maturity in three years. Off-mall stores are
typically profitable during their first year of operation. However, based upon
our limited experience, it appears that it may take slightly longer for these
stores to mature. Further, whether a store was relocated from a local mall or
is a new store in a market may also be an influencing factor as to
profitability and length of time until maturity.
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As of January 29, 2005, 446 stores were operating in 42 states in the United
States and 56 stores were operating in nine provinces in Canada as illustrated
in the map below.
{The paper version on the Annual Report on Form 10-K contains herein a map of
the United States and Canada with states and provinces outlined, labeled with
the appropriate number of Bombay stores located in each, as follows:
UNITED STATES:
AL - 7 KY - 3 NY - 22
AR - 1 LA - 8 OH - 17
AZ - 6 MA - 11 OK - 4
CA - 61 MD - 13 OR - 4
CO - 6 MI - 9 PA - 17
CT - 12 MN - 4 RI - 1
DE - 3 MO - 6 SC - 6
FL - 41 MS - 2 TN - 10
GA - 19 NC - 12 TX - 49
IA - 1 NE - 1 UT - 3
ID - 1 NH - 3 VA - 17
IL - 25 NJ - 19 WA - 5
IN - 7 NM - 1 WI - 3
KS - 2 NV - 3 WV - 1
CANADA:
AB - 4 NB - 1 ON - 31
BC - 6 NF - 1 PQ - 8
MB - 2 NS - 2 SK - 1}
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Direct
We offer virtually all our retail SKUs for purchase over the internet through
our U.S. websites at www.bombaycompany.com for Bombay, www.bombaykids.com for
BombayKIDS and www.bombayoutlet.com for Bombay Outlets. During Fiscal 2003, we
launched our Bombay Canada website at www.bombay.ca, which currently sells core
product and a limited selection of outlet product. We plan to add a Canadian
BombayKIDS site in the future. We continue to pursue online marketing
partnerships to broaden our reach to additional customers. Business-to-
consumer revenues over the Internet were approximately $21.2 million, $17.1
million and $8.1 million in Fiscal 2004, Fiscal 2003 and Fiscal 2002,
respectively. We also maintain websites supporting our wholesale activities.
Bombay has a catalog business which primarily serves as a marketing vehicle to
drive customers into stores and to the Internet. Direct catalog sales
represent less than 2% of revenues.
WHOLESALE
Bailey Street Trading Company - During Fiscal 2000, we created a wholesale
subsidiary, Bailey Street Trading Company ("Bailey Street"). The brand is
separate from Bombay and allows us to capitalize on our strengths in product
design, sourcing and importing. Current product offerings are focused on
occasional furniture, which we distribute to a variety of customers, including
independent gift stores, catalogers, department stores, furniture stores and
mass merchants through a network of independent regional sales representatives.
In November 2004, we announced our intention to exit the Bailey Street
operations through sale or liquidation in order to focus on our core business.
We are currently in the process of evaluating alternatives and expect to exit
Bailey Street during Fiscal 2005.
International - Bombay International, Inc. ("International") is our
international licensing and distribution channel. International operations
have extended to 15 licensed stores as of the end of Fiscal 2004, operating
principally in the Middle East and the Caribbean. International revenues
totaled $3.8 million in Fiscal 2004 compared to $3.7 million in Fiscal 2003.
During Fiscal 2004, the Company entered into a master licensing agreement with
a third party to manage and expand International operations in the Middle East
and certain eastern European countries. We plan limited expansion abroad
through licensing and distribution agreements in existing markets or with
current partners, including the master licensee. During Fiscal 2005,
approximately three additional International stores are planned to be opened by
our licensees.
Intangibles
We own a number of the trademarks and service marks used in our business,
including federal registrations for the marks The Bombay
Company{reg-trade-mark}, Bombay{reg-trade-mark}, the palm tree logo,
BombayKIDS{reg-trade-mark} and Bailey Street Trading Company{reg-trade-mark}.
Our trademarks are also registered or are the subject of pending applications
in a number of foreign countries. Each registration is renewable indefinitely
if the mark is still in use at the time of renewal.
We believe that our trademarks have significant value and that these marks
enhance the Bombay{reg-trade-mark} brand and are instrumental in our ability to
create, sustain demand for and market our product. From time to time, we
discover products in the marketplace that are counterfeit reproductions of our
product or that otherwise infringe upon our trademark or tradedress rights. We
have and will continue to vigorously defend our rights under the marks as
necessary.
Seasonality
Operating results are subject to seasonal variation. Historically, the largest
proportion of sales and substantially all of the income occur in the fourth
fiscal quarter, which includes the Christmas season. Inventory balances are
generally built to their highest levels prior to the Christmas selling season.
Inventories decline, short-term borrowings are repaid and cash balances
increase significantly in December due to the Christmas business.
Competition
The home furnishings and decorative accessories market is highly fragmented and
very competitive. We face competition from furniture stores, department
stores, mass merchants and other specialty retailers, including national chains
and independent retailers. We believe that we compete primarily on the basis
of style, selection, quality and value of merchandise.
Employees
We have approximately 5,000 employees, including approximately 3,000 part-time
employees, and we are not a party to any union contract. Employee relations
are considered to be good based on employee retention and industry trends.
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Risks and Uncertainties
All statements in this Annual Report on Form 10-K, including those incorporated
herein by reference, that do not reflect historical information are forward-
looking statements made in reliance upon the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and financial market conditions which
affect consumer confidence in the spending environment for home-related
purchases; competition; seasonality; success of operating initiatives; new
product development and introduction schedules; uninterrupted flow of product;
acceptance of new product offerings; inherent safety of product offerings;
advertising and promotional efforts; adverse publicity; expansion of the store
chain; availability, locations and terms of sites for store development;
ability to renew leases on an economic basis; changes in business strategy or
development plans including risks associated with the strategy to move off-
mall; availability and terms of borrowings or capital for operating purposes;
labor and employee benefit costs; ability to obtain insurance at a reasonable
cost; rising fuel and energy costs and their impact on the operations of the
business; reliance on technology; security of the technological infrastructure;
changes in government or trade regulations including duties on bedroom
furniture imports from China and the possibility that the scope of such duties
will be expanded to encompass additional countries or product categories; risks
associated with international business; fluctuations in foreign currency
exchange rates; terrorism; war or threat of war; potential travel or
import/export restrictions due to communicable diseases; regional weather
conditions; hiring and retention of adequate and qualified personnel. The
Company undertakes no obligation to revise the forward-looking statements
contained herein to reflect events or circumstances after the date hereof as a
result of new information, future events or otherwise.
(d) Financial Information About Geographic Areas
Bombay operates in one industry segment, specialty retailing. Greater than 90%
of all revenues results from the sale of home furnishings and accessories
through retail stores in the United States and Canada. The remaining portion
of our revenues results from the sale of home furnishings and accessories
through our wholesale operations, direct-to-customer retail operations and
related shipping charges. Our wholesale and direct-to-customer operations have
been immaterial to our operations and financial results to-date. Long-lived
assets include all non-current assets except deferred taxes.
The following table shows net revenues and long-lived assets by geographic area
(in thousands):
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Net revenues:
United States $505,499 $526,219 $442,339
Canada..... 70,588 70,216 51,661
Total.. $576,087 $596,435 $494,000
Long-lived assets:
United States $91,093 $72,356 $49,435
Canada..... 7,136 6,247 4,253
Total... $98,229 $78,603 $53,688
(e) Available Information
We make available free of charge through our website, www.bombaycompany.com,
all materials that we file electronically with the Securities and Exchange
Commission ("SEC"), including our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and Section 16 filings as soon as reasonably practicable after
electronically filing such materials with, or furnishing them to, the SEC.
During the period covered by this Annual Report on Form 10-K, we made all such
materials available through our website as soon as reasonably practicable after
filing or furnishing such materials with the SEC.
Any materials filed by the Company with the SEC may also be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website,
www.sec.gov, that contains reports, proxy and information statements and other
information which we file electronically with the SEC.
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ITEM 2. PROPERTIES.
We own our United States headquarters office complex of which we occupy
approximately 87,000 square feet. We lease stores, distribution centers,
regional and Canadian offices under numerous operating leases. Owned and
leased facilities are summarized following:
Square Feet
Description Owned Leased
Stores:
Large format... - 1,570,000
Regular........ - 38,000
Outlet......... - 200,000
BombayKIDS..... - 212,000
Distribution centers:
Breinigsville, PA - 410,000
Plainfield, IN. - 300,000
McDonough, GA.. - 254,000
Fort Worth, TX. - 250,000
Gilbertsville, PA - 200,000
Mira Loma, CA.. - 156,000
Mississauga, ON, CAN - 114,000
Offices and storage:
Mississauga, ON, CAN - 9,000
Regional sites. - 2,000
Fort Worth, TX. 121,000 35,000
121,000 3,750,000
We lease all of our retail locations and distribution centers under non-
cancelable operating leases whose initial terms typically have 10-year terms,
expiring between 2005 and 2016, and may include options that permit renewal for
additional periods. Rents under the store leases are generally based upon
minimum rentals plus additional contingent rentals based upon a percentage of
the store's sales volume in excess of specified levels. Store lease terms
generally require additional payments covering taxes, common area maintenance
charges, insurance and certain other costs.
Rental expense included in the accompanying consolidated statements of
operations for operating leases was (dollars in thousands):
Fiscal Fiscal Fiscal
2004 2003 2002
(restated) (restated)
Minimum rentals..... $58,286 $58,470 $50,543
Contingent rentals.. 296 482 211
Total............. $58,582 $58,952 $50,754
Leased year-end square footage 3,750,000 3,167,000 2,787,000
The minimum rental commitments for future fiscal years related to real estate
leases that have initial or remaining noncancelable lease terms in excess of
one year are as follows (in thousands):
Fiscal
2005........... $ 44,597
2006........... 43,161
2007........... 41,758
2008........... 39,410
2009........... 37,089
Thereafter..... 110,729
$316,744
We believe that the insurance coverage maintained on all properties is
adequate.
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ITEM 3. LEGAL PROCEEDINGS.
We have certain contingent liabilities resulting from litigation and claims
incident to the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect our
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of Fiscal 2004.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) The principal market for Bombay's common stock is the New York Stock
Exchange. The high and low trading prices, quoted by fiscal quarter,
follow:
Fiscal Year Ended January 29, 2005 High LowFiscal Year Ended January 31, 2004 High Low
First quarter..... $7.99 $5.44 First quarter..... $ 8.69 $4.34
Second quarter.... 6.49 4.70 Second quarter.... 12.65 7.80
Third quarter..... 7.59 4.47 Third quarter..... 14.11 9.20
Fourth quarter.... 7.16 5.10 Fourth quarter.... 13.80 6.30
(b) The approximate number of record holders of common stock on April 28,
2005 was 1,700.
(c) Our credit facility allows us to pay dividends, under the following
circumstances: no default or event of default has occurred and is
continuing; immediately after giving effect thereto, availability exceeds
usage under the line by at least $25 million; and certain other conditions
are satisfied. We are not currently, nor have we been, restricted from
paying such dividends. However, we have not paid dividends the past two
years and will continue to utilize available funds primarily for the
expansion of our retail stores and operating purposes.
(d) The information required by this item appears under the caption "Equity
Compensation Plan Information" in the Definitive Proxy Statement of The
Bombay Company, Inc. relating to the Company's Annual Meeting of
Shareholders, which information is incorporated herein by reference.
We did not repurchase any of our equity securities during the fourth quarter of
Fiscal 2004.
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ITEM 6. SELECTED FINANCIAL DATA.
(Unaudited)
The following selected financial data has been derived from our consolidated
financial statements. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes thereto.
Fiscal Year Ended
January 29, January 31, February 1,February 2,February 3,
Financial Data: 2005 2004 2003 2002 2001
(restated) (restated) (restated) (restated)
Net revenues*................ $576,087 $596,435 $494,000 $437,457 $423,459
Net revenues increase (decrease) (3)% 21% 13% 3% 8%
Same store sales increase (decrease) (12)% 13% 5% (2)% 5%
Net income (loss)*........... $(12,205) $9,866 $7,228 $3,681 8,619
Basic earnings (loss) per share $(.34) $.28 $.22 $.11 $.26
Diluted earnings (loss) per shares $(.34) $.28 $.22 $.11 $.26
Total assets*................ $284,173 $269,735 $239,806 $210,623 $209,839
Stockholders' equity*........ $181,931 $191,017 $169,117 $158,406 $154,470
Return on average assets..... (4.4)% 3.9% 3.2% 1.8% 4.2%
Return on average equity..... (6.5)% 5.5% 4.4% 2.4% 5.6%
Operating Data:
Average sales per store open for full fiscal year* $1,074 $1,249 $1,098 $1,012 $1,012
Average sales per square foot $273 $322 $296 $288 $306
Number of stores:
Beginning of year....... 471 422 419 408 415
Opened.................. 66 84 28 32 10
Closed.................. 35 35 25 21 17
End of year............. 502 471 422 419 408
Store composition:
Large format........... 384 365 334 324 291
Regular................ 20 25 37 59 93
Outlet................. 47 46 46 36 24
BombayKIDS............. 51 35 5 - -
Store locations:
Mall.................. 272 302 328 348 359
Off-mall.............. 183 123 48 35 25
Outlet................ 47 46 46 36 24
Retail square footage: *
Large format........... 1,570 1,459 1,297 1,244 1,116
Regular................ 38 46 68 107 163
Outlet................. 200 198 193 151 92
BombayKIDS............. 212 144 20 - -
Total.................. 2,020 1,847 1,578 1,502 1,371
Bombay has paid no cash dividends during the periods presented.
*In thousands.
