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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM __________ TO __________
COMMISSION FILE NUMBER: 0-22963
BIG DOG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------
DELAWARE 52-1868665
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION
OR ORGANIZATION) IDENTIFICATION NO.)
121 GRAY AVENUE, SANTA BARBARA, CALIFORNIA 93101
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(805) 963-8727
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(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01
par value
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 No X
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 the 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 Rule 12b-2 of the Act.)
Yes No X
The aggregate market value of Common Stock held by non-affiliates of
the registrant on March 15, 2005 was approximately $17,766,000. All outstanding
shares of Common Stock, other than those held by executive officers, directors
and 10% shareholders are deemed to be held by non-affiliates.
On March 15, 2005, the registrant had 9,182,032 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
Proxy Statement for the 2005 Annual Meeting of Shareholders, to be filed with
the Commission no later than 120 days after the end of the registrant's fiscal
year covered by this Form 10-K.
(THIS PAGE INTENTIONALLY LEFT BLANK)
PART I
ITEM 1. BUSINESS
Unless the context indicates otherwise, when this Annual Report on Form 10-K
refers to "we," "us" or "the Company," we are referring to Big Dog Holdings,
Inc. and its subsidiaries on a consolidated basis.
The following discussion should be read in conjunction with the audited
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
GENERAL
Big Dog Holdings, Inc. is the parent company of two retail chains, Big Dog USA,
Inc. ("Big Dogs") and The Walking Company ("TWC"). Big Dogs develops, markets
and retails a branded, lifestyle collection of unique, high-quality,
popular-priced consumer products, including active wear, casual sportswear,
accessories and gifts. TWC is the leading specialty retailer of authentic
comfort footwear and accessories.
The Company's Big Dogs products were first sold in 1983 and operations remained
limited through 1992 when the current controlling stockholders acquired the BIG
DOGS(R) brand and related assets. Following the acquisition of Big Dogs, the
Company initiated a strategy of leveraging the brand through dramatic expansion
of the Big Dog's product line and rapid growth in our retail stores. The number
of Big Dog stores has grown from 5 in 1993 to 188 as of December 31, 2004. After
early years of rapid growth, Big Dogs has reached a level of maturity in the
number of stores and breadth of products. In recent years the Company has
focused on profitability and brand management for Big Dogs.
In March 2004, the Company, through a newly formed subsidiary, acquired
substantially all of the assets of TWC out of bankruptcy. TWC is the leading
specialty retailer of authentic comfort footwear, operating 74 specialty stores
in premium malls across the nation. TWC sells high-quality,technically designed
comfort footwear and accessories from around the world to both men and women.
BUSINESS OF BIG DOGS
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BIG DOGS(R) is an All-American, family-oriented brand that we believe has
established a unique niche in its dedication to providing quality, value and
fun. Our products are centered around the signature BIG DOGS(R) name, logo and
"Big Dog" characters and are designed to appeal to a broad range of customers.
The BIG DOGS(R) brand conveys a sense of fun, humor and a "Big Dog attitude,"
whereby each customer can feel that he or she is a "Big Dog." The Big Dog
attitude and sense of fun are brought to life through our graphic capabilities
that portray the Big Dog characters in a number of engaging, positive and
inspiring situations and activities. The Big Dog attitude is further defined by
a number of slogans such as "If You Can't Run with the Big Dogs Stay on the
Porch"(R), "Large and In Charge" and "Attitude is Everything." These graphics
and slogans combine a bold, spirited attitude with wry, lighthearted humor. The
appeal of the brand is further strengthened through a customer's personal
identification with particular sports and other activities depicted in these
graphics. In addition to our focus on fun, Big Dogs develops customer loyalty
and enhances its brand image by providing a consistently high level of quality
at moderate price points. We accomplish this primarily through (i) selling our
own brand directly to the consumer, (ii) low-cost product development, and (iii)
sourcing high-volume/low-cost basic apparel with limited fashion risk.
The BIG DOGS(R) brand is designed to appeal to men, women and children of all
ages, particularly baby boomers and their kids, especially when they are engaged
in leisure or recreational activities. We develop our apparel products, which
include a wide variety of basic apparel and related products, with an emphasis
on being functional rather than fashion-forward or trendy. These apparel
products include graphic T-shirts, shorts, knit and woven shirts, fleece items,
loungewear and boxer shorts. In addition to its BIG DOGS(R) line of activewear
and casual sportswear for men and women, we have a LITTLE BIG DOGS(R) line of
infants' and children's apparel and a BIG BIG DOGS(R) line of big-size apparel.
We also sell a line of non-apparel products, including plush animals,
stationery and pet products, which feature Big Dog graphics and are developed
to complement our apparel.
We reinforce our brand image by distributing BIG DOGS(R) products primarily
through our own retail stores. This distribution strategy enables us to present
a complete selection of our merchandise in a creative and fun environment. In
addition, this strategy enables us to more effectively reach our target
customers by locating stores in tourist-oriented and other casual environments
where we believe our products have their highest appeal. We operate our retail
stores primarily in outlet malls. In addition to our retail stores, we market
our products through other channels, including our catalog and corporate sales
accounts, website and licensing opportunities.
BUSINESS STRATEGY
Promote the Big Dog Spirit of Fun. A key and unique element in our Big Dogs
brand image is the focus on fun. This spirit of fun revolves around our Big Dog
character that has broad appeal to men, women and children of all ages. We
foster this spirit by creating positive, humorous, topical and inspiring
graphics and slogans that we apply to our merchandise. More than just a logo,
"the Big Dog" represents the leader, athlete, child, comedian, musician, boss,
traveler, parent and dog lover that a wide range of customers can identify with.
Big Dog products are fun, not only because of their graphics and slogans, but
also because they are designed for recreational, sports and leisure activities
and make ideal gifts. Our focus on fun is further enhanced by the lively,
enjoyable atmosphere in our retail stores and is also reflected in our catalog,
website and marketing promotions and activities.
Deliver High Quality at a Good Value. Big Dogs' products are constructed using
high-quality fabrics and other materials. Many of our products feature unique
graphics characterized by advanced print techniques, as well as unique appliques
and embroideries on many of our apparel products. We believe this combination of
quality fabrics and graphics in our apparel products provides the customer with
a product that has an exceptional look and feel. We are able to deliver this
level of quality at reasonable prices primarily as a result of (i) selling our
own brand direct to the consumer, (ii) low-cost product development, (iii)
sourcing of basic apparel, and (iv) low marketing costs. We believe that
delivering quality and value is instrumental in generating customer appeal and
brand loyalty for our products, particularly those that do not prominently
feature Big Dog graphics.
Enhance Functional Products with Graphics. Big Dogs develops functional rather
than fashion-forward products. We believe we have a special competency in
creating distinctive, popular graphics which we use to differentiate our
products from those of our competitors. We have developed a broad assortment of
classic, functional clothing ("basics") in traditional, less fashion-forward
colors. Our focus on basics and our ability to leverage our graphics across
multiple product categories have allowed us to eliminate the need for a
traditional buyer or design staff, and thereby lower our product development
costs compared to most fashion apparel companies. Furthermore, since our
graphics are added in the last stage of production, we are able to be more
responsive to customer preferences while also lowering our inventory risk.
Target a Broad, Diverse Customer Base. We believe we have established Big Dogs
as an All-American, family-oriented brand featuring products, graphic themes,
slogans and promotions that appeal to a broad range of consumers. Although our
marketing focus is on baby boomers and their kids, our customers include men,
women and children of all ages, who span a wide range of geographic areas and
income levels. Furthermore, we believe that the millions of dog and other pet
owners in the United States, as well as children, have a strong natural affinity
for the dog-related images and themes in Big Dogs graphics. In addition, we
believe that the positive image the brand brings to being a "Big Dog" has a
special appeal to big-size customers.
Maintain Controlled Distribution. We sell our products primarily through our own
stores and, to a lesser extent, through our catalog and website. By selling
direct to customers, we are able to present our complete line of merchandise in
a creative and fun environment. This also allows us to target our customers more
precisely by locating stores in tourist-oriented and other high-traffic areas
where we believe consumers are more likely to be of the mind to purchase Big
Dogs' fun, casual apparel. Selling direct to the consumer also allows us (i) to
enhance our margins while still providing customer value, (ii) to be more
responsive to customer feedback, especially with regard to new product
development, (iii) to reduce the need to build brand awareness through
large-scale media advertising, and (iv) to collect customer names for our
catalog through in-store sign-ups.
Create an Entertaining Shopping Experience. Big Dogs seeks to create a
distinctive and fun shopping environment in its stores through an innovative
display of our graphic art and humor, including in-store "T-shirt walls" and
other displays designed to immediately put the customer in a relaxed, fun state
of mind. By showcasing our complete product line, Big Dogs stores offer
something for everyone in the family. Effective cross-merchandising in the
stores is designed to add excitement and prompt add-on purchases. We believe the
customer's shopping experience is further enhanced by our knowledgeable and
enthusiastic sales staff.
Emphasize Grassroots Marketing. We believe Big Dogs' most effective marketing is
by the products themselves and their presentation in our retail stores, catalog
and website. As a result, we have spent relatively little on advertising. Also
important to our marketing strategy is our targeted "grassroots" marketing
activities. These activities include local and charity sponsorships (such as
high school sports teams) and community-oriented promotional events (such as the
Company's annual dog parade in Santa Barbara).
MERCHANDISING
The Big Dogs product line features a branded, lifestyle collection of unique,
high-quality, popular-priced consumer products, including activewear, casual
sportswear, accessories and gifts. Our apparel lines include full collections of
classic unisex casual sportswear and activewear for adults, as well as
collections for infants and children and the big-size market. We continuously
explore opportunities to further leverage our brand and graphics into new
product lines.
Our apparel products are manufactured from premium cotton, or, in some
instances, cotton/ synthetic blends. Big Dogs' apparel is characterized by
quality fabrics, construction and embellishments, and is distinguished from
other apparel lines by the BIG DOGS(R) name, dog logo, graphics and slogans. In
addition to our distinctive graphics, we believe we have achieved recognition
for the quality and performance of our products.
The majority of our products range from between $4 and $45. The following table
sets forth the approximate contribution that each of our product categories made
to total net sales in our retail stores for the year ended December 31, 2004:
% OF RETAIL STORE* NET SALES
----------------------------
YEARS ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
Adult Apparel and Accessories ...............................53.9% 53.0% 51.8%
Big-size Apparel ............................................23.7 22.8 22.6
Infants' and Children's Apparel and Accessories .............16.8 18.7 20.4
Non-Apparel Products .........................................5.6 5.5 5.2
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Total .............................................100.0% 100.0% 100.0%
====== ====== ======
*Does not include catalog, wholesale and internet sales, which are skewed toward larger sizes.
Adult Apparel and Accessories. Big Dogs sells a complete line of adult unisex
activewear and casual sportswear. We offer screen-printed and embroidered
T-shirts and sweatshirts, in a variety of styles and colors that prominently
display the Big Dogs graphics and slogans. In addition, we offer shorts, knit
and woven casual shirts, fleece tops and bottoms, loungewear, boxer shorts,
swimwear and sleepwear, all of which feature print designs or simply the BIG
DOGS(R) name and/or dog logo. Our adult apparel line primarily focuses on basic
items that recur with relatively minor variation from season-to-season and
year-to-year. While certain of our classic, popular items and graphics have been
in the Big Dogs line with very little change for over 10 years, we introduce new
apparel and other products throughout the year to ensure that the merchandise
assortments are consistent with the top sellers within our competitive market.
We leverage the Big Dogs trademarks, characters and more popular graphics by
carefully translating them to a wide variety of apparel accessories, including
caps, socks, sunglasses, bags, and wallets. These products are developed and
introduced based on their consistency with Big Dog's brand image and whether
they complement our other products. Our accessories not only provide an
opportunity to create add-on purchases, but also minimize product development
costs and inventory risk by utilizing graphics and slogans that have first
proven popular on our graphic T-shirts.
Big-Size Apparel. We believe the BIG DOGS(R) image and the positive emphasis the
brand gives to being a "Big Dog" have a unique appeal to consumers who wear big
sizes. Our BIG BIG DOGS(R) category offers a line of unisex activewear and
casual sportswear. As with the regular adult sizes, this category features
screen-printed and embroidered T-shirts and sweatshirts, in a variety of styles
and colors that prominently display the Big Dogs graphic themes and slogans. In
addition, we offers shorts, knit and woven casual and sports shirts, fleece tops
and bottoms, loungewear, boxer shorts, swimwear and sleepwear, which may feature
print designs or simply the BIG DOGS(R) name and/or dog logo. We sell our BIG
BIG DOGS(R) line primarily through our retail stores, catalog and website.
Infant's and Children's Apparel and Accessories. The LITTLE BIG DOGS(R) line
includes infants, toddlers, kids and youth sizes. Products in this line include
graphic T-shirts, shirts, fleece items, infant and toddler one-pieces, boxer
shorts, dresses and shorts, virtually all of which feature distinctive graphics.
The graphics and fabrics of this line are designed to mirror many of the more
popular graphics and fabrics in the BIG DOGS(R) adult line in order to encourage
family purchases and leverage overall product development costs. We sell our
LITTLE BIG DOGS(R) line primarily through our retail stores, catalog and
website. Our sales of children's apparel have decreased somewhat in recent
years, primarily due to increased competitive pressure in that category in
pricing and from the mass market.
Non-Apparel Products. We further leverage our trademarks, characters and more
popular graphics by applying them to a wide variety of adult's and children's
non-apparel items, including pet products, plush animals and other toys,
sporting goods, stationery, calendars and lunch boxes. As with apparel
accessories, new non-apparel products are developed and introduced based on
whether they are consistent with Big Dogs' brand image and complement our other
products. As with apparel accessories, the graphics applied to these products
have first proven popular on our T-shirts, resulting in lower product
development costs and inventory risk. In general, non-apparel items have higher
gross margins than many of our other products.
MARKETING
Big Dogs strives to maintain a consistent brand image through the coordination
of our merchandising, marketing and sales efforts. The goal of our marketing
efforts is to present a distinctive image of quality, value and fun that
consumers will associate with our products and thereby enhance the BIG DOGS(R)
brand image. The BIG DOGS(R) brand image has been developed with relatively
little advertising, as we believe it's most effective marketing is its products
themselves and their presentation in our retail stores, catalog and website. Our
catalog and website serve not only as a means of product distribution, but also
as key marketing pieces for our retail stores.
Also important to our marketing strategy is our targeted "grassroots" marketing
activities. These activities include local and charity sponsorships (such as
high school sports teams) and community-oriented promotional events (such as our
annual dog parade in Santa Barbara). We train and incentivize our store managers
to actively involve their stores in local, grassroots activities. In addition,
we utilize billboard advertising designed to direct customers to local Big Dogs
retail stores.
RETAIL STORES
We seek to create a distinctive and fun shopping environment in Big Dogs stores
through the innovative display of our graphic art and humor, including in-store
"T-shirt walls" and other displays designed to immediately put the customer in a
fun, relaxed state of mind. In addition, our cross-merchandising and colorful
signage is designed to add excitement in the stores and prompt add-on purchases.
By showcasing our complete product line and broad assortment, Big Dogs stores
offer something for everyone in the family and are particularly appealing to
the dedicated Big Dogs customer.
In 2004, our retail stores contributed approximately 94% of Big Dog Sportswear
total net sales. As of December 31, 2004, we operated a total of 188 stores,
186 stores in 40 states and 2 stores in Puerto Rico. Big Dogs stores are
typically located in tourist and recreation-oriented shopping locations and
other casual environments where the Company believes consumers are more likely
to be in a fun, relaxed state of mind. In making site selections, we also
consider a variety of other factors, including proximity to large population
centers, area income, the prestige and potential customer-draw of the other
tenants in the center or area, projected profitability, store location and
visibility within the center, and the accessibility and visibility of the
center from nearby thoroughfares.
The table below sets forth the number of stores located in each state and
territory as of December 31, 2004:
State No. of Stores State No. of Stores
----- ------------- ----- -------------
Alabama 1 Minnesota 4
Arizona 6 Mississippi 3
California 35 Missouri 7
Colorado 5 Nevada 3
Connecticut 1 New Hampshire 2
Delaware 3 New Jersey 2
Florida 14 New Mexico 1
Georgia 6 New York 4
Hawaii 1 North Carolina 6
Idaho 1 Ohio 4
Illinois 4 Oregon 6
Indiana 3 Pennsylvania 7
Iowa 1 South Carolina 5
Kansas 3 South Dakota 1
Kentucky 1 Tennessee 7
Louisiana 1 Texas 9
Maine 2 Utah 1
Maryland 6 Virginia 3
Massachusetts 3 Washington 4
Michigan 6 Wisconsin 4
U.S. Territory No. of Stores
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Puerto Rico 2
We operate Big Dogs retail stores primarily in outlet malls. Big Dogs'
traditional emphasis has been on outlet malls because those malls are often
located in tourist areas and attract significant numbers of Big Dogs' targeted
customers. While the growth in the outlet industry has slowed in recent years,
we expect to continue opening stores in new quality outlet malls as they are
opened to the extent they meet our requirements.
Our outlet mall stores average approximately 2,800 square feet. Our outlet
stores offer a complete and current line of our products priced approximately
25% less than the same items are sold for in our catalog and website, our
full-price stores and by other retailers.
Our Big Dogs store operations are managed by a Senior Vice President--Retail,
Director of Retail Operations, two regional managers and approximately 14
district and area managers. Each of the stores is managed and operated by a
store manager, an assistant manager and full-time and part-time sales
associates. We seek to further enhance our customers' shopping experience by
developing a knowledgeable and enthusiastic sales staff to distinguish Big Dogs
from its competition. In this regard, we have implemented employee training and
incentive programs and encourage our sales associates to be friendly and
courteous and to guide customers to graphics and products that tie into their
individual interests. We believe our commitment to customer service enhances our
ability to generate repeat business and to attract new customers. We also
believe that the fun nature of our products create employee enthusiasm and
positive morale that in turn enhance customer service and contribute to the fun
shopping experience.
NON-RETAIL DISTRIBUTION
Non-retail distribution channels, which include catalog and internet, and
wholesale and corporate sales, represented approximately 6% of Big Dog
Sportswear total net sales in 2004.
Catalog and Internet. In addition to generating their own sales, our catalog
and website serve as key marketing pieces for our products and stores.
Our catalog and Internet sales in 2004 were approximately $5.0 million, or
approximately 5% of Big Dog Sportswear total net sales. Such sales have had
growth in recent years, on a relatively small base. We have the benefit of
being able to develop names for our mailing list through our retail store chain,
which has been the primary source for such list.
Wholesale and Corporate Sales. Big Dogs wholesale and corporate sales revenue
in 2004 was approximately $1.0 million, or approximately 1% of Big Dog
Sportswear total net sales. In second quarter 2004, we decided to focus on our
retail business and closed our small wholesale division. However, we are
continuing to operate our corporate sales division.
SOURCING
Domestic and International Sourcing. Big Dogs does not own or operate any
manufacturing facilities but instead source our products through third-party
contractors with manufacturing facilities that are primarily overseas and to a
limited extent, in Central America. We believe that outsourcing allows us to
enhance production flexibility and capacity, while substantially reducing
capital expenditures and avoiding the costs of managing a large production
workforce. In addition, outsourcing allows us to leverage working capital,
transfer risk and focus our energy and resources on merchandising, marketing and
sales.
Big Dogs' domestic sourcing is primarily limited to graphic T-shirts. Our
graphic T-shirt business is managed in-house. This includes management of
screen printing art and blanks, but not the actual screen-printing operations
which are outsourced. The majority of our other products, excluding T-shirts,
are manufactured overseas, primarily in Asia, the Middle East and Turkey. In
order to reduce our exposure to production risks and delays arising from trade
disputes, political disruption or other factors relating to any one vendor or
country, we utilize a diverse group of vendors. We source the majority of our
product from trading companies. Through these trading companies and directly, we
source from approximately 65 unaffiliated vendors, including over 35 foreign
vendors in a number of countries. In order to enhance our sourcing flexibility,
we use trading companies rather than operate our own foreign sourcing office.
These trading companies assist us in selecting and overseeing third-party
vendors, sourcing fabric and monitoring quotas and other trade regulations. We
do not have supply contracts with any of our suppliers. Although the loss of
major suppliers could have a significant effect on our immediate operating
results, since we are focused on basic apparel, we believe alternate sources of
merchandise for most product categories are available at comparable prices and
that we could replace these suppliers without any long-term adverse effect.
We forecast Big Dogs' production requirements to secure necessary manufacturing
capacity and quota. Since our foreign manufacturers are located at greater
geographic distances from us than our domestic manufacturers, we generally allow
greater lead-times for foreign orders. However, due to our focus on widely
available basics rather than fashion items, we believe these lead times do not
present significant risks.
Quality Control. Our quality control program is designed to ensure that all
goods bearing BIG DOGS(R) trademarks meet our standards. With respect to our
products, Big Dogs, through its employees and sourcing agents, develops and
inspects prototypes of each product prior to manufacture. For apparel products,
Big Dogs, through its employees and sourcing agents, inspects the prototypes and
fabrics prior to cutting by the contractors, establishes fittings based on the
prototype and inspects samples. We or our sourcing agents inspect the final
product prior to shipment to our warehouse or at the warehouse prior to payment.
BUSINESS OF TWC
- ---------------
TWC is a chain of specialty retail stores selling high-quality, technically
designed comfort footwear and accessories from around the world to both men and
women, including such brands as ECCO(R), Mephisto(R), Dansko(R), Merrell(R) and
Birkenstock(R).
TWC was founded in 1991 and grew rapidly from a base of 20 stores in 1995 to
over 100 stores in 2003. As a result of its rapid expansion, TWC made certain
real estate and merchandising missteps and eventually declared bankruptcy in
July 2003. The bankruptcy process allowed TWC to reject its non-performing
stores and liquidate excess and obsolete inventory.
Having purchased the assets of TWC out of bankruptcy in March 2004, the Company
has re-focused TWC's operations on its original core business of operating
specialty stores in premium malls selling the best brands in the comfort shoe
category. We acquired the business of TWC based on, among other factors, our
favorable assessment of its market niche, the favorable demographics of that
market, and an anticipated ability to realize efficiencies and increase
profitability by utilizing the retail store expertise of the Company and by
consolidating TWC's corporate overhead operations with those of the Company.
The footwear products sold by TWC appeal to a large and growing demographic.
BUSINESS STRATEGY
Offer the Best Brands from Around the World. TWC seeks out and offers to its
customers shoe brands that are of high quality, integrate comfort features, and
are not widely distributed. TWC feature a number of European and other foreign
comfort shoe brands not widely found in other US shoe retailers.
Authentic Comfort(TM). Each brand carried integrates comfort features such as
shock absorbing EVA midsoles, hydrophobic foam insoles, waterproof leathers,
anatomically contoured footbeds, and roomy toe boxes that follow the shape of
the foot.
Target a Large and Growing Demographic. The Company has established TWC as the
leading specialty retailer of comfort footwear appealing to a broad range of
consumers. Although marketing focus is on baby boomers and working
professionals, our customers include men and women of all ages. As the baby
boomers age, there is an increasing focus on comfort footwear for both work and
play. In addition, many of our brands are popular with working professionals
such as teachers, medical staff, foodservice personnel and others who spend long
days on their feet.
MERCHANDISING
The TWC product line features high-quality branded comfort footwear and
accessories from around the world. The professional comfort line focuses on
working professionals who spend long hours on their feet. The dress comfort
line includes more formal styles while maintaining the comfort for which TWC is
known. The sport & active comfort line combines function and performance with
style and design to create products that fit an active lifestyle. The casual
comfort line includes comfort footwear for casual, everyday use. TWC also sells
accessories that are designed to add to the comfort of the walking experience.
TWC experiences a level of seasonality in the types of products it sells.
During spring/summer, the focus shifts toward sandals. During the fall/winter,
the focus shifts toward boots, slippers and all-weather footwear.
The majority of our footwear products range from between $80 and $150. The
following table sets forth the approximate contribution made to total net sales
in our retail stores for the year ended December 31, 2004:
% OF RETAIL STORE NET SALES
---------------------------
YEARS ENDED DECEMBER 31, 2004
-----------------------------
Women's footwear..............................................52.5%
Men's footwear ...............................................32.7
Accessories ..................................................14.8
----
Total .......................................................100.0%
======
MARKETING
Historically, TWC lacked a coherent marketing strategy for TWC brand.
A significant focus of the Company's efforts since its acquisition of
TWC has been the development of an effective, coherent marketing image and
strategy. This strategy is being implemented through consistent store design
and image, collateral materials (in-store posters, etc.), and development of
brand-identifying trademarks and slogans (Authentic Comfort(TM), The Best Brands
From Around the World, etc.) Such strategy also being effected with relatively
little media advertising, as we believe TWC's most cost-effective marketing is
through its stores themselves and our catalog and website. In addition, many of
the brands we feature engage in their own media advertising, which acts to
supports our stores. TWC is also able to leverage its marketing dollars by
co-marketing with the companies whose brands it sells and with the malls in
which it has stores.
RETAIL STORES
In 2004, our retail stores contributed nearly 100% of TWC total
net sales. As of December 31, 2004, we operated a total of 74 stores in 27
states and the District of Columbia. TWC stores are typically located in
leading regional malls in prosperous urban areas where the Company believes
demographics are favorable. In making site selections, we also consider a
variety of other factors, including proximity to large population centers, area
income, the prestige and potential customer-draw of the other tenants in the
center or area, rent and operating costs, store location and visibility within
the center, and the accessibility and visibility of the center from nearby
thoroughfares.
The table below sets forth the number of TWC stores located in
each state as of December 31, 2004. TWC stores average approximately 1300
square feet.
State No. of Stores State No. of Stores
----- ------------- ----- -------------
Arizona 1 Michigan 3
California 17 Minnesota 1
Colorado 2 Missouri 1
Connecticut 2 Nevada 1
Delaware 1 New Jersey 2
District of Columbia 1 New York 1
Florida 6 North Carolina 1
Georgia 3 Ohio 2
Hawaii 2 Oregon 3
Illinois 2 Pennsylvania 2
Indiana 1 South Carolina 1
Louisiana 1 Texas 1
Maryland 2 Virginia 4
Massachusetts 5 Washington 5
Our TWC store operations are managed by a Senior Vice President--Retail, Vice
President - Retail, Director of Stores, and 7 district managers. Each of the
stores is managed and operated by a store manager, an assistant manager and
full-time and part-time sales associates. We seek to further enhance the TWC
customer's shopping experience by developing a knowledgeable and enthusiastic
sales staff to distinguish TWC from its competition. In this regard, we (and
the companies whose shoe brands we feature) provide instructive seminars and
training to our staff to educate them on the technical quality of our shoes
and to allow them to guide our customers to the products that best meet their
comfort needs. We believe our commitment to knowledgeable customer service
enhances our ability to generate repeat business and to attract new customers.
DOMESTIC AND INTERNATIONAL SOURCING.
TWC sources its product from a number of selected and approved brands located in
the United States and abroad. No one brand represents more that 10% of the
Company's products. TWC does not own or operate any manufacturing facilities.
Occasionally, the Company goes directly to the manufacturer and has a shoe made
to TWC specifications.
BIG DOGS AND TWC OPERATIONS
MANAGEMENT INFORMATION SYSTEMS
- ------------------------------
The Company is committed to utilizing technology to enhance its competitive
position. We have put in place computer hardware, systems applications and
networks that are the same as those used by a number of large retailers. These
systems support the sales and distribution of products to our stores and
customers and improve the integration and efficiency of our domestic and foreign
sourcing operations. The Company's management information system ("MIS")
provides integration of store, merchandising, distribution and financial
systems. These systems include stock keeping unit ("SKU") and classification
inventory tracking, purchase order management, open-to-buy, merchandise
distribution, automated ticket making, general ledger, sales audit, accounts
payable, fixed asset management, payroll and integrated financials. These
systems operate on an IBM AS 400 platform and a Microsoft NT server network and
utilize Island Pacific software. Our point-of-sale ("POS") system consists of
registers providing price look-up, e-mail and credit card and check
authorization. Through automated two-way communication with each store, sales
information, e-mail and timekeeping information are uploaded to the host system,
and receiving, price changes and systems maintenance are down-loaded through
the POS devices. Sales are updated daily in the merchandising report systems by
polling sales from each store's POS terminals. We evaluate information obtained
through daily polling, including a daily tracking of gross margin, to implement
merchandising decisions regarding reorders, markdowns and allocation of
merchandise. Corporate sales and catalog operations are also supported by MIS
applications from established vendors, designed specifically to meet the unique
requirements of these segments of the business. These applications include
customer service phone center, order processing and mailing list maintenance.
ALLOCATION AND DISTRIBUTION OF MERCHANDISE
- ------------------------------------------
Allocation and distribution of our inventory is performed centrally at the SKU,
merchandise classification and store levels using integrated third-party
software. Utilizing our MIS capabilities, our planning and allocation group
works closely with the merchandising and retail departments to monitor and
respond to customer purchasing trends and meet the seasonal and locale-specific
merchandising requirements of our retail stores.
Our main warehouse facility and our mail order warehouse and fulfillment
facility are located in a 143,000 square-foot distribution facility in Santa Fe
Springs, California. All merchandise is delivered by vendors to this facility,
where it is inspected, entered into our merchandising software system, picked
and boxed for shipment to the stores or customers. We ship merchandise to our
stores at least weekly, to provide a steady flow of merchandise.