NOTE: In January 2005, we revised our accounting for leases and adopted a
policy to capitalize pre-opening rent during the store build out and fixturing
periods. We have restated prior years' financial statements to reflect these
changes. See Note 2 to the consolidated financial statements for further
discussion.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report to Shareholders under "Management's
Discussion and Analysis" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and financial market conditions
which affect consumer confidence in the spending environment for home-related
purchases; competition; seasonality; success of operating initiatives; new
product development and introduction schedules; uninterrupted flow of product;
acceptance of new product offerings; inherent safety of product offerings;
advertising and promotional efforts; adverse publicity; expansion of the store
chain; availability, locations and terms of sites for store development;
ability to renew leases on an economic basis; changes in business strategy or
development plans including risks associated with the strategy to move off-
mall; availability and terms of borrowings or capital for operating purposes;
labor and employee benefit costs; ability to obtain insurance at a reasonable
cost; rising fuel and energy costs and their impact on the operations of the
business; reliance on technology; security of the technological infrastructure;
changes in government or trade regulations including duties on bedroom
furniture imports from China and the possibility that the scope of such duties
will be expanded to encompass additional countries or product categories; risks
associated with international business; fluctuations in foreign currency
exchange rates; terrorism; war or threat of war; potential travel or
import/export restrictions due to communicable diseases; regional weather
conditions; hiring and retention of adequate and qualified personnel. The
Company undertakes no obligation to revise the forward-looking statements
contained herein to reflect events or circumstances after the date hereof as a
result of new information, future events or otherwise.
Restatement of Previously Issued Financial Statements
During the fourth quarter of Fiscal 2004, we began an
evaluation of our lease accounting practices and determined that it was
appropriate to restate previously issued financial statements. Historically,
we have recognized store lease expense on a straight-line basis beginning on
the date that the store opened. This generally had the effect of excluding the
pre-opening store build out, fixturing and merchandise stocking periods during
which the Company typically had no rent payments. Based upon our evaluation of
our lease accounting practices, we have adopted an accounting policy to
capitalize rent during the construction period and recognize straight-line
rent expense upon the store becoming substantially complete and ready for its
intended use, which results in us recording rent expense during the merchandise
stocking periods.
Additionally, in prior periods, we reflected proceeds from landlord
construction allowances as a separately identified component of cash flows from
investing activities in the Consolidated Statements of Cash Flows. We have
restated our historical Fiscal 2003 and Fiscal 2002 Consolidated Statements of
Cash Flows to reflect such proceeds as a component of cash flows from
operating activities.
The restatement includes adjustments to cost of sales, buying and store
occupancy costs, income (loss) before income taxes, provision (benefit) for
income taxes, net income (loss) and earnings (loss) per share. These changes
increased net loss and loss per share by $43,000 and $.00 per diluted share
in the first three quarters of Fiscal 2004. The restatement adjustments
decreased net income and earnings per share in Fiscal 2003 by $85,000 and $.00
per diluted share, and increased net income and earnings per share in Fiscal
2002 by $11,000 and $.00
per diluted share. Although the restatement did not impact any net cash flows
for any period presented, it did have the effect of increasing operating cash
flows and increasing investing cash flows by a similar amount. These changes
increased net cash provided by operating activities and increased our net
cash used in investing activities in Fiscal 2003 and Fiscal 2002 by $11.9
million and $3.5 million, respectively. The restatement also affects periods
prior to Fiscal 2002. The impact of the restatement on such prior periods has
been reflected as a reduction of $301,000, or less than 1%, to total
stockholders' equity as of February 2, 2002 in the
accompanying consolidated statement of changes in stockholders' equity. We
have also restated the applicable financial information for Fiscal 2003,
Fiscal 2002, Fiscal 2001 and Fiscal 2000 in Item 6, Selected Financial Data.
For information with respect to the restatement adjustments, see Note 2 to the
accompanying consolidated financial statements. This Management's Discussion
and Analysis gives effect to these restatements.
The restatement relating to the reflection of proceeds from landlord
construction allowances as a component of cash flows from operating activities
increased our net cash provided by operating activities and increased our net
cash used in investing activities in the three, six and nine month interim
periods of Fiscal 2004 by $.5 million, $4.3 million and $8.5 million,
respectively, and increased our net cash provided by (used in) operating
activities and increased our net cash in investing activities in the nine
month interim period of Fiscal 2003 by $7.4 million.
Executive Overview
Bombay designs, sources and markets a line of proprietary home furnishings that
includes large furniture, occasional furniture, wall decor and decorative
accessories that is timeless, transitional and classic in its styling. More
than 90% of the items are imported from approximately 20 countries worldwide,
with more than half of the product coming from China. We are a multi-
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channel
retailer with store locations, Internet and mail order operations. We have a
small wholesale operation that is immaterial to overall revenue but contributes
incrementally to profitability.
We focus on several key metrics in managing and evaluating our operating
performance and financial condition including the following: same store sales,
sales and gross margins by merchandise categories, operating margins as a
percentage of revenues, earnings per share, cash flow, return on assets and
inventory turn.
We are currently executing a multi-phase turnaround intended to improve
Bombay's long-term profitability and generate competitive operating results in
line with current market leaders in the sector whose operating profits are in
the 8% to 12% range. Fiscal 2004 was an investment year during which many
structural issues were addressed.
Phase I of the turnaround commenced during the third quarter of Fiscal 2002 and
continued into Fiscal 2003. Our goal was to reclaim market share, generating
above average same store sales and validating our positioning within the market
place. We reported 13 consecutive months of double-digit same store sales
increases beginning in September 2002 and continuing through September 2003.
As a result of the strength of these sales, we were able to leverage many of
our fixed costs including our buying and occupancy costs, a key component to
improving our overall operating margins.
Phase II can be characterized by the aggressive repositioning of our real
estate portfolio. During the 1980s and 1990s, our focus was on opening stores
in "A" malls throughout North America. As shopping habits have evolved, with
alternative venues such as lifestyle centers and big box strip centers gaining
popularity, we began to migrate our stores to off-mall locations. In addition
to being more convenient for customers and suitable for the sale of large
items, such locations typically have lower cost structures, both from a fixed
rent perspective and for other common area expenses billed by landlords.
Management believes that the movement to the off-mall locations will ultimately
result in lower fixed costs for Bombay and will help improve profitability.
Another key aspect of Phase II included aggressively investing in marketing to
attract new customers to Bombay and support the move from mall to off-mall.
During the late 1990s and early 2000s, we had become increasingly reliant on
periodic catalogs to drive customers into the store and did not have marketing
vehicles with a broader reach. In Fiscal 2001, the marketing expenditures
reached their historical low of 3.4% of revenues. During Fiscal 2002 and
Fiscal 2003, we increased our marketing to 4.1% and 4.6% of revenues,
respectively, with much of the incremental spending going to support a program
for monthly inserts in Sunday newspapers in our top markets.
In addition to investing in new stores, we began making some key investments in
our infrastructure intended to serve as the foundation upon which we plan to
grow with competitive operating margins. During Phase II, we made investments
in our supply chain, in our information technology, in our distribution network
and in key leadership positions.
As we began Fiscal 2004, we were facing a number of challenges. We had a lack
of new product in our inventory with an assortment over-weighted in basic and
core merchandise. We also were effecting a significant number of migrations of
our core Bombay stores from mall to off-mall, and at the same time, taking our
BombayKIDS stores to critical mass. Additionally, we were anniversarying a
year during which we recorded a 13% same store sales increase. We
underestimated the impact of these factors, as well as the softness of the
environment that would develop in the third and fourth quarters, which led to
an overall decline in revenue for the year and a 12% decline in same store
sales. The lower revenue base made it difficult to leverage fixed costs
throughout the organization and for the year, the Company reported a net loss
of $12.2 million.
With respect to our inventory assortment, we made the conscious decision to
exit Fiscal 2003 with higher levels of core merchandise than ideal. While the
merchandise was salable, it prevented us from bringing in appropriate levels of
new fresh product. As a result, both sales and margin suffered. Product flow
and newness was further impacted by interruptions in the supply chain caused by
the imposition of antidumping duties on bedroom furniture beginning in June
2004. While we were aware of the impending action by the U.S. Department of
Commerce and had taken action to move much of our bedroom furniture production
from China to Vietnam and other source countries, inefficiencies associated
with dealing with new vendors, limited production capacity in these factories
as Bombay and other home furnishings retailers sought alternatives to Chinese
sources, and the inability, in some cases, to locate factories outside of China
that were capable of manufacturing product to Bombay quality and safety
specifications, resulted in disruptions in our supply chain and significant
voids in the assortment, particularly during the second half of the year.
We believe that we have taken, and are continuing to take, positive actions to
correct these situations going forward. We ended the year with a much improved
merchandise mix. We have hired a general merchandise manager experienced in
overseas sourcing and have modified our plans with respect to new product
introductions, eliminating SKU count in certain categories and introducing
additional classifications such as home fragrance, designed to increase repeat
purchases and boost the overall productivity of the store. We plan to slow
the rate of product introduction in key furniture categories, and have taken
steps to mitigate risk as we transition from one product line into another. We
believe that these actions should help drive improved sales and margins.
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We continued to invest in marketing during Fiscal 2004, spending 5.6% of total
revenue on advertising. However, we began to see a decline in the
effectiveness of the reach vehicles being used and some investments were
unwarranted. Going forward, the Company expects to continue to invest in
marketing at the rate of 4.5% of revenues on an annual basis but will
reallocate funds to focus on driving existing customers in to make additional
purchases through the use of more direct mail pieces. We also expect to invest
more heavily in new store grand opening support and will readdress certain
locations that opened softer than expected during Fiscal 2004 with additional
marketing spend.
While Fiscal 2004 was a disappointing year in the short term, there were longer
term successes. We have continued to migrate stores successfully from mall to
off-mall locations. During Fiscal 2004, we closed 35 stores, of which the
majority were mall based. A total of 66 real estate projects, including new
stores and relocations, were completed during the year resulting in opening 61
new off-mall locations. The total number of stores grew to 502, a net increase
of 31 stores. While assortment issues adversely impacted new stores as well as
existing stores, the overall four-wall profit for off-mall stores opened a full
year was approximately 350 to 400 basis points higher than those of mall-based
stores and the average sales per store was 8% higher. Occupancy costs in the
off-mall locations are in line with expectations and represent on average a 15%
reduction in per store costs compared to the mall store - in spite of the fact
that the average off-mall store size is 27% larger than its mall-based
counterpart.
The following table reflects the real estate portfolio at each fiscal year end:
January 29, January 31, February 1,
2005 2004 2003
Units % of total Units % of total Units % of total
Mall.... 272 54% 302 64% 328 78%
Off-mall 183 37 123 26 48 11
Outlet.. 47 9 46 10 46 11
Total 502 100% 471 100% 422 100%
We will continue to invest in the migration of mall to off-mall locations
during Fiscal 2005 as leases expire. Overall, we expect to open 45 to 50
stores and close 42 stores during the year. By the end of Fiscal 2005, we
expect approximately 44% of our stores to be in off-mall locations.
During Fiscal 2004, we also opened a total of 16 BombayKIDS stores, ending the
year with 51 stores. This growth, along with planned openings in Fiscal 2005,
has helped us reach critical mass which we expect to result in improved
efficiency in the buying, distribution, marketing and field operations
functions. We continue to prefer to open BombayKIDS stores adjacent to Bombay
locations thus enabling us to leverage cost and introduce a new customer to the
Bombay brand.
We will continue to invest selectively in infrastructure and, in this area, we
achieved some major goals during Fiscal 2004. In August 2004, we relocated to
a new distribution center in the Northeast. The previous location was
severely undersized and resulted in excessive use of off-site storage. We
also identified and have initiated plans to move to a new distribution center
in the metropolitan Toronto area. The new facility will replace our current
undersized location and is expected to result in improved operational
efficiencies when it opens during the second quarter of Fiscal 2005. We
completed the rollout of the new point-of-sale system and the broadband
environment to our Canadian stores. We relaunched our Internet site on a
more stable, reliable platform. The new site has improved functionality and
we expect to make continued enhancements to it in the future. We have made
improvements in our planning and allocations systems and expect to continue to
invest in this area in order to improve our ability to forecast and assort our
stores. While we believe that these investments are critical to our future
success, we also need to ensure that our expenses are in line with our revenue
base. As a result, we have taken steps in other areas to right size the
organization and continue to aggressively control expenses as we seek to
restore profitability to the Company.
The infrastructure that we develop and the investments that we make will be
critical to the third phase of our turnaround strategy. Our plan is to
organically develop other retail concepts and areas of operations that would
leverage our core competencies and become new growth vehicles for Bombay.
This longer-term strategy is dependent on successfully accomplishing earlier
phases, which will be the focus for Fiscal 2005 and beyond.
Other Disclosures
The largest percentage of our sales and operating income is realized in the
fourth fiscal quarter, which includes December (Christmas season).
Same store sales comparisons are calculated based upon revenue from stores
opened for more than 12 months. Stores converted from the regular format to
the large format and stores relocated from mall to off-mall locations are
classified as new and are excluded from same store sales until they have been
opened for 12 months. Stores relocated within a mall and whose size is
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significantly changed are treated as new stores and are excluded from the same
store sales calculation until opened for a full year. Remodeled stores remain
in the computation of same store sales.
Cost of sales includes all costs associated with the purchase of product
including, but not limited to, vendor cost, inbound transportation costs,
duties, commission, inspections, quality control, warehousing and outbound
transportation costs. Buying costs include costs associated with our buying
department, consisting primarily of salaries, travel, product development and
product sample costs. Store occupancy costs include costs such as rent, real
estate taxes, common area maintenance charges, utilities and depreciation and
amortization of leasehold improvements and other fixed assets relating to our
retail locations.
The impact of inflation on operating results is typically not significant
because the majority of our products are proprietary. We attempt to alleviate
inflationary pressures by improving designs, finding alternative production
sources in lower cost countries and increasing selling prices (subject to
competitive conditions).
An anti-dumping petition against China furniture makers for allegedly dumping
bedroom furniture was filed during 2003. This created some disruption in the
industry and in our flow of product as we shifted orders to vendors with
production capacity in other countries in preparation for the unfavorable
duties. The actual duties determined by the U.S. Department of Commerce were
announced late in 2004 and we do not expect the impact of these duties to have
a material effect on operations going forward.
Bombay has a retail (52-53 week) fiscal year, which ends on the Saturday
nearest January 31. The periods ended January 29, 2005 ("Fiscal 2004"),
January 31, 2004 ("Fiscal 2003") and February 1, 2003 ("Fiscal 2002") reflect
52 weeks.