TRADEMARKS
- ----------
The Company utilizes a variety of trademarks which it owns; including the U.S.
registered trademarks BIG DOGS(R), BIG DOG SPORTSWEAR(R), dog logo, BIG DOG(R),
LITTLE BIG DOGS(R), BIG BIG DOGS(R) and THE WALKING COMPANY(R). In addition, we
have registered certain of our trademarks or have registration applications
pending in over 22 other countries. We regard our trademarks and other
proprietary rights as valuable assets and believe they have significant value
in the marketing of our products. Like most popular brands, from time to time
in the course of business we discover products or businesses in the marketplace
that we believe infringe upon our trademark rights. In addition, in regard to
Big Dogs, companies occasionally claim that a certain product or graphic of
ours infringes on their intellectual property rights (sometimes in regard to
our parodies of other's trademarks that we do as part of the Big Dogs sense of
fun). We vigorously protect our trademarks and defend ourselves against claims
of others. Actions against infringers include the use of cease and desist
letters, administrative proceedings and lawsuits.
COMPETITION
- -----------
Although the level and nature of competition differ somewhat for Big Dogs
versus TWC, and among the product categories each of them feature, both
companies compete primarily on the basis of the brand image we develop and
maintain for them, as well as product quality assortment and price, store
location and layout, and customer service. Big Dogs also competes by offering
a unique combination of quality, value and fun (in both its products and its
store experience). TWC also competes by offering a unique assortment of
quality, hard-to-find brands. The markets for each of our products are highly
competitive. We believe that our long-term competitive position will depend
upon our ability to anticipate and respond effectively to changing consumer
demands and to offer customers a wide variety of high-quality, unique products
at competitive prices.
Although we believe Big Dogs does not compete directly with any single company
with respect to its entire range of merchandise, within each merchandise
category it competes with well-known apparel and specialty retail companies such
as The GAP and Eddie Bauer and The Disney Stores, as well as a large number of
national and regional department stores, specialty retailers and apparel
designers and manufacturers. In addition, in recent years, the amount of casual
sportswear and activewear manufactured specifically for department stores and
sold under their own labels has significantly increased.
TWC competes primarily with small independent specialty shoe retailers ("mom &
pop" operators), small shoes chains and also department store operators such as
Nordstrom and Federated. We believe that due the relatively high price points
for the shoes TWC offers and the high-level of customer service required to
effectively sell the technical comfort benefits of such shoes, the big-box,
mass-market retailers do not present a significant potential competitive threat
to TWC.
Some of the Company's competitors are significantly larger and more diversified
and have substantially greater financial, distribution, marketing and other
resources and have achieved greater recognition for their brand names than the
Company.
EMPLOYEES
- ---------
At March 1, 2005, we had approximately 800 full-time and 900 part-time
employees. Our need for part-time retail employees fluctuates significantly
based on seasonal needs. No employees are covered by collective bargaining
agreements.
AVAILABLE INFORMATION
- ---------------------
Big Dogs' website is www.bigdogs.com and TWC's website is at
www.thewalkingcompany.com. We make available free of charge through our
www.bigdogs.com website the Company's annual, quarterly and current reports,
and any amendments to those reports, as soon as reasonably practical after
electronically filing such reports with the Securities and Exchange Commission.
This website is intended to be an inactive textual reference only and none of
the information contained in our website is part of this report or is
incorporated in this report by reference.
ITEM 2. PROPERTIES
Our corporate headquarters are in leased offices comprising approximately
24,000 square feet in Santa Barbara, California. This lease expires July 2011,
with two options to extend for another 5 years. Our distribution facility is
located in Santa Fe Springs, California in a building comprising approximately
143,000 square feet under a lease that expires in January 2008. We have an
option to extend this lease for 5 years. Additionally, we have TWC
merchandising offices in an office comprising approximately 7,000 square feet
in Westlake, California. This lease expires in September 2005.
We lease all of our store locations. Big Dogs store leases are typically for
an initial term of 5 years with a 5-year option and provide for base rent plus
contingent rent based upon a percentage of sales in excess of agreed-upon sales
levels. In recent years, we have negotiated shorter-term renewals for Big Dogs
stores in malls where we perceive a risk of declining sales. See "Item 1.
BUSINESS - RETAIL STORES." TWC stores typically have longer terms, as required
by leading mall developers.
ITEM 3. LEGAL PROCEEDINGS
In 2004, a licensee of the Company called Big Dog Motorcycles ("BDM") filed
suit against us in federal district court in California for unspecified damages
for breach of the license agreement. We counterclaimed for breach of the
license and trademark infringement. Later that year, BDM filed a separate
action in federal district court in Kansas for declaratory relief that BDM's
use of the Big Dog trademark for its products is not an infringement of the
Company's rights, and amended the California action to include, among other
things a claim for $1.5 million dollars for "wrongful termination" of the
license. We do not believe that the outcome of such litigation will have a
material adverse effect on our results of operations or financial condition.
We are also involved from time to time in litigation incidental to our business.
We believe that the outcome of such litigation will not have a material adverse
effect on our results of operation or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The common stock of our Company is traded on the NASDAQ National Market under
the symbol BDOG. The following table sets forth, for the period from the first
quarter 2003 through the fourth quarter 2004, the high and low "sales" price of
the shares of our common stock, as reported on the NASDAQ National Market.
2004 2003
---- ----
High Low High Low
------------ --------------
First Quarter $ 6.40 $ 3.49 $ 2.67 $ 1.84
Second Quarter 6.32 4.01 3.21 1.93
Third Quarter 7.10 4.35 3.34 2.61
Fourth Quarter 7.10 5.50 4.00 2.73
On March 1, 2005, the last sales price of the common stock as reported on the
NASDAQ National Market was $7.10 per share. As of March 1, 2005, we had
approximately 143 shareholders of record of our common stock.
Our current credit agreement prohibits the payment of dividends (see Liquidity
and Capital Resources). We did not pay a dividend in 2004 and 2003, and do not
expect to pay dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share and operating data)
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $ 161,358 $ 103,757 $ 108,756 $ 112,369 $ 115,280
Cost of goods sold.............................. 72,733 45,025 46,970 49,154 48,836
-------- --------- --------- --------- ---------
Gross profit.................................... 88,625 58,732 61,786 63,215 66,444
-------- --------- --------- --------- ---------
Selling, marketing and distribution expenses.... 73,956 49,089 51,528 52,660 53,176
General and administrative expenses............. 8,060 5,199 5,252 5,618 5,394
-------- --------- --------- --------- ---------
Total operating expenses........................ 82,016 54,288 56,780 58,278 58,570
-------- --------- --------- --------- ---------
Income from operations ......................... 6,609 4,444 5,006 4,937 7,874
Write-off of impaired asset (1)................. --- --- --- --- 3,000
Other income (1)................................ (82) --- --- (334) ---
Interest income (2)............................. (26) (2) (3,175) (39) (258)
Interest expense (2)............................ 857 320 3,761 1,158 596
-------- -------- -------- -------- --------
Income before provision for income taxes........ 5,860 4,126 4,420 4,152 4,536
Provision for income taxes...................... 2,172 1,489 603 1,512 2,719
-------- -------- -------- -------- --------
Net income...................................... $ 3,688 $ 2,637 $ 3,817 $ 2,640 $ 1,817
========== ========== ========== ========= =========
Net income per share
Basic.......................................... $ 0.42 $ 0.32 $ 0.45 $ 0.31 $ 0.17
Diluted........................................ $ 0.40 $ 0.32 $ 0.45 $ 0.31 $ 0.17
Weighted average common shares
Basic.......................................... 8,722 8,307 8,409 8,457 10,808
Diluted........................................ 9,174 8,307 8,409 8,477 10,906
Cash dividend per common share.................. $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.10
OPERATING DATA:
Number of stores (3)
Stores open at beginning of period............. 203 209 208 198 191
Stores added due to The Walking Company
acquisition.................................. 72 --- --- --- ---
Stores opened during period.................... 5 7 7 16 16
Stores closed during period.................... (18) (13) (6) (6) (9)
------- -------- ------- ------- -------
Stores open at end of period................... 262 203 209 208 198
Comparable stores sales increase
(decrease) (4) (5)........................... 3.4% (3.6)% (6.3)% (4.4)% 1.3%
BALANCE SHEET DATA:
Working capital................................. $32,727 $29,574 $26,122 $22,261 $17,553
Total assets.................................... 58,831 42,582 39,679 40,307 43,280
Total indebtedness (6).......................... 1,092 --- --- 1,767 6,000
Stockholders' equity............................ 42,541 34,214 31,983 28,408 25,859
(1) In 2000, we wrote off our entire $3,000,000 investment in PETsMART.com
preferred stock. Subsequently, in 2001, a proposal and acceptance occurred
whereby we sold this preferred stock for $334,000.
(2) In 2002, we earned $3,172,000 of interest income and incurred $3,288,000 of
interest expense relating to the short-sale and repurchase of $95,384,000 of
U.S. Treasury Securities.
(3) Excludes one temporary store which was open for a portion of 2000. Includes
3 temporary stores which were open as of December 31, 2003.
(4) Comparable store sales represent net sales of stores open at least one full
year. Stores are considered comparable beginning on the first day of the third
month following the one-year anniversary of their opening. Stores that are
relocated but remain in the same shopping area remain in the comparable store
base. The Company believes this method best reflects the effect of one-time
promotional events and is most consistent with industry methods.
(5) In 2004, comparable store sales increase consists of a 12.7% increase in
TWC comparable store sales, which is offset by a 1.9% decrease in Big Dogs
comparable store sales.
(6) Includes subordinated debt, obligations under the bank line of credit and
obligations under capital leases.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto of the Company
contained elsewhere in this Form 10-K.
GENERAL
Big Dog Holdings, Inc. is the parent company of two retail chains, Big
Dog USA, Inc., which does business as "Big Dog Sportswear" ("Big Dogs" or "Big
Dog Sportswear")) and The Walking Company ("TWC"). Big Dogs develops, markets
and retails a branded, lifestyle collection of unique, high-quality,
popular-priced consumer products, including active wear, casual sportswear,
accessories and gifts. TWC, acquired March 3, 2004, is a specialty retailer of
authentic comfort footwear and accessories.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
selected statement of operations data expressed as a percentage of net sales:
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
---- ---- ----
Net sales....................................................... 100.0% 100.0% 100.0%
Cost of goods sold.............................................. 45.1 43.4 43.2
----- ----- -----
Gross profit.................................................... 54.9 56.6 56.8
Selling, marketing and distribution expenses.................... 45.8 47.3 47.4
General and administrative expenses............................. 5.0 5.0 4.8
----- ----- -----
Total operating expenses....................................... 50.8 52.3 52.2
----- ----- -----
Income from operations......................................... 4.1% 4.3% 4.6%
YEARS ENDED DECEMBER 31, 2004 AND 2003
NET SALES. Net sales consist of sales from the Company's stores,
catalog, internet website, and corporate sales accounts, all net of returns and
allowances. Net sales increased to $161.4 million in 2004 from $103.8 million
in 2003, an increase of $57.6 million, or 55.5%. The increase was primarily
related to $62.6 million in sales from the acquisition of The Walking Company
on March 3, 2004. This increase was offset by $1.8 million attributable to a
decrease in Big Dog comparable store sales of 1.9%, $1.7 million attributable
to a decrease in Big Dog sales for stores not yet qualifying as comparable
stores, which includes the closure of unprofitable stores netted against new
stores opened in the year, $1.3 million attributable to a decrease in our Big
Dog wholesale business, and $0.2 million attributable to a decrease in our Big
Dog mail order business. The decrease in Big Dog comparable store sales is
primarily related to an overall decrease in consumer traffic in our stores and
outlet locations. During the second quarter 2004, we closed the Big Dog
wholesale division, which accounted for 2% of revenues in 2003.
GROSS PROFIT. Gross profit increased to $88.6 million in 2004 from
$58.7 million in 2003, an increase of $29.9 million, or 50.9%. As a percentage
of net sales, gross profit decreased to 54.9% in 2004 from 56.6% in 2003. The
decrease was attributable to the addition of TWC store sales as of the
acquisition date of March 3, 2004. Such lower margin is expected to continue
for future periods, as TWC margin contribution is generally lower than the
Company's historical results. TWC gross margin was 51.9% in 2004 as compared to
Big Dogs' contribution of 56.8%. The Big Dogs' gross profit for 2004 increased
to 56.8% from 56.6% in 2003. The 0.2% increase was primarily due to a shift
from promotional or lower-margined sales to higher-margined sales. Gross profit
may not be comparable to those of other retailers, since some retailers include
distribution costs and store occupancy costs in costs of goods sold, while we
exclude them from gross margin, including them instead in selling, marketing
and distribution expenses.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses consist of expenses associated with creating,
distributing, and selling products through all channels of distribution,
including occupancy, payroll and catalog costs. Selling, marketing and
distribution expenses increased to $74.0 million in 2004 from $49.1 million in
2003, an increase of $24.9 million, or 50.7%. The $24.9 million increase is
primarily due to $26.2 million related to TWC. However, as a percentage of net
sales these expenses decreased to 45.8% in 2004 from 47.3% in 2003, a decrease
of 1.5%. The decrease as a percentage of sales is primarily related to cost
reductions related to store closures and efficiencies created as a result of
the acquisition of The Walking Company. With the addition of TWC, this lower
level of expenses as a percentage of revenue is expected to continue in future
periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of administrative salaries, corporate occupancy costs and
other corporate expenses. General and administrative expenses increased to
$8.1 million in 2004 from $5.2 million in 2003. The increase is directly
attributable to The Walking Company acquisition. However, as a percentage of
net sales these expenses remained constant at 5.0% for both 2004 and 2003.
OTHER INCOME. Other income of $0.1 million in 2004 is the gain from
early debt extinguishment at a discount of the redeemable convertible notes
related to The Walking Company acquisition.
INTEREST EXPENSE. Interest expense increased to $0.9 million in 2004
from $0.3 million in 2003. The increase in interest expense is due to higher
average outstanding borrowings due to the acquisition of the operations of The
Walking Company. Such higher level of interest expense, as a dollar amount, is
expected to continue in future periods as a result of The Walking Company
acquisition.
INCOME TAXES. In 2004, the provision for income taxes reflects a 37.1%
effective tax rate, compared to a 36.1% effective tax rate in 2003.
YEARS ENDED DECEMBER 31, 2003 AND 2002
NET SALES. Net sales decreased to $103.8 million in 2003 from $108.8
million for 2002, a decrease of $5.0 million, or 4.6%. Of the $5.0 million
decrease, $3.5 million was attributable to a 3.6% comparable store sales
decrease for the period, $1.6 million was attributable to those stores not
opened for comparable periods, which includes the closure of unprofitable
stores netted against new stores opened in the period, and $0.5 million was
attributable to a decrease in our wholesale business. This decrease was offset
by a $0.6 million increase in the mail order business. The 2003 decrease in
comparable store sales is primarily related to a decline in product sales as a
result of lower customer traffic in our stores and outlet locations. Retail
sales were impacted by the highly competitive conditions and overall difficult
retail environment.
GROSS PROFIT. Gross profit decreased to $58.7 million in 2003 from
$61.8 million for 2002, a decrease of $3.1 million, or 5.0%. As a percentage of
net sales gross profit is relatively constant, decreasing to 56.6% in 2003 from
56.8% in 2002. Gross profit may not be comparable to those of other retailers,
since some retailers include distribution costs and store occupancy costs in
costs of goods sold, while we exclude them from gross margin, including them
instead in selling, marketing and distribution expenses.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses decreased to $49.1 million in 2003 from $51.5 million in
2002, a decrease of $2.4 million, or 4.7%. The decrease in selling, marketing
and distribution expenses is primarily due to cost reductions resulting from a
net 6 store decrease in the Company's store base causing lower depreciation
expense and other retail cost expense reductions. The retail cost reductions
related primarily to payroll and lease occupancy expenses. As a percentage of
net sales, these expenses remained relatively constant, decreasing to 47.3% in
2003 from 47.4% in 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses remained relatively constant, decreasing to $5.2 million in 2003 from
$5.3 million in 2002. As a percentage of net sales, these expenses increased
to 5.0% in 2003 from 4.8% in 2002. The increase as a percentage of net sales
is due to a lower net sales base in 2003.
INTEREST INCOME. Interest income decreased to $2,000 in 2003 from
$3.2 million in 2002. In July 2002, we entered into two transactions relating
to the short-sale and repurchase of approximately $95.3 million of U.S.
Treasury Securities and we earned approximately $3.2 million in interest income
from holding these securities. The transactions were intended to address
interest rate exposure and generate capital gains that could be used to offset
previously incurred capital losses. The first transaction, which represented
$95.3 million of U. S. Treasury Securities, matured on November 15, 2002 and
we earned approximately $3.2 million of interest income related to these
securities. In the second transaction, we repurchased $95.4 million of U.S.
Treasury Securities on November 15, 2002.
INTEREST EXPENSE. Interest expense decreased to $0.3 million in 2003
from $3.8 million in 2002. Such decrease was primarily due to $3.3 million of
interest expense related to our short bond transactions (See "Interest Income")
Otherwise, interest expense decreased to $0.3 million in 2003 from $0.5 million
in 2002 related to lower average outstanding borrowings during 2003 as compared
to 2002.
INCOME TAXES. In 2003, the provision for income taxes reflects a 36.1%
effective tax rate, compared to a 13.6% tax rate in 2002. The increase in the
effective tax rate is primarily related to a valuation allowance established in
2000 and relieved in 2002, specifically identified with the write-off of our
$3.0 million investment in PETsMART.com, which represented a capital loss and
required us to generate capital gains in order to realize the deferred tax
asset. Based on the nature of the loss, we provided a valuation allowance in
2000 to reduce our deferred tax asset to a level which, more likely than not,
would be realized. In 2002, we completed our short bond transactions (See
"Interest Income"), which generated the capital gains necessary to offset these
capital losses thereby relieving this valuation allowance.
SEASONALITY AND QUARTERLY RESULTS
We believe our seasonality is somewhat different than many apparel
retailers since a significant number of our Big Dog Sportswear stores are
located in tourist areas and outdoor malls that have different visitation
patterns than urban and suburban retail centers. We believe that the
seasonality of TWC stores will more closely resemble traditional retailers. The
third and fourth quarters (consisting of the summer vacation, back-to-school
and Christmas seasons) have historically accounted for the largest percentage
of our annual sales and profits. We have historically incurred operating losses
in the first half of the year and may be expected to do so in the foreseeable
future.
Our quarterly results of operations may also fluctuate as a result of
a variety of factors, including the timing of store openings, the amount of
revenue contributed by new stores, changes in comparable store sales, changes
in the mix of products sold, customer acceptance of new products, the timing
and level of markdowns, competitive factors and general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
During 2004, our primary uses of cash were for merchandise inventories,
the acquisition of The Walking Company, capital expenditures, and general
operating activity. We satisfied our cash requirements from existing cash
balances, short-term borrowings under its line of credit agreements and other
borrowings.
Cash provided by operating activities was $6.3 million and $5.8
million for 2004 and 2003, respectively. The $0.5 million increase in cash
provided by operating activities relates to an increase in our net income of
$1.1 million, $3.7 million in 2004 compared to $2.6 million in 2003, which was
offset in part by various fluctuations in operating assets and liabilities.
Cash used in investing activities was $3.5 million and $1.0 million
for 2004 and 2003, respectively. Of the cash used in investing activities in
2004, $1.6 million relates to the acquisition of The Walking Company.
Cash used in financing activities was $8.7 million in 2004 compared
to $0.5 million in 2003. As of December 31, 2004, we had short term borrowings
of $0.3 million under its borrowing agreements. As of December 31, 2003, we had
no outstanding short term borrowings.
In October 2001, the Company entered into a credit facility with Wells
Fargo Retail Finance, which was most recently amended in August 2004 (the
"Amended Credit Agreement"). The Amended Credit Agreement, which expires in
March 2007, provides for a total commitment of $28 million with the ability for
the Company to issue documentary and standby letters of credit of up to $3
million. The Company's ability to borrow under the facility is determined using
an availability formula based on eligible assets. The facility is
collateralized by substantially all of the Company's assets and requires daily,
weekly and monthly financial reporting as well as compliance with financial,
affirmative and negative covenants. Prior to the amendment, the most
significant of these financial covenants was compliance with certain
pre-defined earnings before interest, income taxes, and depreciation and
amortization targets. As amended, the more significant covenants include
compliance with certain pre-defined capital expenditures. For all periods
presented, the Company was in compliance with this and all other covenants.
This credit agreement provides for a performance-pricing structured interest
charge, based on prime or ranging up to LIBOR plus 1.75% (5.25% at December 31,
2004), which is based on excess availability levels. As of December 31, 2004
and 2003, no amounts were outstanding under the Amended Credit Agreement.
Additionally, the Company had $899,000 and $966,000, respectively, of letters
of credit outstanding as of December 31, 2004 and 2003. The letters of credit
expire through March 30, 2005.
In addition to the Amended Credit Agreement of the Company, TWC entered
into a separate $17.5 million three-year revolving credit facility with Wells
Fargo Retail Finance on March 3, 2004. The line is secured by substantially all
assets of TWC and requires daily, weekly and monthly financial reporting as well
as compliance with financial, affirmative and negative covenants. The most
significant of these financial covenants is compliance with certain pre-defined
earnings before interest and depreciation, accounts payable to inventory ratio
covenant and capital expenditures. For all periods presented, TWC was in
compliance with this and all other covenants. This credit agreement provides
for a performance-pricing structured interest charge, based on prime or ranging
up to LIBOR plus 2.75% (5.25% at December 31, 2004), which is based on excess
availability levels. As of December 31, 2004, TWC had approximately $304,000
outstanding under this credit agreement and $341,000 of outstanding letters of
credit. The letters of credit expire through January 31, 2005.
In March 2004, in conjunction with the acquisition of The Walking
Company, the Company also entered into a $3 million two-year unsecured
revolving promissory note facility with Israel Discount Bank ("IDB"). This
facility bears interest at IDB prime plus 1% (6.25% at December 31, 2004) and
is personally guarantied by the Chairman of the Company, for which he received
an annual 2.5% guarantee fee of $75,000. At December 31, 2004, no amounts were
outstanding under this facility. In February 2005, this facility was cancelled
by the Company.
In conjunction with the acquisition, the Company assumed $3,279,000 of
secured promissory notes and $721,000 of unsecured promissory notes,
respectively, payable to certain former creditors of The Walking Company. The
secured note holders were also granted rights to convert the notes into a total
of 753,793 shares of common stock of the Company at a conversion price of $4.35
per share through June 30, 2004. In addition, the holders of the secured notes
received a right to sell ("put") 50% of the outstanding principal amount of
such notes to the Company at a 20% discount through June 30, 2004 (the "note
put rights"). The unsecured note holders also were granted rights to convert
the notes into a total of 165,748 shares of common stock of the Company at a
conversion price of $4.35 per share through June 30, 2004. In addition, the
holders of such unsecured notes received note put rights to put 100% of the
outstanding principal amount of such notes to the Company at a 20% discount
through June 30, 2004.
In order to facilitate the acquisition, the Chairman of the Board and
the Chief Executive Officer of the Company each personally guarantied the
potential obligation of the secured and unsecured note put rights and another
$2,800,000 of other potential obligations in regard to certain administrative
claims. In connection therewith, the Chairman and CEO were given the right to
purchase the secured and unsecured put rights if such put rights were exercised
The Chairman and the CEO then assigned part of their right to purchase such
rights to certain executive officers and individuals (the "Assigned Group"). In
March 2004, the holders of the $721,000 of unsecured notes exercised the right
to put such notes, which the Assigned Group purchased for $576,000. The Company
recorded $328,000 as compensation expense, which was equal to the difference
between the market value of the Company common stock into which such notes were
convertible and the amount at which the Assigned Group had the right to
purchase such notes. This amount is included in general and administrative
expenses in the accompanying statements of operations.
During the second quarter, certain note holders and the Assigned Group
exercised their rights to convert $2,918,000 in secured notes, $721,000 in
unsecured notes and $64,000 in accrued interest into 851,117 shares of common
stock. As an inducement to cash out, the Company offered to redeem the
remaining secured notes at a 10% discount instead of the contractual 20%
discount. Accordingly, all of the remaining secured notes were redeemed for a
cash payment of 90% of the face value. As a result of the above transactions
the Company recognized a gain on the early extinguishment of debt of $82,000
which was recorded as other income in the accompanying statement of operations.
As part of the acquisition of The Walking Company, TWC assumed priority
tax claims totaling approximately $627,000. The Bankruptcy Code requires that
each holder of a priority tax claim will be paid in full with interest at the
rate of six percent per year with annual payments for a period of six years. At
December 31, 2004, $72,000 of the priority tax claim note has been classified as
current and is included in current portion of long-term debt, while the
remainder of $289,000 is classified as long-term note payable in the
accompanying consolidated balance sheet.
Management believes that available cash, the credit facilities in place
in 2004 and 2005, and cash generated from operations will be adequate to fund
the Company's working capital requirements for the foreseeable future.
COMMITMENTS AND OBLIGATIONS
As of December 31, 2004, we had the following obligations:
Amounts of Commitment Expiration per Period
------------------------------------------------------------------------------------------------
Total Amounts Less than 1 1 to 3 years 4 to 5 years Over 5 years
Committed year
------------------ ---------------- --------------- ---------------- --------------
Debt:
Revolving lines of credit $ 304,000 $304,000 $ --- $ --- $ ---
Priority tax claims 361,000 72,000 144,000 145,000 ---
Contractual Obligations:
Operating leases 86,141,000 22,919,000 33,750,000 17,720,000 11,752,000
Capital leases 427,000 171,000 256,000 --- ---
Other Commercial
Commitments:
Letters of credit 925,000 925,000 --- --- ---
Standby letters of credit 315,000 315,000 --- --- ---
------------------ ---------------- --------------- ---------------- ---------------
Total Commitments $88,473,000 $24,706,000 $34,150,000 $17,865,000 $11,752,000
------------------ ---------------- --------------- ---------------- ---------------
Revolving Lines of Credit - We have two revolving credit facilities with Wells
Fargo Retail Finance that we use to finance our operations. See "Part I. Item 7
- - Liquidity and Capital Resources" for additional information regarding our
credit facilities.
Priority Tax Claims - In conjunction with the acquisition of The Walking
Company, we assumed priority tax claims. See "Part I. Item 7. - Liquidity and
Capital Resources" for additional information regarding our priority tax claim
debt.
Operating Leases - We lease retail and office space under various operating
leases. Certain leases are cancelable with substantial penalties. See "Part I.
Item 2. -- Properties" for additional information regarding our leases.
Capital Leases - We lease certain computer and copier equipment under various
capital leases. Certain leases are cancelable with substantial penalties.
Letters of Credit - We open letters of credit to facilitate inventory purchases
as required by certain vendors. The letters of credit list certain
documentation requirements that each vendor must present to our bank before
payment is made. We are obligated to make these payments upon presentation of
these documents.
See additional discussion above under Liquidity and Capital Resources.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which provides standards on the accounting for
obligations associated with the retirement of long-lived assets. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002. The adoption of
this statement did not have a significant impact on our consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses exit or disposal
activities including one-time involuntary employee termination benefits,
contract termination costs and costs to consolidate facilities or relocate
employees. Existing accounting guidelines (principally Emerging Issue Task
Force Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity) require companies to recognize a
liability when management commits itself or announces plans to exit or dispose
of an activity. SFAS No. 146 will prohibit companies from recognizing an exit
or disposal liability until the liability has been incurred, generally the
"communication date" for one-time termination benefits and the contract
termination or "cease use date" for contract costs, and will require these
liabilities to be measured at fair value. This statement is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of the
provisions of this statement did not have an impact on our consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have an impact on our consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement did not
have an impact on the consolidated financial statements since we currently have
no instruments that meet this definition.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact, if any, on the Company's financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in standards
issued by the International Accounting Standards Board. The amendment to
Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Such an
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges
occurring in periods beginning after December 16, 2004. Management does not
expect adoption of SFAS No. 153 to have a material impact, if any, on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires that the cost of share-based payment
transactions (including those with employees and non-employees) be recognized in
the financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the company's shares or other equity
instruments, or (2) that require (or may require) settlement by the issuance of
a company's shares or other equity instruments. This statement is effective (1)
for public companies qualifying as SEC small business issuers, as of the first
interim period or fiscal year beginning after December 15, 2005, or (2) for all
other public companies, as of the first interim period or fiscal year beginning
after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal
year beginning after December 15, 2005. Management is currently assessing the
impact of this statement on its financial position and results of operations in
the third and fourth quarters of 2005. In the interim, the Company is
continuing to use the intrinsic value method in estimating employee stock
compensation expense based on the fair value method of accounting. This method
is allowed under SFAS No. 148, which amended SFAS No. 123 in December 2002, and
proforma disclosure of fair value amounts is provided.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51, Consolidated Financial
Statements." This interpretation addresses consolidation by business
enterprises of 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 from other parties. Variable interest entities
are required to be consolidated by their primary beneficiaries if they do not
effectively disperse risks among the parties involved. The primary beneficiary
of a variable interest entity is the party that absorbs a majority of the
entity's expected losses or receives a majority of its expected residual
returns. In December 2003, the FASB amended FIN 46, now known as FIN 46
Revised ("FIN 46R"). The requirements of FIN 46R are effective no later than
the end of the first reporting period that ends after March 15, 2004. A company
that has applied FIN 46 to an entity prior to the effective date of FIN 46R
shall either continue to apply FIN 46 until the effective date of FIN 46R or
apply FIN 46R at an earlier date. We do not believe the adoption of this
interpretation will have an impact on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. Our
significant accounting policies are discussed in Note 1 to the consolidated
financial statements. Certain of these accounting policies as discussed below
require management to make estimates and assumptions about future events that
could materially affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. Our most
critical estimate relates to projecting future cash flows used in assessing
future store operating performance and testing long-lived assets for
impairment.
We evaluate the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. This evaluation is performed based on the
estimated undiscounted future cash flows from operating activities compared
with the carrying value of the related asset. If the undiscounted future cash
flows are less than the carrying value, an impairment loss is recognized,
measured by the difference between the carrying value and the estimated fair
value of the assets, with such estimated fair values determined using the best
information available generally based on prices for similar assets for stores
recently opened.