NET REVENUES
Net revenues consist of sales to retail customers, through store, mail order
and Internet, and wholesale sales, through Bailey Street and to our
international licensees, as well as shipping fees and other revenues. Shipping
fees reflect revenue from customers for delivery of merchandise. Other
includes royalties and territory fees from international licensees.
Fiscal Fiscal Fiscal
Net revenues (in millions) 2004 2003 2002
Retail.......... $551.5 $571.8 $478.3
Wholesale....... 17.0 17.7 10.8
Shipping........ 7.2 6.6 4.6
Other........... .4 .3 .3
Total........ $576.1 $596.4 $494.0
Fiscal Fiscal Fiscal
Merchandise category 2004 2003 2002
Accessories..... 40% 39% 42%
Large furniture. 29 30 26
Occasional furniture 19 19 19
Wall decor...... 12 12 13
Total........ 100% 100% 100%
Fiscal 2004
Net revenues decreased $20.3 million, or 3%, to $576.1 million, compared to
$596.4 million in Fiscal 2003. Revenues from retail operations decreased $19.8
million, or 3%, from the previous year. Same store sales declines of 12% were
partially offset by sales from new stores, which contributed approximately
$85.7 million in net sales. During the year, we opened 50 large format stores
and 16 BombayKIDS stores. Increases from new stores were partially offset by
the closing of 31 large format stores and four regular stores which, in
aggregate, contributed approximately $48.4 million to net sales in Fiscal 2003.
Direct-to-customer revenues increased 6% to $31.7 million from $29.8 million in
the previous year, attributable to 25% growth in Internet sales, which more
than offset the 31% decline in mail order revenues. Wholesale revenues
declined slightly to $18.9 million from $19.5 million in Fiscal 2003 due
primarily to a decline in the Bailey Street business.
All regions of the U.S. and Canada reported low double digit same store sales
declines. We ended Fiscal 2004 with 384 large format stores, 20 regular
stores, 47 outlets and 51 BombayKIDS stores. Total retail square footage
increased 9% from Fiscal 2003 year end, while the store count increased by a
net 31 units. The number of retail transactions for the year increased by
approximately 8%, and the average ticket decreased to $77.
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Fiscal 2003
Net revenues increased $102.4 million, or 21%, to $596.4 million, compared to
$494.0 million in Fiscal 2002. Revenues from retail operations increased $94.9
million, or 20%, from the prior year. Both new stores and same store sales
increases contributed to the growth. Same store sales increased 13% for the
year while stores classified as new stores during Fiscal 2003 contributed
approximately $51.8 million in net sales. During the year, we opened 53 large
format stores, 30 BombayKIDS stores and one outlet. In addition, we converted
four regular stores to the large format. Increases from new stores were
partially offset by the closing of 26 large format stores, eight regular stores
and one outlet which, in aggregate, contributed approximately $24.9 million in
net sales in Fiscal 2002. Direct-to-customer revenues increased 44% to $29.8
million, from $20.6 million, due to strong Internet sales, partially offset by
a decrease of approximately 10% in mail order sales. The remainder of the
increase relates to growth in our wholesale operations, in particular, Bailey
Street, where revenues increased 88%, to $15.8 million from $8.4 million in
Fiscal 2002.
All regions of the U.S. and Canada reported positive same store sales, with all
but the Midwest reporting double-digit sales increases. At the end of Fiscal
2003, we had 365 large format stores, 25 regular stores, 46 outlets and 35
BombayKIDS stores. Total retail square footage increased 17% compared to year-
end Fiscal 2002, while the store count increased by a net 49 units. The number
of retail transactions for the year increased by almost 15% and the average
ticket increased to $86 from $82 in Fiscal 2002.
COST OF SALES, BUYING AND STORE OCCUPANCY COSTS
(In millions)
Fiscal Fiscal Fiscal
2004 2003 2002
(restated)(restated)
Cost of sales, buying
and occupancy costs $420.7 $412.7 $344.0
Shipping........ 7.9 8.8 5.6
Total........ $428.6 $421.5 $349.6
Fiscal 2004
Cost of sales, including buying and store occupancy costs, for Fiscal 2004 was
$428.6 million, or 74.4% of revenues, up from 70.7% of revenues in Fiscal 2003.
Product margins declined 130 basis points as a result of issues with
merchandise mix, promotional activity and a general softness in the home
furnishings retail sector. Additionally, distribution costs had a negative
impact on margins as they were deleveraged on a lower sales volume. Buying and
store occupancy costs increased 240 basis points, reflecting the deleveraging
impact of these relatively fixed costs compared to the lower sales volume.
Buying and store occupancy costs included impairment charges totaling $.5
million to write down the fixed assets related to ten unprofitable stores.
Fiscal 2003
Cost of sales, including buying and store occupancy costs, for Fiscal 2003 was
$421.5 million, or 70.7% of revenues. As a percentage of revenues, these costs
improved from 70.8% in Fiscal 2002. Product margins declined 210 basis points
as we focused on our value offerings at key price points designed to increase
market share and drive sales volumes. Buying and store occupancy costs
declined as a percentage of revenues to 16.8% from 19.1% in Fiscal 2002,
reflecting the significant leverage gained as a result of higher same store
sales. Buying and store occupancy costs included impairment charges totaling
$.2 million to write down the fixed assets related to eight unprofitable
stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal 2004
Selling, general and administrative expenses were $165.7 million compared to
$158.4 million in Fiscal 2003. As a percentage of revenues, expenses increased
to 28.8% in Fiscal 2004 compared to 26.6% in Fiscal 2003.
At the store level, expenses increased $2.4 million, or 90 basis points. The
increase was driven primarily by a $2.0 million increase in store payroll
resulting from the higher store count over the course of the year. On a per
store basis, total costs were down as we tightly managed expenses in a soft
sales environment. The 90 basis point increase as a percentage of revenue is
the result of the same store sales declines and a general softness in sales for
all stores making it difficult to leverage fixed costs, particularly early in
the year when store payroll costs tend to be more fixed in nature.
Marketing and visual merchandising costs increased approximately $1.5 million
or 40 basis points to 5.6% of total revenue. The increase in this category
resulted from our decision to continue to invest in marketing despite the soft
sales trend in order to drive traffic and reach new customers.
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Corporate office selling, general and administrative expenses increased $3.4
million, or 90 basis points over the prior year, due to higher medical and
other insurance costs of $2.7 million and higher severance expenses of $.7
million associated with right-sizing the organization. Additionally, audit
expenses increased approximately $.6 million as a result of the new
requirements for compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Internet and mail order selling, general and administrative expense increased
by $1.1 million due to higher internet sales and higher hosting and design
costs as we launched our updated website on a new platform. Also, we had
approximately $.8 million less foreign exchange gain resulting from changes in
the Canadian dollar exchange rate, in addition to other less significant
changes. Current year depreciation was $2.0 million lower than in Fiscal 2003
as a result of the prior year charge of $2.1 million associated with replacing
the Company's point-of-sales system. Additionally, corporate incentive-based
compensation expense was $1.4 million lower in Fiscal 2004 than in Fiscal 2003.
Fiscal 2003
Selling, general and administrative expenses, including marketing,
were slightly lower at 26.6% of revenues in Fiscal 2003 compared to 26.8%
of revenues in Fiscal 2002. In dollars, total selling, general and
administrative expenses were $158.4 million compared to $132.3 million in
Fiscal 2002, an increase of $26.1 million.
At the store level, costs increased $13.7 million but declined
slightly as a percentage of sales. Major factors contributing to the
increased costs include factors associated with the increase in volume and
number of stores such as higher store payroll and bonuses, which increased
$9.3 million, and higher costs associated with credit card processing and
collections, which increased $1.2 million. Store payroll declined 30
basis points as a percentage of revenue due to leveraging against the
higher sales base while store bonuses, which are based upon improvement in
store level profitability from the comparative prior year period,
increased 10 basis points. Other store level initiatives that resulted in
higher selling, general and administrative costs included the replacement
of the point-of-sale dial-up environment with a new broadband
communication network which resulted in increased costs of approximately
$1.1 million, and store opening and closing expenses of $0.6 million.
Marketing costs, including visual merchandising costs, increased
$7.5 million, or 50 basis points, as we increased our distribution of
monthly Sunday newspaper inserts from three markets in late Fiscal 2002 to
21 markets in Fiscal 2003, in order to attract new customers and drive
traffic into the stores. Growth in Internet marketing, support for new
store openings and general increase attributable to the increased store
count also contributed to the higher marketing dollars.
Corporate office selling, general and administrative expenses
increased $4.9 million compared to the prior year but declined
approximately 40 basis points as a percentage of revenue as we leveraged
insurance and payroll costs against the higher revenue base. Corporate
payroll, including bonuses, increased $3.5 million as we built
infrastructure to support the current and future growth plans. Insurance
costs declined slightly primarily due to favorable experience relating to
workers' compensation insurance. Costs associated with infrastructure
investment in systems resulted in an increase in depreciation and
amortization cost and related operating costs of approximately $2.1
million. Internet selling and operating costs also contributed to the
increase during the period. These cost increases were partially offset by
foreign exchange gains of $1.4 million related to the strengthening of the
Canadian dollar, and costs incurred during Fiscal 2002 of $1.3 million
related to the settlement of a California wage and hour lawsuit and $1.1
million relating to the departure of the former Chief Executive Officer.
INTEREST
Fiscal 2004
During Fiscal 2004, we had interest income of $67,000 and interest expense of
$601,000, compared to interest income of $176,000 and interest expense of
$621,000 in Fiscal 2003. Interest income declined as we had lower levels of
invested cash balances during the year resulting from the lack of
profitability. However, interest expense also declined as we managed inventory
levels and maintained average borrowing levels lower than in Fiscal 2003.
Fiscal 2003
During Fiscal 2003, we had interest income of $176,000 and interest expense of
$621,000, compared to interest income of $331,000 and interest expense of
$152,000 in Fiscal 2002. Decline in interest income and increase in expense
are the result of lower invested cash balances and greater utilization of the
credit facility in the current year. Funds were primarily used to finance our
capital expansion plan, with the addition of 49 locations, and higher inventory
levels to support both the higher store count and the increase in same store
sales.
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INCOME TAXES
We provided income tax benefit of $6.5 million in Fiscal 2004 and income tax
expense of $6.2 million and $5.1 million in Fiscal 2003 and Fiscal 2002,
respectively. The effective rates were 34.6%, 38.7% and 41.2% in the
respective periods. Fluctuations in the effective rate were primarily related
to foreign taxes associated with our Canadian subsidiary and the relative
significance of the profit generated by the Canadian subsidiary to the overall
consolidated entity, as well as the impact of state tax expenses that have not
changed proportionately to income (loss) before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity and capital resources are cash flows from
operations and a line of credit. We have a secured, revolving credit agreement
with a group of banks, with an aggregate commitment of up to $125 million for
working capital, inventory financing and letter of credit purposes. The
available commitment under the facility is limited to a borrowing base
generally comprised of 75% of eligible inventory and 85% of receivables, as
defined in the credit agreement and with seasonal and reserve adjustments. The
aggregate commitment under the facility can be increased to $175 million prior
to September 15, 2007, at the request of the Company. At January 29, 2005, the
bank commitment was $70.2 million, and $61.4 million was available for
borrowings or additional letters of credit. The credit facility expires
September 15, 2009.
Fiscal 2004
During Fiscal 2004, we ended the year with cash and long-term investments of
$9.2 million, $16.5 million lower than at the previous year end. Capital
expenditures were the primary use of cash, at $36.9 million, as we opened 66
stores, including 50 large format stores and 16 BombayKIDS locations, and a
distribution center during the year in addition to routine purchases of
software and equipment.
Although we recorded a net loss of $12.2 million, cash provided by operations
was $19.3 million, due primarily to non-cash depreciation and amortization of
$18.8 million and an increase in accounts payable and accrued expenses of $15.8
million. Cash flows from operations also reflects $11.6 million of landlord
construction allowances from store and distribution center landlords that help
reduce the net outlay of cash related to the new construction.
At January 29, 2005, inventory balances were $5.8 million higher than at
January 31, 2004, due primarily to higher level of merchandise in-transit from
the vendors as of the end of the year. Inventory at the store level and in the
distribution centers was similar to last year's levels. Inventory was $72 per
square foot of retail space as of the end of Fiscal 2004 compared to $75 per
square foot last year. On a per store basis, inventories decreased to $288,000
per store compared to $294,000 per store last year. We believe that the
quality of merchandise is much improved compared to last year with a greater
portion of the assortment consisting of new product to support Fiscal 2005
sales.
From a liquidity and capital expenditures standpoint, our strategy is to
utilize our credit facility to finance seasonal borrowings and working capital
required by store growth while we utilize cash flow from operations and our
balance sheet to finance our capital programs. The operating loss for Fiscal
2004 and the resulting decline in the cash balance has caused us to reassess
our liquidity and capital program and investigate alternatives to fund the
continued migration of stores from mall to off-mall and the growth of the
BombayKIDS stores. Management has developed a plan that calls for a reduction
in store growth for Fiscal 2005 compared to levels previously announced and the
disposal of certain assets which are either non-operating assets or are not an
integral component of our core operations. In November, we announced that we
plan to divest the Bailey Street wholesale operations. We are currently in the
process of assessing sale and liquidation scenarios as well as a combination of
both. Substantially all of the assets of Bailey Street are current assets
(inventory and accounts receivable). We also plan to sell non-operating
assets, including a Company-owned building occupied by a third party and a
parcel of land adjacent to our Company headquarters, in order to supplement our
available capital. We expect that the proceeds from the sale and/or
liquidation of our Bailey Street operation, along with the sale of land and
building, should be adequate, when added to expected cash flow from operations,
to fund our capital expenditure program and result in a higher cash balance at
the end of Fiscal 2005.
Our capital requirements for Fiscal 2005 are estimated to be $20 to $25 million
and includes opening 45 to 50 new stores during the year while closing
approximately 42 stores, resulting in an ending store count of approximately
505 to 510 stores. Other capital expenditure plans include the opening of a
new distribution center to replace an existing undersized facility in Canada
and continued investment in information systems.