We are self-insured for medical insurance coverage. Our policy has
maximum exposure limits. We maintain a liability for estimated claims based on
historical claims experience and other actuarial assumptions.
Our inventories are valued at the lower of cost (first-in, first-out
and weighted average method) or market. We continually evaluate our inventories
by assessing slow moving current product as well as prior seasons' inventory.
Market value of non-current inventory is estimated based on historical sales
trends for this category of inventory, the impact of market trends, and an
evaluation of economic conditions. The Company closely monitors its off-price
sales to ensure the actual results closely match initial estimates. Estimates
are regularly updated based upon this continuing review.
We account for income taxes using an asset and liability approach for
measuring deferred income taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date. A valuation allowance is established, when necessary,
to reduce deferred income tax assets to the amount expected to be realized.
We make limited use of derivative instruments. On the date we enter
into a derivative contract, management designates the derivative as a hedge for
the identified exposure. We formally document all relationships between hedging
instruments and hedged items, as well as the risk-management objective and
strategy for entering into various hedge transactions. In this documentation, we
identify the asset, liability, firm commitment, or forecasted transaction that
has been designated as a hedged item and indicate how the hedging instrument is
expected to hedge the risks related to the hedged item. We formally measure
effectiveness of hedging relationships both at the hedge inception and on an
ongoing basis in accordance with its risk management policy. We would
discontinue hedge accounting prospectively if it is determined that the
derivative is no longer effective in offsetting changes in the hedged item.
RISK FACTORS
Investors in the Company should consider the following risk factors as
well as the other information contained herein.
CONTROL BY MAJORITY SHAREHOLDER, SMALL PUBLIC FLOAT, AND LOW TRADING
VOLUME OF SHARES. Our Chairman of the Board, Fred Kayne, owns approximately 50%
of Big Dogs outstanding common stock. In addition, over 70% of our shares are
held by Mr. Kayne and other directors, officers or beneficial owners of more
than 10%, none of whom have historically traded in the shares on any regular
basis. As a result, Mr. Kayne, acting either individually or with the Company's
current directors and executive officers, will be able to control the election
of directors, and to determine the outcome of any other matter submitted to a
vote of our stockholders, including a change in control. While our shares are
currently listed on the NASDAQ National Market System, the average daily
trading volume, particularly in recent years, has been very low. Due to all
the foregoing, and other factors, there has been and can expect to be
significant illiquidity in our shares.
CONTINUED STORE CLOSURES. The Company continues to evaluate its
current Big Dogs and TWC store portfolio for potential store closures. In 2004,
the Company closed 18 underperforming Big Dogs stores (which included 4
temporary holiday stores) and in 2005 to date has closed 8 Big Dogs stores. We
will continue to take a careful position in regard to long-term real estate
commitments and may close additional stores if considered appropriate.
CHANGES IN CONSUMER PREFERENCES. The consumer products industry in
general and the apparel industry in particular, are subject to changing
consumer demands and preferences. Although we believe our Big Dogs and TWC
products historically have not been significantly affected by fashion trends,
its products are subject to changing consumer preferences. Big Dogs' success
will depend significantly on our ability to continue to produce popular
graphics and products that anticipate, gauge and respond in a timely manner to
changing consumer demands and preferences. We also continue to evaluate our
introduction of more risque graphics in the Big Dogs line in recent years, and
balance their sales against the risk of offending some customers. In addition,
over the years general consumer preferences rise and decline in regard to the
type of graphic and logo-oriented merchandise provided by Big Dogs, which can
have an effect on our business.
FACTORS AFFECTING STORE TRAFFIC. Nearly all of our stores for both Big
Dogs and TWC are located in malls. Accordingly our sales in such stores are,
and will in the future continue to be, affected by the ability of such malls to
continue to generate customer traffic. Big Dogs stores are located largely in
outlet malls, with a majority of such malls we have selected being in tourist
areas or tourist-serving areas where we think the customers will be attracted
to Big Dogs merchandise. Outlet mall traffic appears to have declined overall
in recent years. In addition, tourism, upon which a number of the outlet malls
in which we have stores depend for traffic, may from time to time adversely be
affected by such factors as economic downturns, adverse weather, war or
international conflict, acts of terrorism or terrorism alerts, and increases in
the cost of travel. In addition, customer traffic in both outlet malls and the
regional malls in which TWC has stores is also affected by such factors as
changing consumer preferences, opening of new malls in the area, the closing of
high-profile stores in the mall and declines in the desirability of the
shopping environment in a particular mall.
DEPENDENCE ON KEY PERSONNEL. Our success is significantly dependent on
the performance of our key management, particularly Chief Executive Officer,
Andrew Feshbach, Executive Vice President--Merchandising, Doug Nilsen,
Executive Vice President - Business Affairs, General Counsel, Anthony Wall,
Chief Financial Officer, Roberta Morris, Senior Vice President - Retail
Operations, Lee Cox and Senior Vice President - Merchandising, Michael Grenley.
DEPENDENCE ON THIRD-PARTY AND FOREIGN MANUFACTURERS AND SUPPLIERS. We
do not own or operate any manufacturing facilities and are therefore dependent
on third parties for the manufacture and supply of our Big Dogs and TWC
products. The loss of major suppliers or the failure of such suppliers to timely
deliver our products or to meet our quality standards, could adversely affect
our ability to deliver products to our customers in a timely manner. The
majority of our Big Dogs products are purchased from trading companies with
relationships with manufacturing facilities located outside the United States.
Our operations could be adversely affected by events that result in disruption
of trade from foreign countries in which our suppliers are located. Our staff
or agents periodically visit and observe the operations of such foreign and
domestic manufacturers, but we do not control such manufacturers or their labor
practices. Therefore we cannot necessarily prevent legal or ethical violations
by independent manufacturers of Big Dogs goods, and it is uncertain what impact
such violations would have on us.
SUBSTANTIAL COMPETITION. The markets for each of our products are
highly competitive. In regard to our Big Dogs apparel products, the increased
consumer shift toward large mass-market and discount retailers has put
substantial pricing and competitive pressure on apparel retailers in general.
We believe Big Dogs' long-term competitive position will depend upon our
ability to anticipate and respond effectively to changing consumer demands and
to offer customers a wide variety of high-quality, fun products at competitive
prices.
RELIANCE ON INFORMATION SYSTEMS. We rely on various information
systems to manage our operations and regularly make investments to upgrade,
enhance or replace such systems. Substantial disruptions affecting our
information systems could have an adverse effect on our business.
DEPENDENCE ON TRADEMARKS. We use a number of trademarks, the primary
ones of which are registered with the United States Patent and Trademark Office
and in a number of foreign countries. While we believe our trademark rights are
strong, in our pursuit and defense of particular infringement claims it cannot
be assured that we will always prevail. See "Business - Trademarks."
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Form
10-K that are not purely historical are forward-looking statements, including
without limitation statements regarding our expectations, beliefs, intentions
or strategies regarding the future. Such forward-looking statements include the
discussions in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the seasonality of business, expected new
store openings, integration of acquisition and costs and inflation risks. All
forward-looking statements in this document are based upon information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe we have material exposure to losses from market-rate
sensitive instruments. We have not invested in derivative financial instruments
We have credit agreements with Wells Fargo Retail Finance whereby we may borrow
at a floating rate. These credit agreements provides for a performance-pricing
structured interest charge, ranging up to LIBOR plus 2.75%, based on access
availability levels. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." We had $304,000 outstanding borrowings under these arrangements as
of December 31, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" at Item 15(a) for a
listing of the consolidated financial statements filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 29, 2004, our Audit Committee dismissed our previous
independent auditor, Deloitte & Touche LLP or D&T. Effective September 29,
2004, our Audit Committee engaged Singer Lewak Greenbaum & Goldstein LLP to
serve as our independent auditors for 2004. D&T's reports on our consolidated
financial statements for the years ended December 31, 2002 and 2003 did not
contain an adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles. During the
years ended December 31, 2002 and 2003, and the interim period ended September
29, 2004, there were no disagreements with D&T on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to D&T's satisfaction, would have caused it to
make reference to the subject matter in connection with its report on our
consolidated financial statements, and no reportable events.
ITEM 9a. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The term "disclosure
controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of the
Securities and Exchange Act of 1934 ("Exchange Act"). These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our chief executive officer and our chief financial
officer have evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days before the filing of this Annual
Report on Form 10-K (the "Evaluation Date"), and believe that, as of the
Evaluation Date, such controls and procedures were effective at ensuring that
required information will be disclosed on a timely basis in our reports filed
under the Exchange Act.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls, known to
the Chief Executive Officer or the Chief Financial Officer, subsequent to the
date of the evaluation.
ITEM 9b. OTHER INFORMATION.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other information with respect to this item is incorporated by
reference from the registrant's definitive proxy statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and present and recent past
positions of persons serving as our executive officers as of March 1, 2005:
NAME AGE POSITION
- ---- --- --------
Andrew D. Feshbach 44 President, Chief Executive Officer and Director
Douglas N. Nilsen 56 Executive Vice President - Merchandising (Big Dog USA)
Anthony J. Wall 49 Executive Vice President - Business Affairs,
General Counsel and Secretary
Roberta J. Morris 45 Chief Financial Officer, Treasurer and
Assistant Secretary
Lee M. Cox 36 Senior Vice President - Retail Operations
Michael Grenley 47 Senior Vice President-Merchandising (TWC)
ANDREW D. FESHBACH co-founded the Company in May 1992 and has served
as President, Chief Executive Officer and as a director since that time. From
1990 until the present, he has served as a Vice President of Fortune Financial,
a private merchant banking firm owned by the Company's Chairman and majority
stockholder, Fred Kayne. Mr. Feshbach has an M.B.A. from Harvard University.
DOUGLAS N. NILSEN has served as Executive Vice President-Merchandising
for Big Dog USA for more than five years. From 1990 to September 1995, he
served as Director of Merchandise at Walt Disney Attractions, Inc. for its U.S.
theme parks and resorts, and in such capacity was responsible for merchandising
all apparel and accessories. Mr. Nilsen has an M.B.A. from New York University.
ANTHONY J. WALL has served as Executive Vice President, General Counse
and Secretary of the Company for more than five years. Mr. Wall also serves as
General Counsel of Fortune Fashions Industries LLC, a custom manufacturer of
embellished apparel, Fortune Casuals, LLC, a manufacturer of casual apparel for
the mass market, and Fortune Swimwear, a manufacturer of swimwear for the mass
market, and a Vice President of Fortune Financial, all of which are controlled
by Fred Kayne.
ROBERTA J. MORRIS has served as Chief Financial Officer since March
1998, having previously served as Senior Vice President--Finance since January
1995. Prior to joining the Company in 1993, Ms. Morris was employed as a Senior
Audit Manager with Deloitte & Touche LLP. Ms. Morris is a certified public
accountant.
LEE M. COX joined the Company in September 2000 and has served as
Senior Vice President - Retail since February 2001. From 1994 until September
2000, Mr. Cox was employed by Adidas Retail, Inc. in various capacities, most
recently as Director of Retail Stores.
MICHAEL GRENLEY joined the Company in March 2004 and serves as Senior
Vice President - Merchandising for TWC. From 1994 until the Company's
acquisition of The Walking Company, Mr. Grenley served as Executive Vice
President - Merchandise and Chief Operations Officer for the previous The
Walking Company. Prior to The Walking Company, Mr. Grenley was a Vice President
of Merchandise at Macy's California.
The members of the Audit Committee of the Board of Directors are
Steven Good (Chairman), David Walsh and Skip Coomber. Our Board, in its
judgment, has determined that Mr. Good meets the Securities and Exchange
Commission's definition of audit committee financial expert and has designated
him as such. Our Board has further determined that Messrs. Good, Walsh and
Coomber are independent as such term is used under Schedule 14A of the
Securities Exchange Act of 1934.
We have adopted a code of ethics for our principal executive officer
and senior financial officers. Copies of the code of ethics are available by
writing to Big Dog Holdings, Inc., Attention General Counsel, 121 Gray Ave.,
Santa Barbara, CA 93101. Should any changes to or waivers of this code of
ethics be made, such changes to or waivers will be timely disclosed on the
Company's website, unless the same is disclosed in a current report on Form 8-K
filed with the Securities Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference
from the registrant's definitive proxy statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference
from the registrant's definitive proxy statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference
from the registrant's definitive proxy statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Part III is incorporated by
reference from the Proxy Statement of Big Dog Holdings, Inc., relating to the
2005 Annual Meeting of Stockholders, to be filed with the SEC within 120 days
of the fiscal 2004 year end.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) 1. The financial statements listed in the "Index to Consolidated
Financial Statements" at page F-1 are filed as a part of this report.
2. Schedule II - Valuation and Qualifying Accounts
Schedules other than that referred to above have been omitted
because they are not applicable or are not required under the
instructions contained in Regulation S-X or because the
information is included elsewhere in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits included or incorporated herein: See "Index to
Exhibits."
(b) Reports on Form 8-K.
No reports on Form 8-K have been issued that were not been
previously disclosed.
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
March 31, 2005 on its behalf by the undersigned, thereunto duly authorized.
BIG DOG HOLDINGS, INC.
By /s/ANDREW D. FESHBACH
------------------------
Andrew D. Feshbach
Chief Executive Officer and President
Each person whose signature appears below hereby authorizes Andrew D.
Feshbach and Anthony J. Wall or either of them, as attorneys-in-fact to sign on
his behalf, individually, and in each capacity stated below and to file all
amendments and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ANDREW D. FESHBACH Chief Executive Officer, President and Director March 31, 2005
- ---------------------
Andrew D. Feshbach (Principal Executive Officer)
/s/ROBERTA J. MORRIS Chief Financial Officer, Treasurer and Assistant March 31, 2005
- --------------------
Roberta J. Morris Secretary (Principal Financial and Accounting Officer)
/s/FRED KAYNE Chairman of the Board March 31, 2005
- -------------
Fred Kayne
/s/SKIP R. COOMBER, III Director March 31, 2005
- -----------------------
Skip R. Coomber, III
/s/STEVEN C. GOOD Director March 31, 2005
- -----------------
Steven C. Good
/s/ROBERT H. SCHNELL Director March 31, 2005
- --------------------
Robert H. Schnell
/s/DAVID J. WALSH Director March 31, 2005
- -----------------
David J. Walsh
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003, and 2002
PAGE
-----
Report of Independent Registered Public Accounting Firm...................................... F-2
Report of Independent Registered Public Accounting Firm...................................... F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003................................. F-4
Consolidated Statements of Income for the years ended December 31, 2004, 2003, and
2002......................................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2004, 2003, and 2002......................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and
2002......................................................................................... F-7
Notes to the Consolidated Financial Statements............................................... F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Big Dog Holdings, Inc. and subsidiaries
Santa Barbara, CA
We have audited the consolidated balance sheet of Big Dog Holdings,
Inc. and subsidiaries as of December 31, 2004, and the related consolidated
statements of income, stockholders' equity and cash flows for the year in the
period ended December 31, 2004. Our audit also included the financial statement
schedule listed in the Index at Item 15(a). 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 audit.