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In connection with continuing operations, we have various contractual
obligations and commercial commitments requiring payment in future periods,
summarized in the table below.
(In thousands)
Payments Due by Period
Total Less than 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
CONTRACTUAL OBLIGATIONS
Real estate operating leases $317,636 $ 45,489 $124,329 $71,168 $76,650
Unconditional purchase orders 163,784 163,784 * * *
Equipment operating leases 2,256 850 1,366 40 *
Employment contracts.. 3,265 2,950 315 * *
Other contractual obligations 13,844 11,659 2,185 * *
Total contractual cash obligations $500,785 $224,732 $128,195 $71,208 $76,650
COMMERCIAL COMMITMENTS
Import letters of credit $5,870 $5,870 $ * $ * $ *
Standby letters of credit 2,942 2,942 * * *
Guarantees of travel cards 199 199 * * *
Total commercial commitments $9,011 $9,011 $ * $ * $ *
Fiscal 2003
During Fiscal 2003, we used $31.0 million of cash, ending the year with $25.6
million in cash and long-term investments. The decline in the level of cash
from Fiscal 2002, for both year-end comparisons and throughout the period, is
due to our higher capital expenditures and corresponding inventory levels in
Fiscal 2003 to support the additional stores and growth in same store sales.
The primary sources of cash were net income, including non-cash depreciation,
amortization expense and deferred tax expense, as well as the exercise of stock
options. Cash was primarily used for capital expansion, partially offset by
construction allowances granted by landlords, and to purchase additional
inventory to support the larger store base and increased same store sales.
Other significant uses of cash included the payment of federal income taxes and
a decrease in other current assets, primarily due to a decrease in prepaid rent
resulting from the timing of the end of the fiscal period.
Capital expenditures totaled $41.1 million and included the costs of opening 53
large format stores, 30 KIDS stores, one outlet, a distribution center in
Plainfield, Indiana, investments in new point-of-sale, planning and allocation
and other systems and routine purchases of equipment. These expenditures were
partially offset by construction allowances of $11.9 million granted by
landlords.
At January 31, 2004, inventory levels were $138.9 million or $36.1 million
higher than at February 1, 2003. This increase represents investments to
support the additional number of stores and higher sales levels. The year end
level was above desired levels as a result of aggressively buying to Christmas
sales that did not materialize.
CRITICAL ACCOUNTING POLICIES
In the course of preparing the financial statements, management makes certain
judgments relative to accounting policies that are appropriate in the
circumstances and the application of those policies. The following policies
are those deemed to be most critical.
Inventory Valuation
Inventories are valued at the lower of cost or market, with cost being
determined based upon the weighted average inventory method. Cost is calculated
based upon the actual landed cost of an item at the time it is received in the
warehouse based upon actual vendor invoices, or estimates of costs for which an
invoice is not present, or for which an allocation of shared costs is required.
In addition, we include the cost of warehousing and transporting product to the
stores in our costs.
We regularly evaluate our compliance with the lower of cost or market
principle. Items are evaluated by SKU and, to the extent that the cost of the
item exceeds the current selling price, provision is made to reduce the
carrying cost of the item. Additionally, we review the aging of our inventory
by SKU. The carrying cost of the item is reduced based upon certain age
criteria and product category. Since the determination of carrying value of
inventory involves both estimation and judgment of cost and market value,
differences in these estimates could result in valuations that vary from the
recorded amount.
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Each month, we record an allowance for shrinkage to provide for the estimated
cost of lost or stolen inventory. The amount of the allowance is determined
based upon the historical shrinkage results and is adjusted at least annually
to reflect current circumstances. Inventory is physically counted at all
locations at least once each year, at which time actual results are reflected
in the financial statements. Physical counts were taken at substantially all
stores and distribution centers during January 2005.
Impairment of Long-Lived Assets
We review long-lived assets with definite lives at least annually and whenever
events or changes in circumstances indicate that the carrying value of the
asset may not be recoverable. This review includes the evaluation of
individual under-performing retail stores and assessing the recoverability of
the carrying value of the fixed assets related to the store. Future cash flows
are projected for the remaining lease life using a probability-weighted
approach to estimate the fair value of the store assets. These projections
consider such factors as future sales levels, gross margins, changes in rent
and other expenses as well as the overall operating environment specific to
that store. If the estimated future cash flows are less than the carrying
value of the assets, we record an impairment charge equal to the difference
between the assets' fair value and carrying value. Since the projection of
future cash flows involves judgment and estimates, differences in circumstances
or estimates could produce different results.
Income Taxes
In determining net loss for financial statement purposes, we make certain
estimates and judgments in the calculation of tax benefit and the resulting
tax liabilities and in the recoverability of deferred tax assets.
In the ordinary course of business, there may be transactions and calculations
where the ultimate tax outcome is not certain. The calculation of tax
liabilities involves dealing with uncertainties in the application of complex
tax laws. We recognize potential liabilities for anticipated tax audit issues
in the U.S. and other tax jurisdictions based on an estimate of the ultimate
resolution of whether, and the extent to which, additional taxes will be due.
Although we believe that the estimates are reasonable, no assurance can be
given that the final outcome of these matters will not be different than what
is reflected in the current and historical income tax provisions and accruals.
Deferred tax assets are recognized for items that have a difference between the
time they are deductible for financial statement purposes and for tax purposes
as well as for net operating loss carryforwards and credit carryforwards. As
of January 29, 2005, we have recorded $9.4 million of net deferred tax assets,
including net operating loss and credit carryforwards of $4.0 million recorded
during Fiscal 2004 as a result of our net taxable loss exceeding amounts for
which a carryback was available.
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, requires that deferred tax assets be reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the recorded deferred tax assets will not be realized in
future periods. This assessment requires significant judgment, and the fact
that a benefit may be expected for a portion but not all of a deferred tax
asset increases the judgmental complexity.
We evaluate the realizability of our deferred tax assets on an ongoing basis,
considering all available positive and negative evidence, including the
reversal patterns of the assets, our past results, the existence of cumulative
losses in recent years, our forecast of future taxable income and on-going
prudent and feasible tax planning strategies. A significant factor impacting
our evaluation of the deferred tax assets recorded as of January 29, 2005, was
the net loss recognized for Fiscal 2004. We believe that the performance of
Fiscal 2004 will not be repeated and that we will return to profitability in
Fiscal 2005 and beyond for the following reasons:
We entered 2005 with an improved inventory mix having elected to
clear much of the undesirable inventory in late Fiscal 2004 whereas last
year, we entered the year with an oversupply of core and basic
merchandise, which restricted our ability to introduce new, fresh product
into the assortment and resulted in higher inventory carrying costs.
We have taken measures to substantially improve our merchandise
assortment and the process by which we introduce new product and exit old
product under the leadership of our new general merchandise manager.
We do not expect the supply chain interruption and additional costs
that we experienced as a result of the imposition of antidumping duties
on bedroom furniture from China, which necessitated moving production
from China to Vietnam and other alternative source countries.
We have an increased number of stores in off-mall locations where
operating costs are lower and where we have experienced higher average
sales volumes, thus helping to improve the overall profitability of our
stores. Additionally, many of these stores were relatively new or were
the result of migrating from mall to off-mall locations. As the stores
become more mature, we expect overall sales volumes to strengthen.
We have fewer new store openings planned for Fiscal 2005, which will
reduce store opening expenses and help to reduce the cannibalization of
existing stores, thereby enhancing profitability.
We have taken steps to reduce general and administrative costs in
order to right size the organization and improve profitability.
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Based upon our evaluation, we have concluded that it is more likely than not
that the benefit of the deferred tax assets will be realized and, thus, no
valuation allowance has been established as of January 29, 2005. However, if
our plans for the return to profitability in the future do not come to
fruition, or if other conditions indicate that the benefit of the deferred tax
assets is more likely than not to be realized, we will record a valuation
allowance to reduce the assets to their realizable value. Such valuation
allowance, if established, would serve to increase our tax expense and reduce
net income in the period in which it is recorded.
Insurance
We are self-insured with respect to medical and dental insurance coverage
offered to our eligible employees, up to a maximum of $150,000 per claim.
Above that amount, medical insurance coverage is in place. In connection with
the self-insured portion, we maintain a liability for claims that are in the
process of being paid and those that have been incurred but not yet reported to
our insurance carrier. We base the amount of the liability upon historical
claims experience and actuarial estimates regarding the exposure for claims
incurred but not yet reported. At January 29, 2005, the balance of the medical
and dental liability was $957,000.
Since Fiscal 2001, we have also maintained workers' compensation insurance
coverage with a deductible of up to $150,000 per claim. At January 29, 2005,
we had recorded a liability of $3.1 million, representing the estimated amount
that will have to be paid in future periods related to the settlement of claims
under the insurance policies for Fiscal 2001 through Fiscal 2004. The amount
of the liability reflects expected remaining workers' compensation claims based
upon actuarial estimates, utilizing historical claims experience and other
relevant information and trends. Prior to Fiscal 2001, our workers'
compensation insurance was not subject to a deductible. Beginning in Fiscal
2005, our workers' compensation insurance deductible will be $250,000 per
claim.
If circumstances change or if information becomes available that would indicate
that future payments with respect to insurance liabilities would be different
than what was previously estimated, we will adjust such liabilities
accordingly. Since the amounts recorded for insurance liabilities are based
upon various estimates, actual future requirements could vary from the recorded
liabilities.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46, Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51 ("FIN 46"). FIN 46 is intended to clarify the
application of ARB No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. For those entities, a controlling financial interest cannot be
identified based on an evaluation of voting interests and may be achieved
through arrangements that do not involve voting interests. The consolidation
requirement of FIN 46 was effective immediately to variable interests in
variable interest entities ("VIEs") created or obtained after January 31, 2003.
FIN 46 also sets forth certain disclosures regarding interests in VIEs that are
deemed significant, even if consolidation is not required. In December 2003,
the FASB issued FIN 46 (revised December 2003), Consolidation of Variable
Interest Entities ("FIN 46R"), which delayed the effective date of the
application of FIN 46 to us for non-special purpose VIEs acquired or created
before February 1, 2003, to our interim period ended on May 1, 2004, and
provided additional technical clarifications to implementation issues. During
Fiscal 2004, we adopted the provisions of FIN 46R. Since we do not have any
VIEs, the adoption of FIN 46R had no impact on our consolidated financial
position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS 151
requires that fixed production costs be allocated to inventory based on the
normal capacity of production facilities and that unallocated overheads be
recognized as an expense in the periods in which they are incurred. In
addition, other items such as abnormal freight, handling costs and amounts of
excess spoilage require treatment as current-period charges rather than as a
portion of the inventory cost. SFAS 151 is effective for Fiscal 2006, at which
time we will adopt the provisions of the standard. We do not expect the
adoption of the standard to have a material impact on our consolidated
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) ("123R"), Share-
Based Payment. SFAS 123R establishes standards for accounting for transactions
in which an entity exchanges its equity instruments for goods or services. The
primary focus of SFAS 123R is on employee services obtained in share-based
payment transactions. SFAS 123R requires that all share-based payments to
employees be recognized in the financial statements based upon their fair
values. The cost will be recognized over the period during which an employee
is required to provide services in exchange for the award. The standard is
effective for our financial statements beginning in Fiscal 2006, at which time
we will adopt its provisions. We are in the process of planning our
implementation and evaluating the impact of adoption on our consolidated
financial position and results of operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the potential loss arising from adverse changes in the
value of financial instruments. The risk of loss is assessed based upon the
likelihood of adverse changes in fair values, cash flows or future earnings.
We have exposure to interest rate risk, as borrowings under our credit facility
are based upon LIBOR, prime and other benchmark rates which may fluctuate with
market conditions. Based upon our seasonal borrowing levels, management does
not believe that a change in interest rates of 100 basis points would have a
significant impact on our consolidated financial position or results of
operations.
International purchases of inventory are primarily denominated in United States
dollars, which reduces our risk to foreign exchange rate fluctuation. Our
greatest foreign exchange exposure is with respect to intercompany transactions
with our Canadian subsidiary and translation of their financial statements for
inclusion in our consolidated financial statements.
As of January 29, 2005 we had no debt or other market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The index to the consolidated financial statements is found on page 28. Our
consolidated financial statements and notes to the consolidated financial
statements follow the index.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
There have been no changes in or disagreements with accountants on accounting
or financial disclosures.
ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
that are designed to provide reasonable assurance that the information that we
are required to disclose in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. It should be noted that, because of inherent
limitations, our disclosure controls and procedures, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Management began a review of our accounting policies and practices with respect
to leases during the fourth quarter of Fiscal 2004 based upon their monitoring
of restatement activity and the related communication within the retail
industry. As a result of this internal review, we identified errors in our
reporting of landlord allowances within the consolidated statements of cash
flows. Landlord allowances, although clearly separately identified, were
improperly included as a component of cash flows from investing activities
instead of cash flows from operating activities. Accordingly, we have
restated our consolidated statements of cash flows for Fiscal 2003 and Fiscal
2002. Management, with the participation of the Chief Executive Officer and
Chief Financial Officer, has performed an evaluation of our disclosure controls
and procedures as of January 29, 2005, and for the reason set forth below, our
Chief Executive Officer and Chief Financial Officer have concluded that as of
January 29, 2005, our disclosure controls and procedures were not effective at
a reasonable level of assurance, based on the evaluation of these controls and
procedures as required by Exchange Act Rule 13a-15(b).
In light of the material weakness described below, we performed additional
analysis and other procedures to ensure that our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, management believes that the financial statements
included in this Annual Report on Form 10-K present fairly, in all material
respects, our financial position, results of operations and cash flows for the
periods presented in conformity with accounting principles generally accepted
in the United States of America.
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Exchange Act Rule 13a-
15(f). Our internal control over financial reporting is a process that is
designed under the supervision of our Chief Executive Officer and Chief
Financial Officer, and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. Our internal control over financial reporting
includes those policies and procedures that:
i. Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
ii. Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States
of America, and that receipts and expenditures recorded by us are
being made only in accordance with authorizations of our management
and Board of Directors of the Company; and
iii. Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief
Financial Officer, performed an assessment of the effectiveness of the
Company's internal control over financial reporting as of January 29, 2005. In
making this assessment, we used the criteria set forth in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the "COSO").
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. Management has concluded that as of January 29, 2005,
our controls over the selection and application of our lease accounting
policies related to the classification of landlord allowances within the
consolidated statements of cash flows were ineffective to ensure that such
leasing transactions were reported in the consolidated statements of cash flows
in accordance with accounting principles generally accepted in the United
States of America. Specifically, the deficiency in our controls over the
selection and application of our lease accounting policies failed to identify
misstatements in the reporting of cash provided by operating activities and
cash used in investing activities reported in the consolidated statements of
cash flows, which resulted in the restatement of our Fiscal 2003 and Fiscal
2002 annual consolidated financial statements. Additionally, this control
deficiency could result in a misstatement of cash provided by operating
activities and cash used in investing activities that would result in a
material misstatement to annual or interim financial statements that would not
be prevented or detected. Accordingly, management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has determined that
this control deficiency constituted a material weakness. Because of this
material weakness, management has concluded that as of January 29, 2005, we did
not maintain effective internal control over financial reporting based on the
criteria established in Internal Control-Integrated Framework issued by the
COSO.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP,
has audited our management's assessment of the effectiveness of the Company's
internal control over financial reporting as of January 29, 2005 as stated in
their report, which is included herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in our internal control over financial reporting occurred during the
fiscal quarter ended January 29, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
In the first quarter of 2005, the Company enhanced its monitoring of
developments surrounding the accounting for leases and revised its accounting
policies with respect to classification of tenant allowances.
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ITEM 9B. OTHER INFORMATION.
There were no events during the fourth fiscal quarter requiring disclosure in a
report on Form 8-K, other than those previously reported on a Form 8-K.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
We have adopted a code of ethics that applies to all employees including our
principal executive officer and principal financial and accounting officer. A
copy of the Code of Business Conduct and Ethics was previously filed as an
Exhibit to the Annual Report on Form 10-K for the year ended January 31, 2004
and is incorporated herein by reference. In addition, the code is posted on
our website at www.bombaycompany.com or can be obtained, free of charge, upon
request from the office of the Corporate Secretary.
Other information required under Item 10 appears under the captions "Election
of Directors", "Executive Officers of the Company", "Meetings and Committees of
the Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Definitive Proxy Statement of The Bombay Company, Inc. relating to the
Company's Annual Meeting of Shareholders, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item appears under the captions "Executive
Compensation" and "Compensation of Directors" in the Definitive Proxy Statement
of The Bombay Company, Inc. relating to the Company's Annual Meeting of
Shareholders, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item appears under the captions "Equity
Compensation Plan Information" and "Security Ownership" in the Definitive Proxy
Statement of The Bombay Company, Inc. relating to the Company's Annual Meeting
of Shareholders, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no relationships or related transactions during the reporting period
which require disclosure.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item appears under the captions "Independent
Registered Public Accounting Firm's Fees" and "Audit Committee's Pre-approval
Policy and Procedures" in the Definitive Proxy Statement of The Bombay Company,
Inc. relating to the Company's Annual Meeting of Shareholders, which is
incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)The following documents are filed as a part of this Annual Report for The
Bombay Company, Inc. and its
subsidiaries:
(1)Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Fiscal Years Ended
January 29, 2005, January 31, 2004
and February 1, 2003
Consolidated Balance Sheets at January 29, 2005 and January 31, 2004
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended January 29, 2005, January 31, 2004 and February 1, 2003
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 29, 2005, January 31, 2004 and February 1, 2003
Notes to Consolidated Financial Statements
(2)Financial statement schedules not included in this Form 10-K Annual
Report have been omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3)Exhibits:
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE BOMBAY COMPANY, INC.
(Registrant)
Date: April 29, 2005
/s/ JAMES D. CARREKER
James D. Carreker
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Name Position Date
/s/ JAMES D. CARREKER Chairman of the Board and April 29, 2005
James D. Carreker Chief Executive Office
/s/ NIGEL TRAVIS Lead Director April 27, 2005
Nigel Travis
/s/ JOHN H. COSTELLO Director April 27, 2005
John H. Costello
/s/ SUE T. GROENTEMAN Director April 28, 2005
Sue T. Groenteman
/s/ PAUL J. RAFFIN Director April 27, 2005
Paul J. Raffin
/s/ JULIE L. REINGANUM Director April 27, 2005
Julie L. Reinganum
/s/ LAURIE M. SHAHON Director April 27. 2005
Laurie M. Shahon
/s/ BRUCE R. SMITH Director April 27, 2005
Bruce R. Smith
/s/ ELAINE D. CROWLEY Senior Vice President, April 29, 2005
Elaine D. Crowley Chief Financial Officer and Treasurer
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INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
Report of Independent Registered Public Accounting Firm..... 29-30
Consolidated Statements of Operations for the Fiscal Years
Ended January 29, 2005, January 31, 2004 and February 1, 2003 31
Consolidated Balance Sheets at January 29, 2005 and
January 31, 2004 32
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended January 29, 2005, January 31, 2004 and
February 1, 2003 34-35
Consolidated Statements of Cash Flows for the Fiscal Years
Ended January 29, 2005, January 31, 2004 and February 1, 2003 36
Notes to Consolidated Financial Statements.................. 37-48
Unaudited Quarterly Financial Data.......................... 49
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Bombay Company, Inc.:
We have completed an integrated audit of The Bombay Company, Inc.'s fiscal 2004
consolidated financial statements and of its internal control over financial
reporting as of January 29, 2005 and audits of its fiscal 2003 and fiscal 2002
consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based
on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of The Bombay Company, Inc. and its subsidiaries (the
"Company") at January 29, 2005 and January 31, 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
January 29, 2005 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
has restated its fiscal 2003 and fiscal 2002 consolidated financial statements.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that The
Bombay Company, Inc. did not maintain effective internal control over financial
reporting as of January 29, 2005, because the Company did not maintain
effective controls over its selection and application of lease accounting
policies related to the classification of landlord allowances within the
Company's consolidated statements of cash flows, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
29
30
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified and
included in management's assessment. As of January 29, 2005, management has
concluded that the Company's controls over the selection and application of its
lease accounting policies related to the classification of landlord allowances
within the consolidated statements of cash flows were ineffective to ensure
that such leasing transactions were reported in the consolidated statements of
cash flows in accordance with accounting principles generally accepted in the
United States of America. Specifically, the deficiency in the Company's
controls over the selection and application of its lease accounting policies
failed to identify misstatements in the reporting of cash provided by operating
activities and cash used in investing activities reported in the consolidated
statements of cash flows, which resulted in the restatement of the Company's
fiscal 2003 and fiscal 2002 annual consolidated financial statements.
Additionally, this control deficiency could result in a misstatement of cash
provided by operating activities and cash used in investing activities that
would result in a material misstatement to annual or interim financial
statements that would not be prevented or detected. Accordingly, management
has determined that this control deficiency constitutes a material weakness.
This material weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the fiscal 2004 consolidated
financial statements, and our opinion regarding the effectiveness of the
Company's internal control over financial reporting does not affect our opinion
on those consolidated financial statements.
In our opinion, management's assessment that The Bombay Company, Inc. did not
maintain effective internal control over financial reporting as of January 29,
2005, is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, The Bombay Company, Inc.
has not maintained effective internal control over financial reporting as of
January 29, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
April 29, 2005
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31
CONSOLIDATED STATEMENTS OF OPERATIONS
The Bombay Company, Inc. and Subsidiaries
(In thousands, except per share amounts)
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Net revenues............................... $576,087 $596,435 $494,000
Costs and expenses:
Cost of sales, buying and store occupancy costs 428,561 421,459 349,582
Selling, general and administrative expenses 165,658 158,446 132,305
Interest income......................... (67) (176) (331)
Interest expense........................ 601 621 152
594,753 580,350 481,708
Income (loss) before income taxes.......... (18,666) 16,085 12,292
Provision (benefit) for income taxes....... (6,461) 6,219 5,064
Net income (loss)....................... $(12,205) $ 9,866 $ 7,228
Basic earnings (loss) per share............ $(.34) $.28 $.22
Diluted earnings (loss) per share.......... $(.34) $.28 $.22
Average common shares outstanding.......... 35,697 34,649 33,048
Average common shares outstanding and
dilutive potential common shares........ 35,697 34,966 33,298
The accompanying notes are an integral part of these consolidated financial
statements.
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32
CONSOLIDATED BALANCE SHEETS
The Bombay Company, Inc. and Subsidiaries
(In thousands, except shares)
January 29, January 31,
2005 2004
(restated)
ASSETS
Current assets:
Cash and cash equivalents (short-term investments of $3,187 and $15,421 respectively) $ 9,168 $ 25,619
Inventories, at lower of cost or market............. 144,702 138,908
Other current assets................................ 27,022 26,012
Total current assets........................... 180,892 190,539
Property and equipment, at cost:
Land................................................ 892 892
Building............................................ 5,198 5,198
Leasehold improvements.............................. 133,062 113,302
Furniture and equipment............................. 47,144 40,756
186,296 160,148
Accumulated depreciation........................ (94,284) (87,460)
Net property and equipment...................... 92,012 72,688
Deferred taxes......................................... 5,052 593
Other assets........................................... 5,794 5,492
Goodwill, less amortization of $611.................... 423 423
Total assets................................. $284,173 $269,735
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............... $ 48,997 $ 35,348
Income taxes payable................................ * 1,103
Accrued payroll and bonuses......................... 5,660 8,019
Gift cards and certificates redeemable.............. 8,312 7,129
Accrued insurance................................... 4,081 3,730
Total current liabilities....................... 67,050 55,329
Accrued rent and other long term liabilities........... 35,192 23,389
Commitments and contingencies (Notes 6 and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 1,000,000 shares authorized * *
Common stock, $1 par value, 50,000,000 shares authorized,
38,149,646 shares issued........................ 38,150 38,150
Additional paid-in capital.......................... 79,700 79,210
Retained earnings................................... 73,737 85,942
Accumulated other comprehensive income.............. 944 122
Common shares in treasury, at cost, 2,259,261 and
2,816,772 shares, respectively.................. (9,268) (11,555)
Deferred compensation............................... (1,332) (852)
Total stockholders' equity...................... 181,931 191,017
Total liabilities and stockholders' equity... $284,173 $269,735
The accompanying notes are an integral part of these consolidated financial
statements.
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33
THIS PAGE INTENTIONALLY NOT USED
33
34 & 35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The Bombay Company, Inc. and Subsidiaries
(In thousands)
Accumulated
Common Stock Treasury Stock Additional Stock Other Annual
Paid-In Purchase Deferred Retained Comprehensive Comprehensive
Shares Amount Shares Amount Capital Loans Compensation Earnings Income(Loss) Income(Loss)
Total, February 2, 2002
(as previously reported) 38,150 $38,150 (5,113)$(20,861) $75,267 $(950) $(267) $69,144 $(1,776)
Cumulative effect of restatement
for lease accounting (Note 2) * * * * * * * (296) (5)
Total, February 2, 2002
(as restated) 38,150 38,150 (5,113) (20,861) 75,267 (950) (267) 68,848 (1,781)
Purchases of treasury shares * * (202) (895) * 864 * * *
Shares contributed or sold to
employee benefit plans * * 66 271 (89) * * * *
Exercise of stock options * * 596 2,438 45 * * * *
Director fee distributions * * 77 313 3 * * * *
Restricted stock distributions,
net of cancellations * * (45) (184) 220 * (36) * *
Deferred compensation expense * * * * * * 66 * *
Net repayments of stock purchase
loans * * * * * 103 * * *
Interest charges on stock
purchase loans, net * * * * * (17) * * *
Net income (restated) * * * * * * * 7,228 * $7,228
Foreign currency translation
adjustments (restated) * * * * * * * * 381 381
Total, February 1, 2003
(as restated) 38,150 38,150 (4,621) (18,918) 75,446 * (237) 76,076 (1,400) $7,609
Purchases of treasury shares * * (9) (69) * * * * *
Shares contributed or sold to
employee benefit plans * * 64 262 113 * * * *
Exercise of stock options * * 1,613 6,610 3,007 * * * *
Director fee distributions * * 55 227 33 * * * *
Restricted stock distributions,
net of cancellations * * 81 333 611 * (944) * *
Deferred compensation expense * * * * * * 329 * *
Net income (restated) * * * * * * * 9,866 * $9,866
Foreign currency translation
adjustments (restated) * * * * * * * * 1,522 1,522
Total, January 31, 2004
(as restated) 38,150 38,150 (2,817)(11,555) 79,210 * (852) 85,942 122 $11,388
Shares contributed or sold to
employee benefit plans * * 81 331 90 * * * *
Exercise of stock options * * 258 1,017 3 * * * *
Director fee distributions * * 14 55 27 * * * *
Restricted stock distributions,
net of cancellations * * 205 884 370 * (1,171) * *
Deferred compensation expense * * * * * * 691 * *
Net loss * * * * * * * (12,205) * $(12,205)
Foreign currency translation
adjustments * * * * * * * * 822 822
Total, January 29, 2005 38,150 $38,150 (2,259)$(9,268)$79,700 $* $(1,332) $73,737 $944 $(11,383)
The accompanying notes are an integral part of these consolidated financial
statements.