We conducted our audit 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 includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Big
Dog Holdings, Inc. and subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the year in the period ended December
31, 2004, in conformity with generally accepted accounting principles in the
United States of America.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, CA
March 14, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Big Dog Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Big Dog
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2003, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2003, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 23, 2004
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------------
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 4,670,000 $ 10,503,000
Receivables:
Trade, net............................................................ 20,000 25,000
Other................................................................. 391,000 91,000
Inventories (Note 13).................................................. 39,581,000 24,752,000
Prepaid expenses and other current assets.............................. 928,000 789,000
Deferred income taxes (Notes 5 and 8).................................. 1,691,000 875,000
----------- ------------
Total current assets.................................................... 47,281,000 37,035,000
PROPERTY AND EQUIPMENT, net (Note 2).................................... 9,956,000 4,144,000
INTANGIBLE ASSETS, Net.................................................. 172,000 211,000
DEFERRED INCOME TAXES (Notes 5 and 8)................................... 1,042,000 946,000
OTHER ASSETS............................................................ 380,000 246,000
----------- ------------
TOTAL................................................................... $ 58,831,000 $ 42,582,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 6)......................................... $ 304,000 $ ---
Current portion of long-term debt (Note 7)............................. 243,000 ---
Accounts payable....................................................... 5,033,000 1,932,000
Income taxes payable (Note 8).......................................... 2,643,000 1,513,000
Accrued expenses and other current liabilities (Note 3)................ 6,331,000 4,016,000
----------- -----------
Total current liabilities............................................... 14,554,000 7,461,000
NOTE PAYABLE (Note 7)................................................... 289,000 ---
CAPITAL LEASE OBLIGATIONS (Note 9)...................................... 256,000 ---
DEFERRED RENT AND LEASE INCENTIVES (Note 9)............................. 943,000 606,000
DEFERRED GAIN ON SALE-LEASEBACK (Note 2)................................ 248,000 301,000
----------- -----------
Total liabilities...................................................... 16,290,000 8,368,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)
STOCKHOLDERS' EQUITY (Note 10):
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding.......................................... $ --- $ ---
Common stock $.01 par value, 30,000,000 shares authorized, 10,709,030 and
9,698,284 shares issued at December 31, 2004
and 2003, respectively............................................... 107,000 97,000
Additional paid-in capital............................................. 25,513,000 20,510,000
Retained earnings...................................................... 25,149,000 21,461,000
Treasury stock, 1,529,998 and 1,455,152 shares at December 31, 2004
and 2003, respectively................................................ (8,228,000) (7,854,000)
----------- -----------
Total stockholders' equity............................................ 42,541,000 34,214,000
----------- -----------
TOTAL................................................................... $ 58,831,000 $ 42,582,000
============ ============
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
---- ---- ----
NET SALES.................................................... $ 161,358,000 $ 103,757,000 $ 108,756,000
COST OF GOODS SOLD (Note 13)................................. 72,733,000 45,025,000 46,970,000
------------ -------------- -------------
GROSS PROFIT................................................. 88,625,000 58,732,000 61,786,000
------------ -------------- -------------
OPERATING EXPENSES:
Selling, marketing and distribution......................... 73,956,000 49,089,000 51,528,000
General and administrative.................................. 8,060,000 5,199,000 5,252,000
------------ -------------- ------------
Total operating expenses................................... 82,016,000 54,288,000 56,780,000
------------ -------------- ------------
INCOME FROM OPERATIONS....................................... 6,609,000 4,444,000 5,006,000
OTHER INCOME (Note 7)........................................ (82,000) --- ---
INTEREST INCOME (Note 5)..................................... (26,000) (2,000) (3,175,000)
INTEREST EXPENSE (Notes 5 and 6)............................. 857,000 320,000 3,761,000
----------- ------------ -------------
INCOME BEFORE PROVISION FOR INCOME TAXES..................... 5,860,000 4,126,000 4,420,000
PROVISION FOR INCOME TAXES (Notes 5 and 8)................... 2,172,000 1,489,000 603,000
----------- ------------ -------------
NET INCOME................................................... $ 3,688,000 $ 2,637,000 $ 3,817,000
============ ============= =============
NET INCOME PER SHARE
BASIC....................................................... $ 0.42 $ 0.32 $ 0.45
========== ============ ============
DILUTED..................................................... $ 0.40 $ 0.32 $ 0.45
=========== ============ ============
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK
------------ PAID-IN RETAINED --------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------ ------- -------- ------ ------ ------
BALANCE,
JANUARY 1, 2002............ 9,698,284 $ 97,000 $ 20,510,000 $ 15,007,000 1,233,220 $(7,206,000) $28,408,000
Repurchased common
stock (Note 10).......... ---- ---- ---- ---- 72,416 (242,000) (242,000)
Net income................. ---- ---- ---- 3,817,000 ---- ---- 3,817,000
---------- --------- ------------- ------------ ---------- ----------- ---------
BALANCE,
DECEMBER 31, 2002.......... 9,698,284 97,000 20,510,000 18,824,000 1,305,636 (7,448,000) 31,983,000
Repurchased common
stock (Note 10).......... ---- ---- ---- ---- 149,516 (406,000) (406,000)
Net income................. ---- ---- ---- 2,637,000 ---- ---- 2,637,000
--------- --------- ----------- ----------- --------- --------- ----------
BALANCE,
DECEMBER 31, 2003.......... 9,698,284 97,000 20,510,000 21,461,000 1,455,152 (7,854,000) 34,214,000
Repurchased common
stock (Note 10).......... ---- ---- ---- ---- 74,846 ( 374,000) (374,000)
Warrants exercised (Note 7) 993,146 10,000 4,922,000 ---- ---- ---- 4,932,000
Options exercised.......... 17,600 ---- 63,000 ---- ---- ---- 63,000
Tax benefits related to
exercise of stock options
(Notes 8 and 10)......... ---- ---- 18,000 ---- ---- ---- 18,000
Net income................. ---- ---- ---- 3,688,000 ---- ---- 3,688,000
--------- --------- ---------- ---------- ---------- ----------- ---------
BALANCE,
DECEMBER 31, 2004.......... 10,709,030 $ 107,000 $ 25,513,000 $ 25,149,000 1,529,998 $(8,228,000) $42,541,000
========== ========= ============ ============ =========== ============= ==========
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
---- ---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 3,688,000 $ 2,637,000 $ 3,817,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 3,666,000 2,075,000 2,619,000
Compensation expense..................................................... 328,000 --- ---
Gain on early extinguishment of notes payable............................ (82,000) --- ---
Amortization of deferred financing fees.................................. 273,000 151,000 153,000
Provision for losses on receivables...................................... 87,000 (25,000) 68,000
Loss on disposition of property and equipment............................ 51,000 2,000 21,000
Loss on sale of U.S. Treasury Bonds...................................... --- --- 115,000
Write-off of impaired asset - fixed assets............................... --- 50,000 102,000
Deferred income taxes.................................................... (912,000) 139,000 (6,000)
Changes in operating assets and liabilities:
Receivables............................................................. (381,000) 368,000 285,000
Inventories............................................................. (2,075,000) 56,000 1,969,000
Prepaid expenses and other current assets............................... 1,635,000 (332,000) 16,000
Accounts payable........................................................ 1,308,000 (3,000) (988,000)
Income taxes payable.................................................... 1,130,000 958,000 (1,428,000)
Accrued expenses and other current liabilities.......................... (2,700,000) (143,000) 22,000
Deferred rent and lease incentives...................................... 337,000 (87,000) 10,000
Deferred gain on sale-leaseback......................................... (53,000) (53,000) (52,000)
--------- ---------- ---------
Net cash provided by operating activities.............................. 6,300,000 5,793,000 6,723,000
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (1,886,000) (1,044,000) (1,299,000)
Acquisition of The Walking Company, net of cash acquired.................. (1,577,000) --- ---
Proceeds from sale of U.S. Treasury Bonds................................. --- --- 95,269,000
Repurchase of U.S. Treasury Bonds......................................... --- --- (95,384,000)
Other..................................................................... --- 11,000 (11,000)
--------- ---------- -----------
Net cash used in investing activities.................................. (3,463,000) (1,033,000) (1,425,000)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement............................. (7,634,000) --- (1,767,000)
Repayment of redeemable convertible notes and rights...................... (363,000) --- ---
Repurchase of common stock................................................ (374,000) (406,000) (242,000)
Payment of deferred financing fees........................................ (175,000) (45,000) (150,000)
Exercise of stock options................................................. 81,000 --- ---
Repayment of capital lease obligations.................................... (166,000) --- ---
Repayment of notes payable................................................ (39,000) --- ---
--------- --------- ----------
Net cash used in financing activities.................................. (8,670,000) (451,000) (2,159,000)
---------- --------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....................... (5,833,000) 4,309,000 3,139,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................... 10,503,000 6,194,000 3,055,000
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR..................................... $ 4,670,000 $ 10,503,000 $ 6,194,000
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................. $ 545,000 $ 172,000 $ 3,617,000
Income taxes............................................................. $ 1,954,000 $ 392,000 $ 2,037,000
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
2004
----
ACQUISITION OF THE WALKING COMPANY:
Working capital, other than cash.....................................$ (4,000)
Properties........................................................... 7,260,000
Redeemable convertible notes and rights assumed......................(4,998,000)
Notes payable........................................................ (681,000)
----------
Net cash effect due to acquisition of net assets of
The Walking Company..................................................$1,577,000
==========
REDEMPTION OF NOTES AND RIGHTS:
Redeemable convertible notes and rights assumed......................$4,998,000
Expiration of warrants............................................... 328,000
Accrued interest..................................................... 75,000
Amortization of premium on convertible notes.......................... (24,000)
Gain on early extinguishment of debt.................................. (82,000)
Issuance of 993,146 shares of common stock...........................(4,932,000)
----------
Net cash effect due to redemption of notes and rights................$ 363,000
==========
OTHER:
Capital leases.......................................................$ 383,000
==========
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
The consolidated financial statements include the accounts of Big Dog
Holdings, Inc. and its subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated.
The Company principally develops and markets apparel and other
consumer products through Company-operated retail stores, corporate sales
accounts, catalog and Internet website.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
less than three months when purchased to be cash equivalents.
INVENTORIES
Inventories, consisting substantially of finished goods, are stated at
the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation and amortization of property and equipment are
provided using the straight-line method over the following useful lives:
Store fixtures..................................... 5 years
Machinery and equipment............................ 5 years
Computer equipment................................. 3 years
Software........................................... 5 years
Leasehold improvements are depreciated over the lesser of the estimated useful
life of the asset or the term of the lease, whichever is shorter.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. This evaluation is
performed based on the estimated undiscounted future cash flows from operating
activities compared with the carrying value of the related asset. If the
undiscounted future cash flows are less than the carrying value, an impairment
loss is recognized, measured by the difference between the carrying value and
the estimated fair value of the assets, with such estimated fair values
determined using the best information available generally based on prices for
similar assets for stores recently opened. The Company's evaluation for the
year ended 2004, which included all retail locations, indicated that no asset
impairment existed and therefore no write-down of assets was recorded. The
Company's evaluation for years ended 2003 and 2002, which included all retail
locations, indicated that operating losses existed for certain retail locations
with a projection that the operating losses for these retail locations will
continue. As such, the Company recorded write-downs of leasehold improvements
for certain retail stores which approximated $50,000 and $102,000 for years
2003 and 2002, respectively. Such costs are included in selling, marketing and
distribution expenses in the consolidated statements of income.
INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
which changed the accounting for "indefinite lived" intangibles from an
amortization method to an impairment-only approach. Accordingly, amortization of
intangible assets ceased on December 31, 2001. Beginning in 2002, impairment
tests are performed at least annually and more often as circumstances require.
The Company's evaluation for the year ended 2004 indicated that trademark for
its Lifeforms brand was impaired. As such, the Company recorded a $45,000
write-down of this asset in 2004. Such costs are included in general and
administrative expenses in the consolidated statements of income. Management
did not believe any impairment of its intangible assets existed at
December 31, 2003 and 2002, respectively.
Intangible assets, primarily trademark related, are stated at cost,
less accumulated amortization. The Company had additions to trademarks of
$6,000 and $62,000 in fiscal years 2004 and 2003, respectively. Accumulated
amortization was $823,000 at December 31, 2004 and 2003.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
The Company makes limited use of derivative instruments. On the date
the Company enters into a derivative contract, management designates the
derivative as a hedge for the identified exposure. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as the risk-management objective and strategy for entering into various
hedge transactions. In this documentation, the Company identifies the asset,
liability, firm commitment, or forecasted transaction that has been designated
as a hedged item and indicates how the hedging instrument is expected to hedge
the risks related to the hedged item. The Company formally measures
effectiveness of its hedging relationships both at the hedge inception and on
an ongoing basis in accordance with its risk management policy. The Company
would discontinue hedge accounting prospectively if it is determined that the
derivative is no longer effective in offsetting changes in the hedged item.
REVENUE RECOGNITION
Substantially all of the Company's revenues are generated by its
retail operations, which are recognized at the time of sale. The Company also
generates revenues through its corporate sales, Internet and mail order
catalog operations, which are recognized at the time of shipment. Outbound
shipping charges billed to customers are included in net sales when the
products are shipped for corporate sales, Internet and mail order catalog sales.
The Company records an allowance for estimated returns in the period of sale
based on prior experience.
INCOME STATEMENT COMPONENTS
Cost of goods sold consists of the cost of the product and related
overhead costs related to the product, including purchasing, inbound freight
charges, warehouse receiving costs, quality control inspection costs, internal
product development costs and shipping and other handling costs to our stores
or customers.
Selling, marketing and distribution expenses consist of expenses
associated with creating, distributing, and selling products through all
channels of distribution, including occupancy, payroll and catalog costs. The
distribution costs included in selling, marketing and distribution expense was
$3,147,000, $2,505,000, and $2,787,000 for the years ended December 31, 2004,
2003, and 2002, respectively.
General and administrative expenses consist of administrative salaries,
corporate occupancy costs and other corporate expenses.
STORE PREOPENING EXPENSES
The Company expenses store pre-opening costs as incurred, which totaled
$87,000, $87,000 and $121,000, in 2004, 2003, and 2002, respectively.
ADVERTISING COSTS
Costs associated with the production of our mail order catalogs are
capitalized and expensed over the expected revenue stream following the mailing
of the respective catalog, generally three months. All other advertising costs
are expensed as incurred. Advertising expense charged to operations for the
years ended December 31, 2004, 2003 and 2002 was $1,254,000, $931,000 and
$1,153,000, respectively. Capitalized advertising costs related to our mail
order catalogs were $113,000 and $87,000 as of December 31, 2004 and 2003,
respectively, and are included in prepaid expenses and other current assets on
the consolidated balance sheets.