34 35
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Bombay Company, Inc. and Subsidiaries
(In thousands)
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Cash flows from operating activities:
Net income (loss).................... $(12,205) $ 9,866 $ 7,228
Adjustments to reconcile net income to net cash from operations:
Depreciation..................... 16,606 14,005 13,462
Amortization..................... 2,208 4,248 2,743
Restricted stock compensation.... 692 328 66
Deferred taxes and other......... (6,944) 5,057 (1,537)
Change in assets and liabilities:
Increase in inventories.......... (4,831) (34,833) (12,430)
Increase in other assets......... (2,118) (5,835) (2,633)
Increase (decrease) in accounts payable and accrued expenses 15,803 (1,843) 13,624
Increase (decrease) in income taxes payable (971) (2,276) 3,608
Increase (decrease) in accrued payroll and bonuses (2,435) 725 2,156
Increase (decrease) in noncurrent liabilities 1,858 1,876 (661)
Landlord construction allowances.... 11,625 11,900 3,525
Net cash provided by operations 19,288 3,218 29,151
Cash flows from investing activities:
Purchases of property, equipment and other (36,886) (41,062) (13,749)
Proceeds from sale of property and equipment 36 172 289
Net cash used in investing activities (36,850) (40,890) (13,460)
Cash flows from financing activities:
Purchases of treasury stock......... * (83) (31)
Collection of stock purchase loans.. * * 104
Sale of stock to employee benefit plans 422 387 182
Exercise of stock options........... 847 6,310 2,328
Net cash provided by financing activities 1,269 6,614 2,583
Effect of exchange rate change on cash . (158) 69 (81)
Net increase (decrease) in cash and cash equivalents (16,451) (30,989) 18,193
Cash and cash equivalents at beginning of year 25,619 56,608 38,415
Cash and cash equivalents at end of year $ 9,168 $ 25,619 $ 56,608
Supplemental disclosures of cash flow information:
Interest paid....................... $ 601 $ 597 $ 152
Income taxes paid................... 1,310 4,191 2,298
Non-cash investing and financing activities:
Distributions of director fees.... 82 260 316
Distributions of restricted stock. 1,254 943 368
Repurchase of shares from stock purchase loans * * 864
Capitalization of construction period rent 1,487 1,916 612
The accompanying notes are an integral part of these consolidated financial
statements.
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37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bombay Company, Inc. and Subsidiaries
NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Bombay Company, Inc. and its wholly-owned subsidiaries design, source and
market a unique line of fashionable home accessories, wall decor and furniture
through a network of retail locations throughout the United States and Canada,
through specialty catalogs, over the Internet and internationally through
licensing arrangements. We also have a small wholesale operation that
distributes a separate line of occasional furniture. Throughout this report,
the terms "our", "we", "us", "Bombay" and "Company" refer to The Bombay
Company, Inc., including its subsidiaries.
The consolidated financial statements include the accounts of Bombay and its
wholly-owned subsidiaries. All significant intercompany transactions, balances
and profits have been eliminated. Certain prior year amounts have been
reclassified to conform to current year presentation. Bombay has a retail (52-
53 week) fiscal year, which ends on the Saturday nearest January 31. The
periods ended January 29, 2005 ("Fiscal 2004"), January 31, 2004 ("Fiscal
2003") and February 1, 2003 ("Fiscal 2002") reflect 52 weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates. Such estimates
are based on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates affect
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. Actual results could differ materially from those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of our Canadian operations is the Canadian dollar.
Fiscal year end exchange rates are used to translate assets and liabilities to
U.S. dollars. Monthly average exchange rates are used to translate income and
expenses. We record the cumulative effect of foreign currency translation
adjustments in accumulated other comprehensive income (loss) within
stockholders' equity. During Fiscal 2004, Fiscal 2003 and Fiscal 2002, foreign
exchange gain totaled $551,000, $1,377,000 and $23,000, respectively, related
to transactions of our Canadian subsidiary.
CASH AND CASH EQUIVALENTS
We consider cash in stores, deposits in banks and short-term investments with
original or remaining maturities of three months or less when purchased as cash
and cash equivalents for the purposes of the financial statements. Short-term
investments are recorded at the lower of cost or fair market value.
INVENTORIES
Inventories consist primarily of finished merchandise and are valued at the
lower of cost or market, with cost being determined based upon the weighted
average inventory method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method over the
lives shown:
Building............... Forty years
Furniture and equipment Two to ten years
Leasehold improvements. The lesser of the life of the lease or asset
Landlord construction allowances are recorded as accrued rent and other long
term liabilities, and are amortized as a reduction of rent expense over the
life of the related lease.
We charge maintenance and repairs to expense as they are incurred. We
capitalize improvements and betterments which materially prolong the useful
lives of the assets. As property is retired or sold, we remove the cost and
related accumulated depreciation from the accounts, and we recognize gains or
losses in the statements of income.
CAPITALIZED SOFTWARE COSTS
We capitalize certain external and internal costs associated with computer
software and significant enhancements to software features of existing
products. We amortize the costs utilizing the straight-line method over the
estimated economic lives of the software, which range from three to seven
years. Total costs capitalized were $17,522,000 and $15,128,000 at January 29,
2005 and January 31, 2004, respectively. Accumulated amortization related to
these assets was $12,195,000 and $10,016,000 at January 29, 2005 and January
31, 2004, respectively.
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IMPAIRMENT OF LONG-LIVED ASSETS
During Fiscal 2002, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. SFAS 144 requires that long-lived assets with definite
lives be evaluated for impairment whenever conditions indicate that the
carrying value of the assets may not be recoverable. In determining if an
impairment exists, assets must be grouped at the lowest level for which there
are identifiable cash flows that are largely independent of cash flows from
other groups of assets. In performing this impairment test, we group our
assets at the store level. If an impairment exists, the amount of the
impairment is measured as the difference between the carrying value and the
estimated fair value of the assets.
GOODWILL
We test goodwill for impairment at least annually, as of the end of the fiscal
year, and whenever conditions indicate that such an impairment could exist.
Goodwill is tested for impairment by comparing the estimated fair value of our
net assets to their carrying value. If the carrying value exceeds the
estimated fair value, we calculate the implied value of goodwill and recognize
an impairment loss. No impairment was recorded in Fiscal 2004, Fiscal 2003 or
Fiscal 2002.
REVENUE RECOGNITION
We recognize revenue when delivery has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. Revenues are net of
returns and exclude sales tax.
We include in revenues amounts collected from customers for shipping and
handling orders. In Fiscal 2004, Fiscal 2003 and Fiscal 2002, these revenues
totaled $7,149,000, $6,566,000 and $4,626,000, respectively. The associated
shipping and handling expenses are included in cost of sales.
GIFT CERTIFICATES
We record proceeds from the sale of gift cards and certificates as a liability
at the time we receive them. When the holder of the card or certificate
redeems it for merchandise, we relieve the liability and recognize revenue.
COST OF SALES, BUYING AND STORE OCCUPANCY COSTS
We include in cost of sales all costs associated with the purchase of product
including, but not limited to, vendor cost, inbound transportation costs,
duties, commission, inspections, quality control, warehousing and outbound
transportation costs. Buying costs include expenses associated with our buying
department, consisting primarily of salaries, travel, product development and
product sample costs. Store occupancy costs include costs such as rent, common
area maintenance charges, utilities and depreciation and amortization of
leasehold improvements and other fixed assets relating to our retail locations.
ADVERTISING COSTS
We expense advertising costs the first time the advertising takes place.
During Fiscal 2004, Fiscal 2003 and Fiscal 2002, advertising expense was
$29,018,000, $27,604,000 and $20,258,000, respectively.
INCOME TAXES
We use the liability method of computing deferred income taxes on all material
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. We assess the
realizability of deferred tax assets based on available evidence and, if
necessary, provide a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. This
assessment requires significant judgment, and the fact that a benefit may be
expected for a portion but not all of a deferred tax asset increases the
judgmental complexity.
All unremitted earnings of the foreign subsidiary are considered to be
permanently reinvested. Accordingly, no U.S. deferred taxes have been provided
on such earnings.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners. Such amounts are included in accumulated other comprehensive income
(loss) within stockholders' equity and consist of the cumulative effect of
foreign currency translation adjustments. There is no tax effect on the
cumulative effect of foreign currency translation adjustments as undistributed
earnings of the Canadian subsidiary are considered to be permanently reinvested
and will continue to be reinvested in this subsidiary in the foreseeable
future.
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NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation Number ("FIN") 46, Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51. FIN 46 addresses consolidation by business
enterprises of variable interest entities ("VIEs") in which the enterprise
absorbs a majority of the VIE's expected losses, receives a majority of the
VIE's expected residual returns, or both, as a result of ownership, contractual
or other financial interests in the VIE. In December 2003, the FASB amended
and clarified FIN 46 by issuing FIN 46R. During Fiscal 2004, we adopted the
provisions of FIN 46R. The adoption of FIN 46R did not have a material impact
on our consolidated financial position or results of operations.
In November 2004, the FASB issued SFAS 151, Inventory Costs. SFAS 151 requires
that fixed production costs be allocated to inventory based on the normal
capacity of production facilities and that unallocated overheads be recognized
as an expense in the periods in which they are incurred. In addition, other
items such as abnormal freight, handling costs and amounts of excess spoilage
require treatment as current-period charges rather than as a portion of the
inventory cost. SFAS 151 is effective for Fiscal 2006, at which time we will
adopt the provisions of the standard. We do not expect the adoption of the
standard to have a material impact on our consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS 123R (Revised 2004), Share-Based
Payment. SFAS 123R establishes standards for accounting for transactions in
which an entity exchanges its equity instruments for goods or services. The
primary focus of SFAS 123R is on employee services obtained in share-based
payment transactions. SFAS 123R requires that all share-based payments to
employees be recognized in the financial statements based upon their fair
values. The cost will be recognized over the period during which an employee
is required to provide services in exchange for the award. The standard is
effective for our financial statements beginning in Fiscal 2006, at which time
we will adopt its provisions. We are in the process of planning our
implementation and evaluating the impact of adoption on our consolidated
financial position and results of operations.
EARNINGS (LOSS) PER SHARE
Basic earnings per share are based upon the weighted average number of shares
outstanding. Diluted earnings per share are based upon the weighted average
number of shares outstanding plus the shares that would be outstanding assuming
exercise of dilutive stock options and distribution of deferred director
compensation.
The computation for basic and diluted earnings (loss) per share are as follows
(in thousands, except per share amounts):
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Numerator:
Net income (loss)....... $(12,205) $9,866 $7,228
Denominator for basic earnings per share:
Average common shares outstanding 35,697 34,649 33,048
Denominator for diluted earnings per share:
Average common shares outstanding 35,697 34,649 33,048
Stock options........... * 314 227
Deferred director compensation * 3 23
35,697 34,966 33,298
Basic earnings (loss) per share $(.34) $.28 $.22
Diluted earnings (loss) per share $(.34) $.28 $.22
During Fiscal 2004, we reported a net loss. Accordingly, common stock
equivalents would be anti-dilutive during the period and, thus, are not
included in the computation of diluted loss per share. At January 29, 2005,
3,114,000 stock options and 51,000 units of deferred director compensation were
potentially dilutive securities which were excluded from the computation.
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STOCK-BASED COMPENSATION
We apply the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, and the disclosure-only provisions of SFAS 123, Accounting for
Stock-Based Compensation, in accounting for our stock-based incentive plans.
No compensation expense related to grants of stock options has been reflected
in net income (loss), as all options granted under the plans had an exercise
price equal to the market price of Bombay's common stock on the date of grant.
Compensation expense related to grants of restricted stock is measured as the
quoted market price of Bombay's common stock at the measurement date, amortized
to expense over the vesting period. The following table illustrates the effect
on net income (loss) and earnings (loss) per share if we had applied the fair
value recognition provisions of SFAS 123 to stock-based compensation. For
purposes of the pro forma disclosures below, the estimated fair value of the
options is recognized as expense over the vesting period (in thousands):
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Net income (loss) as reported $(12,205) $ 9,866 $7,228
Stock-based compensation expense
determined under SFAS 123, net of tax (1,767) (1,196) (925)
Net income (loss), pro forma $(13,972) $ 8,670 $6,303
Basic earnings (loss) per share, as reported (.34) .28 .22
Diluted earnings (loss) per share, as reported (.34) .28 .22
Basic earnings (loss) per share, pro forma (.39) .25 .19
Diluted earnings (loss) per share, pro forma (.39) .25 .19
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model based upon the following weighted average
assumptions:
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
Expected volatility 64.1% 65.7% 63.9%
Expected life years 6 5 6
Expected dividends. * * *
Risk-free interest rate 4.10% 3.57% 5.21%
The weighted average fair value, as of the date of grant, of options granted
during Fiscal 2004, Fiscal 2003 and Fiscal 2002 was $3.96, $3.95 and $1.71,
respectively.
NOTE 2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During the fourth quarter of Fiscal 2004, we began an
evaluation of our lease accounting practices and determined that it was
appropriate to restate previously issued financial statements. Historically,
we have recognized store lease expense on a straight-line basis beginning on
the date that the store opened. This generally had the effect of excluding the
pre-opening store build out, fixturing and merchandise stocking periods during
which the Company typically had no rent payments. Based upon our evaluation of
our lease accounting practices, we have adopted an accounting policy to
capitalize rent during the construction period and recognize straight-line
rent expense upon the store becoming substantially complete and ready for its
intended use, which results in us recording rent expense during the
merchandise stocking periods.
Additionally, in prior periods, we reflected proceeds from landlord
construction allowances as a component of cash flows from investing activities
in the Consolidated Statements of Cash Flows. We have restated our historical
Fiscal 2003 and Fiscal 2002 Consolidated Statements of Cash Flows to reflect
such proceeds as a component of cash flows from operating activities.
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The effects of these restatements were as follows (in thousands):
Fiscal Year Ended January 31, 2004
Impact of
As Reported Restatement As Restated
CONSOLIDATED BALANCE SHEET
Leasehold improvements.. $103,295 $10,007 $113,302
Property and equipment, at cost 150,141 10,007 160,148
Accumulated depreciation (82,034) (5,426) (87,460)
Net property and equipment 68,107 4,581 72,688
Deferred taxes.......... 372 221 593
Total assets............ 264,933 4,802 269,735
Accrued rent and other
long term liabilities 18,217 5,172 23,389
Retained earnings....... 86,312 (370) 85,942
Total stockholders' equity 191,387 (370) 191,017
Total liabilities and stockholders' equity 264,933 4,802 269,735
CONSOLIDATED STATEMENT OF OPERATIONS
Cost of sales, buying and
store occupancy costs $421,322 $137 $421,459
Income before income taxes 16,222 (137) 16,085
Provision for income taxes 6,271 (52) 6,219
Net income.............. 9,951 (85) 9,866
Basic earnings per share $.29 $(.01) $.28
Diluted earnings per share $.28 $(.00) $.28
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by (used in)
operating activities. $(8,682) $11,900 $3,218
Net cash used in
investing activities. (28,990) (11,900) (40,890)
Fiscal Year Ended February 1, 2003
Impact of
As Reported Restatement As Restated
CONSOLIDATED STATEMENT OF OPERATIONS
Cost of sales, buying and
store occupancy costs $349,599 $(17) $349,582
Income before income taxes 12,275 17 12,292
Provision for income taxes 5,058 6 5,064
Net income............. 7,217 11 7,228
Basic earnings per share $.22 $.00 $.22
Diluted earnings per share $.22 $.00 $.22
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by
operating activities. $25,626 $ 3,525 $ 29,151
Net cash used in
investing activities. (9,935) (3,525) (13,460)
The effects of the restatement on years prior to Fiscal 2002 resulted in an
adjustment to reduce stockholders' equity as of February 2, 2002 by $301,000.
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NOTE 3 - STORE IMPAIRMENTS
We review long-lived assets with definite lives at least annually and whenever
events or changes in circumstances indicate that the carrying value of the
asset may not be recoverable. This review includes the evaluation of
individual under-performing retail stores and assessing the recoverability of
the carrying value of the fixed assets related to the store. Future cash flows
are projected for the remaining lease life using a probability-weighted
approach to estimate the fair value of the store assets. These projections
consider such factors as future sales levels, gross margins, changes in rent
and other expenses as well as the overall operating environment specific to
that store. If the estimated future cash flows are less than the carrying
value of the assets, we record an impairment charge equal to the difference
between the assets' fair value and carrying value. Since the projection of
future cash flows involves judgment and estimates, differences in circumstances
or estimates could produce different results.
Following the holiday selling season in our fourth fiscal quarter, we reviewed
our real estate portfolio for impairment, focusing on store locations currently
operating at a loss. Of the 502 Company-owned stores open as of January 29,
2005, ten stores were identified for which the carrying amounts of the store
assets were not expected to be recoverable. As a result of the review, we
recorded an impairment charge to buying and occupancy costs of $534,000 to
reduce the carrying value of the assets to their estimated net realizable
values. Similar reviews, performed in Fiscal 2003 and Fiscal 2002, resulted in
charges to buying and occupancy costs of $244,000 and $693,000, respectively.
NOTE 4 - DEBT
Effective September 29, 2004, we entered into a secured credit agreement with a
group of banks, pursuant to a credit agreement with Wells Fargo Retail Finance,
LLC, as Arranger and Administrative Agent. The facility replaced our previous
$75 million facility, all indebtedness under which was repaid coincident with
the closing of the new facility. The new facility is comprised of separate
lines of credit in the United States and in Canada, with separate availability
bases. The United States and Canadian lines are secured by inventory,
receivables and certain other assets of the Company and its United States
subsidiaries. The Canadian line is also secured by certain assets of the
Company's Canadian subsidiary, which can borrow up to US$18 million under the
line in certain circumstances. Aggregate borrowings under the United States
and Canadian lines cannot exceed $125 million, except as noted below.
The facility may be used for working capital, inventory financing, and letter
of credit needs. Borrowings under the facility may be made, at the Company's
option and, subject to certain limitations, in the form of loans or by the
issuance of bankers' acceptances with respect to inventory purchases. Loans
under the facility bear interest, at the Company's option, at either the prime
lending rate of Wells Fargo Bank, National Association, or the LIBOR rate plus
a margin of 1.00% to 1.75%, with such margin depending on the amount by which
the average available commitment exceeds usage under the line. The available
commitment under the facility is limited to a borrowing base generally
comprised of 75% of eligible inventory and 85% of receivables, as defined in
the credit agreement and with seasonal and reserve adjustments. The aggregate
commitment under the facility can be increased to $175 million prior to
September 15, 2007, at the request of the Company. The facility expires
September 15, 2009.
The credit agreement contains no covenants regarding the maintenance of
financial ratios, but does include other customary covenants including, but not
limited to, the maintenance of certain minimum availability under the facility;
reporting of certain financial and operational information to the lender; and
limitations regarding the incurrence of other debt, creation of liens, certain
investments, sales, transfers and dispositions of assets. Throughout Fiscal
2004, and continuing, we have been in compliance with all covenants of the
credit agreement. The credit agreement allows us to pay dividends, so long as:
no default or event of default has occurred and is continuing; immediately
after giving effect thereto, availability exceeds usage under the line by at
least $25 million; and certain other conditions are satisfied. We are not
currently, nor have we been, restricted from paying such dividends.
At January 29, 2005, total availability under the facility was $70,200,000.
There were no borrowings as of January 29, 2005. Letters of credit totaling
$8,812,000, primarily to support inventory purchases, were outstanding, and
$61,388,000 was available for additional borrowings or letters of credit.
Interest expense and negotiated fees for Fiscal 2004, Fiscal 2003 and Fiscal
2002, totaled $1,334,000, $1,086,000 and $617,000, respectively.
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NOTE 5 - INCOME TAXES
The components of income (loss) before income taxes and the provision (benefit)
for domestic and foreign income taxes are shown below (in thousands):
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Income (loss) before income taxes:
Domestic........... $(20,632) $11,790 $11,159
Foreign............ 1,966 4,295 1,133
$(18,666) $16,085 $12,292
Provision (benefit) for income taxes:
Current:
Federal........ $(2,360) $(1,019) $ 5,065
Foreign........ 717 1,729 884
State and local 303 (176) 498
(1,340) 534 6,447
Deferred (prepaid):
Federal........ (4,650) 5,009 (1,298)
Foreign........ 194 42 57
State and local (665) 634 (142)
(5,121) 5,685 (1,383)
Total provision (benefit)
for income taxes... $(6,461) $ 6,219 $ 5,064
The effective tax rate differs from the federal statutory tax rate for the
following reasons:
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Federal statutory tax rate (34.0)% 34.0% 34.0%
Increase in effective tax rate
rate due to:
Foreign income taxes 1.3 1.7 4.6
State and local taxes,
net of federal income
tax benefit (1.3) 1.9 1.9
Other, net.. (.6) 1.1 .7
Effective tax rate (34.6)% 38.7% 41.2%
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Deferred taxes reflect the net tax impact of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes. Deferred tax assets (liabilities) are
comprised of the following (in thousands):
January 29, January 31,
2005 2004
(restated)
Deferred tax liabilities:
Depreciation............ $(5,001) $(4,432)
Other................... (2,289) (1,357)
(7,290) (5,789)
Deferred tax assets:
Accrued rent............ 5,041 4,288
NOL and credit carryforwards 5,982 *
Inventory valuation..... 2,366 2,505
Accrued insurance....... 1,385 1,314
Other................... 1,893 1,938
16,667 10,045
Net deferred tax assets $ 9,377 $ 4,256
Deferred tax assets, net of liabilities:
Current................. $4,324 $4,189
Non-current............. 5,053 67
Total.............. $9,377 $4,256
As of January 29, 2005, we have recorded net deferred tax assets of $9,377,000,
including federal net operating loss carryforwards of $4,688,000, expiring in
Fiscal 2024, state net operating loss carryforwards of $589,000, expiring in
Fiscal 2005 through Fiscal 2024 and general business credits, foreign tax
credits and other tax carryforwards of $705,000, expiring in Fiscal 2013
through Fiscal 2024, recorded during Fiscal 2004 as a result of our net taxable
loss exceeding amounts for which a carryback was available.
We evaluate the realizability of our deferred tax assets on an ongoing basis,
considering all available positive and negative evidence, including the
reversal patterns of the assets, our past results, the existence of cumulative
losses in recent years, our forecast of future taxable income and on-going
prudent and feasible tax planning strategies. A significant factor impacting
our evaluation of the deferred tax assets recorded as of January 29, 2005, was
the net loss recognized for Fiscal 2004 and the likelihood that losses will
continue in future years.
Based upon our evaluation, we have concluded that it is more likely than not
that the benefit of the deferred tax assets will be realized and, thus, no
valuation allowance has been established as of January 29, 2005. However, if
our plans for the return to profitability in the future do not come to fruition
or if other conditions indicate that the benefit of the deferred tax assets is
more likely than not to be realized, we will record a valuation allowance to
reduce the assets to their realizable value. Such valuation allowance, if
established, would serve to increase our tax expense and reduce net income in
the period in which it would be recorded.
The Internal Revenue Service has completed its examination of federal income
tax returns through Fiscal 2001, and will be examining Fiscal 2002 through
Fiscal 2004 in the near future. Additionally, we are routinely involved in
state and local income tax audits and, from time to time, foreign jurisdiction
tax audits. We have paid or accrued any liabilities associated with these
audits, and do not expect them to have a material effect on the Company's
consolidated financial statements.
NOTE 6 - LEASES
We lease all of our retail locations and distribution centers under non-
cancelable operating leases whose initial terms typically have 10-year terms,
expiring between 2005 and 2016, and may include options that permit renewal for
additional periods. We also lease certain equipment and our field office
facilities under non-cancelable operating leases whose terms typically range
from 3 to 5 years. During the fourth quarter of Fiscal 2004, we began an
evaluation of our lease accounting
practices and have revised our lease accounting practices to capitalize rent
during the construction period and recognize straight-line expense upon the
store becoming substantially complete and ready for its intended use, which
results in us recording rent expense during the merchandise stocking periods.
As a result, we restated our consolidated financial statements for Fiscal 2003
and Fiscal 2002. See further discussion in Note 2.
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Minimum rental commitments include step rent provisions, escalation clauses,
capital improvement funding and other lease concessions, which are recognized
on a straight-line basis over the primary lease term which includes the pre-
opening store build out, fixturing and merchandise stocking period. In
addition to minimum rental payment, certain leases require additional
contingent rentals based on a percentage of the store's sales volumes exceeding
specified levels as well as reimbursement for real estate taxes, common area
maintenance, insurance and certain other costs.
Rental expense included in the accompanying consolidated statements of
operations for operating leases was (in thousands):
Fiscal Fiscal Fiscal
2004 2003 2002
(restated)(restated)
Minimum rentals. $58,286 $58,470 $50,543
Contingent rentals 296 482 211
Total......... $58,582 $58,952 $50,754
Minimum rental commitments that have initial or remaining noncancelable lease
terms in excess of one year for future fiscal years are as follows (in
thousands):
Fiscal
2005....... $ 45,447
2006....... 43,836
2007....... 42,433
2008....... 39,426
2009....... 37,129
Thereafter. 110,729
$319,000
NOTE 7 - COMMITMENTS AND CONTINGENCIES
As of January 29, 2005, we have outstanding unconditional purchase orders
totaling $163,784,000 relating to the acquisition of inventory in Fiscal 2005.
We have certain contingent liabilities resulting from litigation and claims
incident to the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect our
financial position, results of operations or cash flows.
We are party to employment agreements with certain executives which provide for
compensation and certain other benefits. The agreements also provide for
severance payments under certain circumstances.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Bombay Company, Inc. Employee 401(k) Savings and Stock Ownership Plan
("401(k) Plan") is open to substantially all employees who have been employed
for one year and who work at least 1,000 hours per year. Under the 401(k)
Plan, a participant may contribute up to 75% of earnings with Bombay matching
100% of the initial 3% contribution, and 50% of the next 2% contributed by the
participant. Participant contributions and Company match are paid to a
corporate trustee and invested in various funds or Bombay stock, as directed by
the participant. Company matching contributions made to participants' accounts
are fully vested immediately. Similar benefit plans are in effect for eligible
foreign employees.
To the extent employees are unable to contribute up to 5% of their earnings to
the 401(k) Plan because of limitations imposed by IRS regulations, a
Supplemental Stock Program was adopted. Under this program, employee
contributions in excess of IRS limitations, along with Company matching
contributions, are distributed annually in the form of Bombay common stock.
The Bombay Company, Inc. Stock Purchase Program ("SPP") is open to all full-
time employees who have at least 90 days of service. Each participant may
contribute 1% to 10% of qualifying compensation, to a maximum annual
contribution of $21,250. Contributions are used to purchase shares of Bombay
common stock at a discount of 15% from the lesser of the fair market price
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at
the beginning or at the end of the investment period. The participants' shares
are fully vested upon purchase. Participants' shares are held by a third-party
administrator until the respective participant requests a distribution.
Total Bombay contributions to these plans for Fiscal 2004, Fiscal 2003 and
Fiscal 2002 were $756,000, $714,000 and $723,000, respectively.
NOTE 9 - COMMON STOCK AND STOCK OPTIONS
Our Board of Directors has authorized a stock repurchase program to purchase up
to an aggregate of $30 million of Bombay's stock. The shares may be purchased
from time to time, through open market purchases and privately negotiated
transactions. During Fiscal 2003 and Fiscal 2002, 9,000 and 13,000 shares,
respectively, were acquired at an aggregate cost of $69,000 and $31,000,
respectively. Treasury shares are used for various employee and director stock
plans as the need arises.
The Bombay Company, Inc. 1996 Long Term Incentive Stock Plan ("Employee Plan")
provides for the granting of options and other types of stock-related awards
under the 1996 plan to officers and key management employees. At January 29,
2005, the option shares reserved for the Employee Plan was 4,511,002. The
option price is fixed at the market price or higher on the date of the grant.
Options are generally exercisable annually at a rate of 33% per year beginning
one year after the grant date. Shares available for additional grants were
1,458,720; 1,795,138 and 2,432,019 at January 29, 2005, January 31, 2004 and
February 1, 2003, respectively.
The Bombay Company, Inc. Non-Employee Director Equity Plan ("Director Plan")
provides for the granting of options to members of the Board of Directors who
are neither Bombay employees nor officers. At January 29, 2005, the option
shares reserved for the Director Plan were 451,444. The option price is fixed
at the market price on the date of the grant. The option grant, initial and
annual, is 10,000 shares, with an additional 2,500 shares for the Lead Director
and each of the committee chairs. The initial grant becomes exercisable at
a rate of 20% per year beginning one year after the grant date. Each
additional annual grant becomes fully exercisable six months after the grant
date. Shares available for additional grants were 55,185; 116,469 and 325,196
at January 29, 2005, January 31, 2004 and February 1, 2003, respectively.