DEFERRED RENT AND LEASE INCENTIVES
When a lease includes lease incentives (such as a rent holiday or
reimbursement of certain lessee construction costs) or requires fixed
escalations of the minimum lease payments, rental expense is recognized on a
straight-line basis over the initial term of the lease and the difference
between the average rental amount charged to expense and amounts payable under
the lease is included in deferred rent and lease incentives in the accompanying
consolidated balance sheets.
INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach for measuring deferred income taxes based on temporary differences
between the financial statement and income tax bases of assets and liabilities
existing at each balance sheet date. A valuation allowance is established, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized.
EARNINGS PER SHARE
Basic earnings per share is calculated based on the weighted average
number of shares outstanding. Diluted earnings per share is calculated based on
the same number of shares plus additional shares representing stock
distributable under stock-based plans computed using the treasury stock method.
The following reconciles the numerator and denominator of the basic
and diluted per-share computations for net income:
YEARS ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
Net income.................................................... $ 3,688,000 $ 2,637,000 $ 3,817,000
============ ============ ============
Basic Weighted Average Shares:
Weighted average number of shares outstanding................ 8,722,000 8,307,000 8,409,000
Effect of Dilutive Securities:
Options and warrants......................................... 452,000 --- ---
------------ ------------ -------------
Diluted Weighted Average Shares:
Weighted average number of shares outstanding and
Common share equivalents..................................... 9,174,000 8,307,000 8,409,000
============ ============ ============
Antidilutive options and warrants............................. 566,000 1,744,000 1,683,000
============ ============ ============
Antidilutive options and warrants consist of the weighted average of
stock options and warrants for the respective years that had an exercise price
greater than the average market price during the year. Such options and warrants
are therefore excluded from the computation of diluted shares.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation, requires companies to
estimate employee stock compensation expense based on the fair value method of
accounting. However, the statement allows the alternative of continued use of
the intrinsic value method described in Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, if pro forma
disclosure of fair value amounts is provided. The Company has elected the
alternative of continued use of APB Opinion No. 25.
Had compensation cost for the Company's stock option plan been
determined based on their fair value at the grant date for options granted in
2004, 2003, and 2002 consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been adjusted to the
pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
Net income:
As reported...................................................... $ 3,688,000 $ 2,637,000 $ 3,817,000
Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects........................... 114,000 --- ---
Deduct: Total stock-based employee compensation expense determined
under fair value method, net of related tax effects.............. (380,000) (693,000) (994,000)
----------- ------------ ------------
Pro forma........................................................ $ 3,422,000 $ 1,944,000 $ 2,823,000
============ ============ ===========
Net income per share:
As reported:
Basic........................................................... $ 0.42 $ 0.32 $ 0.45
Diluted......................................................... $ 0.40 $ 0.32 $ 0.45
Pro forma:
Basic........................................................... $ 0.39 $ 0.23 $ 0.34
Diluted......................................................... $ 0.37 $ 0.23 $ 0.34
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
CONCENTRATION OF CREDIT RISK
The Company has $4,127,000 of cash on deposit with a high credit
quality financial institution in excess of the Federal Deposit Insurance
Corporation limits as of December 31, 2004.
The estimated fair values of receivables, accounts payable and
short-term borrowings approximate their carrying values because of the
short-term maturity of these instruments.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which provides standards on the accounting for
obligations associated with the retirement of long-lived assets. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002. The adoption of
this statement did not have a significant impact on the Company's consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses exit or disposal
activities including one-time involuntary employee termination benefits,
contract termination costs and costs to consolidate facilities or relocate
employees. Existing accounting guidelines (principally Emerging Issue Task
Force Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity) require companies to recognize a
liability when management commits itself or announces plans to exit or dispose
of an activity. SFAS No. 146 will prohibit companies from recognizing an exit
or disposal liability until the liability has been incurred, generally the
"communication date" for one-time termination benefits and the contract
termination or "cease use date" for contract costs, and will require these
liabilities to be measured at fair value. This statement is effective for exit
or disposal activities initiated after December 31, 2002. The adoption of the
provisions of this statement did not have an impact on the Company's
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have an impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of this statement did not have an impact on the Company's consolidated
financial statements.
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact, if any, on the Company's financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29, "Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in standards
issued by the International Accounting Standards Board. The amendment to
Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Such an
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges
occurring in periods beginning after December 16, 2004. Management does not
expect adoption of SFAS No. 153 to have a material impact, if any, on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No.123(R) requires that the cost of share-based payment
transactions (including those with employees and non-employees) be recognized
in the financial statements. SFAS No. 123(R) applies to all share-based
payment transactions in which an entity acquires goods or services by issuing
(or offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the company's shares or other equity
instruments, or (2) that require (or may require) settlement by the issuance of
a company's shares or other equity instruments. This statement is effective (1)
for public companies qualifying as SEC small business issuers, as of the first
interim period or fiscal year beginning after December 15, 2005, or (2) for all
other public companies, as of the first interim period or fiscal year beginning
after June 15, 2005, or (3) for all nonpublic entities, as of the first fiscal
year beginning after December 15, 2005. Management is currently assessing the
impact of this statement on its financial position and results of operations
for the third and fourth quarter 2005. In the interim, the Company is
continuing to use the intrinsic value method in estimating employee stock
compensation expense based on the fair value method of accounting. This method
is allowed under SFAS No. 148, which amended SFAS No. 123 in December 2002,
and proforma disclosure of fair value amounts is provided.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51, Consolidated Financial
Statements." This interpretation addresses consolidation by business
enterprises of 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 from other parties. Variable interest entities
are required to be consolidated by their primary beneficiaries if they do not
effectively disperse risks among the parties involved. The primary beneficiary
of a variable interest entity is the party that absorbs a majority of the
entity's expected losses or receives a majority of its expected residual
returns. In December 2003, the FASB amended FIN 46, now known as FIN 46
Revised ("FIN 46R"). The requirements of FIN 46R are effective no later than
the end of the first reporting period that ends after March 15, 2004. A company
that has applied FIN 46 to an entity prior to the effective date of FIN 46R
shall either continue to apply FIN 46 until the effective date of FIN 46R or
apply FIN 46R at an earlier date. The adoption of this interpretation did not
have an impact on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
------------
2004 2003
---- ----
Leasehold improvements............................. $11,970,000 $ 7,728,000
Store fixtures..................................... 12,780,000 9,560,000
Machinery and equipment............................ 4,129,000 3,455,000
Computer equipment and software.................... 6,840,000 6,031,000
---------- -----------
35,719,000 26,774,000
Less accumulated depreciation and amortization..... 25,763,000 22,630,000
---------- -----------
Property and equipment, net........................ $9,956,000 $4,144,000
========== ===========
Depreciation and amortization expense of property and equipment totaled
$3,666,000, $2,075,000 and $2,560,000 in 2004, 2003 and 2002, respectively.
In May 1999, the Company purchased the building which houses its
downtown Santa Barbara retail store for $1,600,000. In August 1999, the Company
sold this building for $2,119,000 and simultaneously entered into a 10-year
lease. The $527,000 gain related to the sale of this building is being deferred
over the life of the lease.
3. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
Accrued liabilities and other current liabilities consist of the following:
DECEMBER 31,
------------
2004 2003
---- ----
Accrued compensation and benefits........................ $2,677,000 $2,109,000
Sales tax payable........................................ 1,527,000 876,000
Store credits............................................ 467,000 303,000
Sales return reserve..................................... 285,000 ---
Other current liabilities................................ 1,375,000 728,000
---------- ----------
Total accrued liabilities and other current liabilities.. $6,331,000 $4,016,000
========== ==========
4. THE WALKING COMPANY ACQUSITION
On March 3, 2004 (the "acquisition date"), the Company acquired
substantially all of the assets and assumed certain liabilities of The Walking
Company (the "acquisition"), pursuant to an asset purchase agreement for a
purchase price of approximately $22 million (subject to adjustment). The
Walking Company is a leading independent specialty retailer of high quality,
technically designed comfort footwear and accessories. The Walking Company had
total annual sales of approximately $74 million in 2003 and had been operating
under the protection of the U.S. Bankruptcy Court since July 2003. The Company
was selected as the highest and best bidder for The Walking Company assets at
a U.S. Bankruptcy Court ordered auction, which was confirmed on March 2, 2004.
Under the terms of the asset purchase agreement, a subsidiary of the
Company acquired substantially all of the assets of The Walking Company
including, but not limited to, the inventory and fixed assets of 72 stores
located in 28 states and trademarks, all of which will be used by the
subsidiary to continue the business under the name "The Walking Company"
("TWC"). The transaction was accounted for under the purchase method of
accounting, and accordingly the results of operations of TWC have been
consolidated in the Company financial statements since the acquisition date.
The purchase price consisted of approximately $1.7 million in cash,
$5.0 million in issuance of notes and rights (see Notes 6 and 7), $15.4 million
of assumption of accounts payable, accrued expenses and other liabilities
(including acquisition related costs of $1.3 million.) The Company funded the
cash portion of the purchase price by drawing upon existing and new lines of
credit, and from available cash.
The total purchase consideration has been allocated to the assets and
liabilities acquired based on their respective estimated fair values as
summarized below. The purchase price allocation is subject to change and will
be finalized upon review and refinement of certain estimates and completion of
valuation and appraisals.
Cash and cash equivalents................................ $ 123,000
Inventories.............................................. 12,754,000
Other current assets..................................... 1,944,000
Property, plant and equipment............................ 7,260,000
------------
Total assets acquired.............................. $ 22,081,000
------------
Current and other liabilities............................ 15,429,000
Notes payable and rights issued.......................... 4,952,000
------------
Total liabilities assumed.......................... $ 20,381,000
------------
Net assets acquired over liabilities............... $ 1,700,000
============
The following table presents unaudited pro forma results of the combined
operations for the year ended December 31, 2004 and 2003, respectively, as if
the acquisition had occurred as of the beginning of such periods rather than as
of the acquisition date.
Year ended
December 31,
2004 2003
-------------------- ---------------------
Net sales $169,677,000 $168,186,000
Net income 3,137,000 2,345,000
Net income per common share:
Basic $ 0.36 $ 0.28
Diluted $ 0.34 $ 0.28
The pro forma results have been prepared based on available information, using
assumptions that the Company's management believes are reasonable and include no
significant non-recurring items. The results do not purport to represent the
actual financial position or results of operations that would have occurred if
the acquisition had occurred on the dates specified. The results above are not
necessarily indicative of the results that may be achieved in the future. These
results also do not reflect any adjustments for the effect of certain operating
synergies or expected cost reductions that the Company may realize as a result
of the acquisition. No assurances can be given that the amount of financial
benefits, if any, may actually be realized as the result of the acquisition.
5. SHORT BOND TRANSACTIONS
During July 2002, the Company entered into two transactions relating
to the short-sale and repurchase of $95,384,000 of U.S. Treasury Securities.
The transactions were intended to address interest rate exposure and generate
capital gains that could be used to offset previously incurred capital losses.
The first transaction, which represented $95,384,000 of U. S. Treasury
Securities, matured on November 15, 2002. In the second transaction, the
Company repurchased $95,384,000 of U. S. Treasury Securities on November 15,
2002. As of December 31, 2002, the Company had recorded interest income of
$3,172,000 and interest expense of $3,288,000 related to these transactions.
The net loss related to these transactions totaled $116,000. As a result of
the transactions, the Company released $1,050,000 of its deferred tax valuation
allowance, as it was able to utilize the capital losses.
6. SHORT-TERM BORROWINGS
In October 2001, the Company entered into a credit facility with Wells
Fargo Retail Finance, which was most recently amended in August 2004 (the
"Amended Credit Agreement"). The Amended Credit Agreement, which expires in
March 2007, provides for a total commitment of $28,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to
$3,000,000. The Company's ability to borrow under the facility is determined
using an availability formula based on eligible assets. The facility is
collateralized by substantially all of the Company's assets and requires daily,
weekly and monthly financial reporting as well as compliance with financial,
affirmative and negative covenants. Prior to the amendment, the most
significant of these financial covenants was compliance with certain
pre-defined earnings before interest, income taxes, and depreciation and
amortization targets. As amended, the more significant covenants include
compliance with certain pre-defined capital expenditures. For all periods
presented, the Company was in compliance with this and all other covenants.
This credit agreement provides for a performance-pricing structured interest
charge, based on prime or ranging up to LIBOR plus 1.75% (5.25% at December 31,
2004), which is based on excess availability levels. As of December 31, 2004
and 2003, no amounts were outstanding under the Amended Credit Agreement.
Additionally, the Company had $899,000 and $966,000, respectively, of letters
of credit outstanding as of December 31, 2004 and 2003. The letters of credit
expire through March 30, 2005.
In addition to the Amended Credit Agreement of the Company, TWC
entered into a separate $17,500,000 three-year revolving credit facility with
Wells Fargo Retail Finance on March 3, 2004. The line is secured by
substantially all assets of TWC and requires daily, weekly and monthly
financial reporting as well as compliance with financial, affirmative and
negative covenants. The most significant of these financial covenants is
compliance with certain pre-defined earnings before interest and depreciation,
accounts payable to inventory ratio covenant and capital expenditures. For all
periods presented, TWC was in compliance with this and all o ther covenants.
This credit agreement provides for a performance-pricing structured interest
charge, based on prime or ranging up to LIBOR plus 2.75% (5.25% at December 31,
2004), which is based on excess availability levels. As of December 31, 2004,
TWC had approximately $304,000 outstanding under this credit agreement and
$341,000 of outstanding letters of credit. The letters of credit expire through
January 31, 2005.
In March 2004, in conjunction with the acquisition of TWC, the Company
also entered into a $3,000,000 two-year unsecured revolving promissory note
facility with Israel Discount Bank ("IDB"). This facility bears interest at IDB
prime plus 1% (6.25% at December 31, 2004) and is personally guarantied by the
Chairman of the Company, for which he received an annual 2.5% guarantee fee of
$75,000. At December 31, 2004, no amounts were outstanding under this facility.
In February 2005, this facility was cancelled by the Company.
7. REDEEMABLE CONVERTIBLE NOTES AND NOTE PAYABLE
In conjunction with the acquisition, the Company assumed $3,279,000 of
secured promissory notes and $721,000 of unsecured promissory notes,
respectively, payable to certain former creditors of TWC. The secured note
holders were also granted rights to convert the notes into a total of 753,793
shares of common stock of the Company at a conversion price of $4.35 per share
through June 30, 2004. In addition, the holders of the secured notes received a
right to sell ("put") 50% of the outstanding principal amount of such notes to
the Company at a 20% discount through June 30, 2004 (the "note put rights").
The unsecured note holders also were granted rights to convert the notes into a
total of 165,748 shares of common stock of the Company at a conversion price of
$4.35 per share through June 30, 2004. In addition, the holders of such
unsecured notes received note put rights to put 100% of the outstanding
principal amount of such notes to the Company at a 20% discount through June
30, 2004.
In order to facilitate the acquisition, the Chairman of the Board and
the Chief Executive Officer of the Company each personally guarantied the
potential obligation of the secured and unsecured note put rights and another
$2,800,000 of other potential obligations in regard to certain administrative
claims. In connection therewith, the Chairman and CEO were given the right to
purchase the secured and unsecured put rights if such put rights were exercised.