The Director Plan also allows directors the option to receive retainer and
meeting fees in the form of Bombay common stock or to defer receipt of such
fees in the form of stock units. To the extent that a director elects to defer
at least 50% of the annual retainer, the director is paid an additional 25% of
the amount of the deferral, also in the form of stock units. Deferred amounts
are credited to an account for such director in units equivalent to Bombay
common stock.
The following table includes option information for the Employee Plans and
Director Plan:
Weighted
Number Option Price Average
Stock Option Activity Of Shares Per Share Option Price
February 2, 2002. 4,230,585 $1.75 - 25.75 $4.59
Options granted 1,200,388 2.38 - 5.02 2.71
Options exercised (595,703) 2.65 - 5.44 3.91
Options canceled (1,547,000) 2.38 - 25.75 4.55
February 1, 2003. 3,288,270 1.75 - 25.75 4.05
Options granted 1,248,800 4.54 - 13.52 6.75
Options exercised (1,603,784) 1.75 - 15.88 3.93
Options canceled (221,966) 1.75 - 25.75 8.53
January 31, 2004. 2,711,320 2.06 - 15.88 5.03
Options granted 1,005,500 4.52 - 7.07 6.42
Options exercised (252,883) 1.75 - 5.48 3.27
Options canceled (349,941) 2.38 - 15.88 5.78
January 29, 2005. 3,113,996 2.06 - 13.52 5.55
Exercisable at:
February 1, 2003 1,821,900 1.75 - 25.75 4.96
January 31, 2004 786,709 2.06 - 15.88 4.43
January 29, 2005 1,408,467 2.06 - 13.52 4.72
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The following table summarizes stock options outstanding at January 29, 2005:
Outstanding Exercisable
Weighted Weighted Weighted
Exercise Average Average Average
Price Remaining Exercise Exercise
Range Shares Life Price Shares Price
$2.06 - 2.48 345,483 7.0 $ 2.39 192,608 $ 2.34
2.55 - 2.94 291,139 6.5 2.75 263,990 2.74
3.00 - 3.94 203,913 5.8 3.42 197,246 3.42
4.00 - 4.97 505,985 6.9 4.65 286,873 4.62
5.00 - 5.90 635,142 8.7 5.67 117,977 5.49
6.00 - 7.89 641,200 8.4 6.87 175,637 6.73
9.13 - 13.52 491,134 8.1 9.39 174,136 9.38
3,113,996 7.7 $ 5.55 1,408,467 $ 4.72
The exercise of non-qualified stock options in Fiscal 2004, Fiscal 2003 and
Fiscal 2002 resulted in income tax benefits of $212,000, $3,283,000 and
$155,000, respectively, which were credited to additional paid-in capital. The
income tax benefits are the tax effect of the difference between the market
price on the date of exercise and the option price.
The Bombay Company, Inc. 1996 Long Term Incentive Stock Plan provides for the
granting of restricted stock to officers and key management employees.
Restricted stock grants are generally issued in separate tranches, which vest
in designated increments, generally 12 to 36 months, contingent upon continued
employment of the award recipient. The market value of the restricted stock at
the date of grant is recorded as deferred compensation, a component of
stockholders' equity, and is charged to expense over the respective vesting
periods. If restricted stock is unvested at the time when an award recipient
leaves the employment of the Company, the shares are canceled, the related
amounts are removed from deferred compensation and amounts previously expensed
for the unvested shares are reversed. The following table summarizes
restricted stock issued under the 1996 Long Term Incentive Stock Plan:
Weighted
Number Average
Restricted Stock Activity Of Shares Grant Price
Unvested at February 2, 2002 200,000
Shares granted......... 75,000 $4.89
Shares vested and distributed (65,000)
Shares canceled........ (120,000)
Unvested at February 1, 2003 90,000
Shares granted......... 131,256 $9.05
Shares vested and distributed (15,000)
Shares canceled........ (50,000)
Unvested at January 31, 2004 156,256
Shares granted......... 280,480 $6.29
Shares vested and distributed (35,000)
Shares canceled........ (75,000)
Unvested at January 29, 2005 326,736
During Fiscal 2004, Fiscal 2003 and Fiscal 2002, $691,000, $329,000 and $66,000
was recognized as net compensation expense in conjunction with the restricted
stock grants.
NOTE 10 - SHAREHOLDERS' RIGHTS PLAN
We have a shareholders' rights plan under which each share of Bombay common
stock includes one Preferred Share Purchase Right ("Right") entitling the
holder to buy one one-thousandth of a share of Series A Junior Participating
Preferred Stock of the Company at an exercise price of $50. The Rights, which
have ten year terms expiring in 2005, are exercisable if a person or group
acquires 15% or more of the common stock of Bombay or announces a tender offer
for 15% or more of the common stock. If a person or group acquires 15% or more
of the outstanding common stock of Bombay, each Right will entitle the holder
to purchase, at the Right's exercise price, a number of shares of Bombay common
stock having a market value of twice the Right's exercise price. If Bombay is
acquired in a merger or other business combination transaction after a person
or group acquires 15% or more
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of our common stock, each Right will entitle its
holder to purchase, at the Right's exercise price, a number of shares of the
acquiring company's common stock having a market value of twice the Right's
exercise price. The Rights are redeemable at one cent per Right at any time
before they become exercisable. We are currently evaluating what action, if
any, we will take upon the expiration of this Plan.
NOTE 11 - STOCK PURCHASE LOANS
On May 16, 2002, the Board of Directors elected to abolish our Executive Stock
Loan Program, which originated in August 1999. At that date, participants
owned 189,031 shares of Bombay common stock purchased under the program. We
reacquired, at then current market prices aggregating $864,000, the Bombay
common stock that was previously purchased by the executive officers under the
program, and the notes were extinguished. Amounts owed to Bombay or the
participants as a result of the difference between the market value of the
stock and the loan balance plus accrued interest were paid in full.
During Fiscal 2002, $17,000 in interest income was recognized related to the
loans.
NOTE 12- PLANNED DIVESTITURE OF BAILEY STREET TRADING COMPANY
On November 17, 2004, our Board of Directors approved the divestiture of our
Bailey Street Trading Company (" Bailey Street") wholesale operations. This
action was taken to allow management to focus on improving the performance of
our core businesses as well as to provide capital to support the continued
expansion of those businesses. Substantially all of the assets of Bailey
Street consist of inventory and receivables. As a result of the decision to
exit the operations, we expect to take a non-cash charge of approximately $2
million in connection with vacating our 200,000 square foot leased distribution
center in Gilbertsville, PA. Other charges in connection with the divestiture
are not expected to be material. We are currently in the process of assessing
sale and liquidation scenarios as well as a combination of both. We would
expect to complete the disposal of the operations and/ or liquidation of
substantially all of the Bailey Street assets during Fiscal 2005.
NOTE 13 - GEOGRAPHIC AREAS
We operate primarily in one industry segment, specialty retailing. Greater
than 90% of all revenues results from the sale of home furnishings and
accessories through retail stores in the United States and Canada. The
remaining portion of our revenues results from the sale of home furnishings and
accessories through our wholesale operations, direct-to-customer retail
operations and related shipping charges. Our wholesale and direct-to-customer
operations have been immaterial to our operations and financial results to-
date. Long-lived assets include all non-current assets except deferred taxes.
The following table shows net revenues and long-lived assets by geographic area
(in thousands):
Fiscal Year Ended
January 29, January 31, February 1,
2005 2004 2003
(restated) (restated)
Net revenues:
United States $505,499 $526,219 $442,339
Canada..... 70,588 70,216 51,661
Total.. $576,087 $596,435 $494,000
Long-lived assets:
United States $91,093 $72,356 $49,435
Canada..... 7,136 6,247 4,253
Total... $98,229 $78,603 $53,688
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UNAUDITED QUARTERLY FINANCIAL DATA
The Bombay Company, Inc. and Subsidiaries
(In thousands, except per share amounts)
The following table contains selected quarterly consolidated financial data for
Fiscal 2004 and Fiscal 2003 that was prepared on a basis consistent with the
audited consolidated financial statements and includes all adjustments
necessary for a fair statement, in all material respects, of the information
set forth herein on a consistent basis. As discussed in Note 2, the Company
has restated its previously issued financial statements to reflect revisions to
our lease accounting policy. The following table includes the effect of the
restatement on previous periods:
January 29, October 30, July 31, May 1,
2005 2004 2004 2004
(restated) (restated)(restated)
Net revenues........ $203,358 $126,669 $122,479 $123,581
Gross profit........ 58,421 31,747 27,399 29,959
Net income (loss)... 7,198 (7,328) (6,332) (5,743)
Basic earnings (loss) per share .20 (.20) (.18) (.16)
Diluted earnings (loss) per share .20 (.20) (.18) (.16)
January 31, November 1, August 2, May 3,
2004 2003 2003 2003
(restated) (restated) (restated)(restated)
Net revenues........ $211,564 $135,361 $130,273 $119,237
Gross profit........ 67,158 39,091 35,381 33,346
Net income (loss)... 12,145 (225) (786) (1,268)
Basic earnings (loss) per share .34 (.01) (.02) (.04)
Diluted earnings (loss) per share .33 (.01) (.02) (.04)
The following table contains selected quarterly consolidated financial data for
Fiscal 2003 and the first three fiscal quarters of Fiscal 2004 as previously
reported in the Company's Quarterly Reports on Form 10-Q as filed with the SEC:
October 30, July 31, May 1,
2004 2004 2004
(as reported) (as reported) (as reported)
Net revenues........ $126,669 $122,479 $123,581
Gross profit........ 31,813 27,405 29,955
Net loss............ (7,286) (6,328) (5,746)
Basic loss per share (.20) (.18) (.16)
Diluted loss per share (.20) (.18) (.16)
January 31, November 1, August 2, May 3,
2004 2003 2003 2003
(as reported) (as reported) (as reported) (as reported)
Net revenues........ $211,564 $135,361 $130,273 $119,237
Gross profit........ 67,150 39,215 35,410 33,338
Net income (loss)... 12,140 (148) (768) (1,273)
Basic earnings (loss) per share .34 (.00) (.02) (.04)
Diluted earnings (loss) per share .33 (.00) (.02) (.04)
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INDEX TO EXHIBITS
The Bombay Company, Inc. and Subsidiaries
Filed with the Annual Report on Form 10-K for the fiscal year ended January 29,
2005.
Number Description
3(a) - Restated Certificate of Incorporation dated January 1, 1993 and Certificate of Amendment of the Restated Certificate of
Incorporation dated March 31, 1993.
3(b) - Bylaws, as amended and restated effective May 21, 1997.
4(a) - Preferred Stock Purchase Rights Plan.
4(b) - Amendment to Preferred Stock Purchase Rights Plan. (5)
10(a) - Form of Indemnification Agreement. (7)
10(b) - The Bombay Company, Inc. Supplemental Stock Program.
10(c) - Executive Long Term Disability Plan.
10(d) - The Bombay Company, Inc. 1996 Long-Term Incentive Stock Plan.
10(e) - Form of Option Award Agreement under the 1996 Long-Term Incentive Stock Plan.
10(f) - Form of Restricted Stock Agreement under the 1996 Long-Term Incentive Stock Plan.
10(g) - The Bombay Company, Inc. Amended and Restated 2001 Non-Employee Directors'
Equity Plan. (2)
10(h) - Form of Option Award Agreement under the Amended and Restated 2001 Non-Employee Directors' Equity Plan. (2)
10(i) - Executive Management Incentive Compensation Plan. (4)
10(j) - Employment Letter with Donald V. Roach. (3)
10(k) - Employment Letter with Brian N. Priddy. (3)
10(l) - Employment Agreement with James D. Carreker. (6)
10(m) - Restricted Stock Agreement with James D. Carreker. (6)
10(n) - Restricted Stock Agreement with James D. Carreker. (8)
10(o) - Stock Option Agreement with James D. Carreker. (6)
10(p) - Employment Letter with Lucretia D. Doblado. (7)
10(q) - Employment Letter with Steven C. Woodward. (8)
10(r) - Loan and Security Agreement by and among The Bombay Company, Inc. and each of its subsidiaries that are signatories
thereto as Borrowers, the lenders that are signatories thereto as Lenders, and Wells Fargo Retail Finance, LLC as
Arranger and Administrative Agent, dated September 29, 2004. (9)
10(s) - First Amendment to Loan and Security Agreement, dated November 24, 2004.
14 - Code of Business Conduct and Ethics. (7)
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INDEX TO EXHIBITS (CONT.)
The Bombay Company, Inc. and Subsidiaries
Number Description
21 - Subsidiaries of the Registrant. (1)
22 - Definitive Proxy Statement of the Company relating to Annual Meeting of Shareholders (certain portions of such Proxy
Statement are incorporated herein by reference and are identified by reference to caption in the text of this report).
(10)
23 - Consent of PricewaterhouseCoopers LLP.
31(a) - Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) - Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 - Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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________________
(1)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended January 29, 2000. Such Exhibit is incorporated
herein by reference.
(2)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended January 2, 2002. Such Exhibit is incorporated
herein by reference.
(3)Filed with the Commission as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended August 3, 2002. Such Exhibit
is incorporated herein by reference.
(4)Filed with the Commission as an Exhibit to the Company's Definitive Proxy
Statement dated April 10, 2003, which Proxy Statement was filed with the
Commission as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended February 1, 2003. Such Exhibit is incorporated herein by
reference.
(5)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended February 1, 2003. Such Exhibit is incorporated
herein by reference.
(6)Filed with the Commission as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended August 2, 2003. Such Exhibit
is incorporated herein by reference.
(7)Filed with the Commission as an Exhibit to the Company's Annual Report on
Form 10-K for the year ended January 31, 2004. Such Exhibit is incorporated
herein by reference.
(8)Filed with the Commission as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 31, 2004.
(9)Filed with the Commission as an Exhibit to the Company's Form 8-K/A on
October 29, 2004. Such Exhibit is incorporated herein by reference.
(10)To be filed with the Commission on or about May 6, 2005.
52