The Chairman and the CEO then assigned part of their right to purchase such
rights to certain executive officers and individuals (the "Assigned Group"). In
March 2004, the holders of the $721,000 of unsecured notes exercised the right
to put such notes, which the Assigned Group purchased for $576,000. The Company
recorded $328,000 as compensation expense, which was equal to the difference
between the market value of the Company common stock into which such notes were
convertible and the amount at which the Assigned Group had the right to
purchase such notes. This amount is included in general and administrative
expenses in the accompanying statements of operations.
During the second quarter, certain note holders and the Assigned Group
exercised their rights to convert $2,918,000 in secured notes, $721,000 in
unsecured notes and $64,000 in accrued interest into 851,117 shares of common
stock. As an inducement to cash out, the Company offered to redeem the
remaining secured notes at a 10% discount instead of the contractual 20%
discount. Accordingly, all of the remaining secured notes were redeemed for a
cash payment of 90% of the face value. As a result of the above transactions
the Company recognized a gain on the early extinguishment of debt of $82,000
which was recorded as other income in the accompanying statement of operations.
As part of the acquisition of The Walking Company, TWC assumed priority
tax claims totaling approximately $627,000. The Bankruptcy Code requires that
each holder of a priority tax claim will be paid in full with interest at the
rate of six percent per year with annual payments for a period of six years. At
December 31, 2004, $72,000 of the priority tax claim note has been classified
as current and is included in current portion of long-term debt, while the
remainder of $289,000 is classified as long-term note payable in the
accompanying consolidated balance sheet.
8. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
---- ---- ----
Current:
Federal...................................... $ 2,615,000 $ 1,224,000 $ 510,000
State........................................ 469,000 126,000 99,000
------------ ----------- ----------
Total.......................................... 3,084,000 1,350,000 609,000
------------ ----------- ----------
Deferred:
Federal...................................... (767,000) 101,000 (36,000)
State........................................ (145,000) 38,000 30,000
----------- ----------- ------------
Total.......................................... (912,000) 139,000 (6,000)
----------- ----------- ------------
Total income tax provision....................... $ 2,172,000 $ 1,489,000 $ 603,000
============ =========== ============
The Company's effective income tax rate differs from the federal statutory rate due to the following:
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
----- ----- -----
Federal statutory income tax rate................ 34.0% 34.0% 34.0%
State taxes, net of federal benefit.............. 3.9 3.6 3.6
Valuation allowance.............................. -- -- (23.8)
Other, net....................................... (0.8) (1.5) (0.2)
------ ------ ------
Total............................................ 37.1% 36.1% 13.6%
====== ====== ======
Significant components of the Company's net deferred income tax assets
are as follows:
DECEMBER 31,
------------
2004 2003
---- ----
Deferred income tax assets:
Allowance for doubtful receivables and sales returns....... $ 115,000 $ 38,000
Accrued vacation........................................... 156,000 103,000
Inventory uniform capitalization........................... 988,000 547,000
Depreciation............................................... 472,000 468,000
Intangible assets.......................................... 95,000 120,000
Deferred rent.............................................. 376,000 239,000
Deferred gain on sale of building.......................... 99,000 119,000
State income taxes......................................... 27,000 ---
Reserve liabilities........................................ 518,000 293,000
--------- ---------
Total deferred income tax assets............................... 2,846,000 1,927,000
--------- ---------
Deferred income tax liabilities:
Prepaid expenses........................................... (113,000) (89,000)
State income taxes......................................... --- (17,000)
---------- ----------
Total deferred income tax liabilities......................... (113,000) (106,000)
---------- ----------
Deferred income tax asset..................................... $ 2,733,000 $ 1,821,000
========== ==========
At December 31, 2004 and 2003, there are $1,691,000 and $875,000 in
current deferred tax assets, respectively, and $1,042,000 and $946,000 in
non-current deferred tax assets, respectively, which are included in the
accompanying consolidated balance sheets.
In fiscal 2000, the Company had established a valuation allowance of
approximately $1,050,000 which was specifically identified with the $3,000,000
write off of its investment in an unrelated third party, PETsMART.com, in 1999.
The write off of this asset represented a capital loss and required the Company
to generate capital gains in order to realize the deferred tax asset. Based on
the nature of the loss, the Company provided this valuation allowance to reduce
the deferred tax asset to an amount which, more likely than not, would be
realized. In 2002, the Company completed two short bond transactions. As a
result of the transactions, the Company released its deferred tax valuation
allowance, as it was able to utilize the capital losses.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases retail stores, office buildings and warehouse space
under lease agreements that expire through 2016. Future minimum lease payments
under noncancelable operating and capital leases are as follows:
Operating Capital
YEARS ENDING DECEMBER 31, Leases Leases
- ------------------------ --------- -------
2005 ................................................ $ 22,919,000 $216,000
2006 ................................................ 18,995,000 208,000
2007 ................................................ 14,755,000 53,000
2008 ................................................ 10,412,000 ---
2009 ................................................ 7,308,000 ---
Thereafter............................................. 11,752,000 ---
------------ ----------
Total minimum obligations.............................. $ 86,141,000 477,000
===========
Less amount representing interest...................... 50,000
----------
Present value of minimum lease payments................ 427,000
Less current portion................................... 171,000
----------
Long-term portion...................................... $256,000
==========
The above amounts do not include contingent rentals based on sales in
excess of the stipulated minimum that may be paid under certain leases on
retail stores. Additionally, certain leases contain future adjustments in
rental payments based on changes in a specified inflation index. The effective
annual rent expense for the Company is the total rent paid over the term of
the lease, amortized on a straight-line basis. The difference between the
actual rent paid and the effective rent recognized for financial statement
purposes is reported as deferred rent.
Rent expense for 2004, 2003 and 2002, totaled $24,332,000, $16,325,000
and $16,711,000, respectively, and includes contingent rentals of $572,000,
$370,000 and $345,000 for 2004, 2003, and 2002, respectively, which are
included in operating expenses in the Consolidated Statements of Income. The
cost of equipment under capital leases at December 31, 2004 was $496,000 and
accumulated depreciation for such equipment at December 31, 2004 was $68,000.
No assets were leased under capital leases in 2003.
LITIGATION
In 2004, a licensee of the company called Big Dog Motorcycles ("BDM")
filed suit against the Company in federal district court in California for
unspecified damages for breach of the license agreement. The Company
counterclaimed for breach of the license and trademark infringement. Later that
year, BDM filed a separate action in federal district court in Kansas for
declaratory relief that BDM's use of the Big Dog trademark for its products is
not an infringement of the Company's rights, and amended the California action
to include, among other things a claim for $1.5 million dollars for "wrongful
termination" of the license. The Company does not believe that the outcome of
such litigation will have a material adverse effect on its results of operations
or financial condition.
The Company is also involved from time to time in litigation
incidental to its business. The Company believes that the outcome of such
litigation will not have a material adverse effect on its results of operation
or financial condition.
10. STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1998, the Board of Directors authorized the repurchase of up
to $10,000,000 of its common stock. The Company has repurchased 1,529,998 shares
totaling $8,228,000 as of December 31, 2004 and 1,455,152 shares totaling
$7,854,000 as of December 31, 2003.
The Company's credit agreement prohibits the payment of dividends. The
Company did not pay a dividend in 2004 and 2003, and does not expect to pay
dividends in the future.
PREFERRED STOCK
The Company is authorized to issue 3,000,000 of preferred stock. As of
December 31, 2004 and 2003, the Company did not have any preferred stock issued
or outstanding. Under the Company's Certificate of Incorporation, the Board of
Directors is authorized to fix the terms of the preferred stock provided for in
such Certificate.
STOCK OPTIONS
In August 1997, the Company adopted the 1997 Performance Award Plan to
attract, reward and retain officers and employees. The maximum number of shares
reserved for issuance under this plan was 1,000,000. In February 1998, the
Company amended the 1997 Performance Award Plan (the "Plan") to increase the
maximum number of shares reserved for issuance under the Plan to 2,000,000. The
Company amended the Plan again in April 2002 to increase the maximum number of
shares reserved for issuance under the Plan to 3,000,000. Awards under this
plan may be in the form of nonqualified stock options, incentive stock options,
stock appreciation rights, restricted stock, performance shares, stock bonuses,
or cash bonuses based upon performance.
The following summarizes stock option activity for the periods presented:
WEIGHTED-
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Balance at January 1, 2002................................ 1,664,250 5.34
Options granted......................................... 94,500 3.73
Options cancelled....................................... (76,500) (5.89)
---------
Balance at December 31, 2002.............................. 1,682,250 5.23
Options granted......................................... 128,500 3.38
Options cancelled....................................... (66,250) (5.06)
---------
Balance at December 31, 2003.............................. 1,744,500 5.10
Options granted......................................... 400,000 4.50
Stock rights granted.................................... 1,067,817 4.35
Options exercised....................................... (17,600) (3.57)
Options cancelled....................................... (45,250) (5.78)
Stock rights exercised.................................. (993,146) (4.35)
Stock rights cancelled.................................. (74,671) (4.35)
---------
Balance at December 31, 2004.............................. 2,081,650 4.98
=========
The following table summarizes information about stock options outstanding at
December 31, 2004:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------ ----------- ---------------- -------------- ----------- --------------
$2.90 - 3.60 541,500 7.5 years $ 3.47 260,100 $ 3.44
4.00 - 4.85 761,000 6.4 years 4.28 438,300 4.27
5.00 - 6.50 608,150 5.3 years 6.07 417,600 6.28
8.00 85,000 3.7 years 8.00 65,500 8.00
10.00 - 14.00 86,000 3.6 years 10.05 56,350 10.07
--------- ---------
2.90 - 14.00 2,081,650 6.1 years 4.98 1,237,850 5.23
========= =========
At December 31, 2004, 2003 and 2002, the number of options
exercisable for each year was 1,237,850, 1,046,875, and 704,300, respectively.
The weighted-average exercise price of those options was $5.23, $5.20, and
$5.33, respectively.
The Company accounts for its stock-based awards using the intrinsic
value method in accordance with APB Opinion No. 25 and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock options.
The weighted average fair values of the options granted were $2.04,
$2.03, and $3.18 during 2004, 2003, and 2002, respectively. The fair value of
stock-based awards to employees is calculated through the use of an option
pricing model, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in 2004, 2003, and 2002, respectively: expected cumulative volatility of 93%,
214%, and 224%; risk-free interest rates of 4.4%, 2.7%, and 5.4%; expected
lives of 7.0, 10.0, and 10.0 years.
11. SEGMENT INFORMATION
Since The Walking Company acquisition on March 3, 2004, the Company
has operated its business under two reportable segments: (i) Big Dog Sportswear
business, and (ii) TWC business. The Big Dog Sportswear business includes the
Company's 188 Big Dog retail stores (primarily located in outlet malls),
corporate sales, and its catalog and internet business selling quality
sportswear. TWC business includes the Company's 74 Walking Company stores
located primarily in leading retail malls selling comfort footwear. These two
retail chains are managed separately.
The accounting policies of the reportable segments are consistent with
the consolidated financial statements of the Company. The Company evaluates
individual store profitability in terms of a store's contribution which is
defined as gross margin less direct selling, occupancy, and certain indirect
selling costs. Below are the results of operations on a segment basis for the
year ended December 31, 2004 (with TWC's results being reported only for the
period from the March 3, 2004 acquisition date):
Big Dog Sportswear The Walking Company Total
------------------ ------------------- -----
Year Ended December 31, 2004
Statements of Income:
Sales $98,771,000 $62,587,000 $161,358,000
Gross Margin 56,150,000 32,475,000 88,625,000
Depreciation and Amortization 1,675,000 1,991,000 3,666,000
Interest income (2,000) (24,000) (26,000)
Interest expense 428,000 429,000 857,000
Provision for income taxes 973,000 1,199,000 2,172,000
Net Income 1,654,000 2,034,000 3,688,000
Balance Sheet:
Total assets $35,378,000 $23,453,000 $ 58,831,000
Prior to the acquisition of The Walking Company on March 3, 2004, the Company
had only one reportable segment.
12. EMPLOYEE BENEFIT PLAN
The Company has a Retirement Savings Plan (the "Plan"), a defined
contribution plan adopted pursuant to Section 401(k) of the Internal Revenue
Code. The Plan is available to substantially all of the Company's employees.
The Company amended the Plan in November 2000 to match each dollar deferred up
to 3% of compensation, which is limited to $1,000 annually, per participant.
Participants vest in the Company's contribution at varying rates of 0% to 20%
per year over six years. The Company contributed approximately $156,000,
$124,000 and $167,000 in 2004, 2003 and 2002, respectively.
13. RELATED PARTY TRANSACTIONS
Two of the Company's stockholders and directors have ownership
interests in two former merchandise vendors to the Company. Merchandise
inventory purchased from these related vendors totaled $324,000 and $75,000 in
2004 and 2003, respectively. There were no purchases made in 2002.
The Company engaged a related party to perform retail construction
services. Construction services provided to the Company totaled $297,000 in
2004. No construction services were provided in 2003 or 2002.
In the normal course of business, one of the Company's officers pays
for certain operating expenses which are reimbursed by the Company. At December
31, 2004 and 2003, the related outstanding payable was $176,000 and $116,000,
respectively.
See discussion of related party guarantees in Note 6.
14. SUBSEQUENT EVENT
On January 31, 2005, the Company borrowed $4 million under its $28
million revolving line of credit with Wells Fargo Retail Finance (see Note 6)
and concurrently loaned the money to a related party. The note receivable from
the related party accrued interest at Libor plus 1.75% and was repaid on March
28, 2005.
15. QUARTERLY FINANCIAL DATA (unaudited)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share)
Year ended December 31, 2004:
Net sales........................................... $21,880 $41,043 $42,695 $55,740
Gross profit........................................ 11,221 23,030 23,433 30,941
Selling, marketing and distribution expenses........ 14,132 18,875 19,363 21,586
General and administrative expenses................. 1,797 1,936 1,811 2,516
Total operating expenses............................ 15,929 20,811 21,174 24,102
(Loss) income from operations....................... (4,708) 2,219 2,259 6,839
Net (loss) income................................... (2,996) 1,251 1,284 4,149
Net (loss) income per share
Basic.............................................. $ (0.36) $ 0.15 $ 0.14 $ 0.45
Diluted............................................ $ (0.36) $ 0.14 $ 0.13 $ 0.43
Weighted average shares outstanding
Basic.............................................. 8,244 8,261 9,189 9,178
Diluted............................................ 8,244 8,907 9,633 9,732
Year ended December 31, 2003:
Net sales........................................... $15,354 $24,208 $29,487 $34,708
Gross profit........................................ 8,103 14,218 16,829 19,582
Selling, marketing and distribution expenses........ 11,311 11,883 12,390 13,505
General and administrative expenses................. 1,201 1,333 1,189 1,476
Total operating expenses............................ 12,512 13,216 13,579 14,981
(Loss) income from operations....................... (4,409) 1,002 3,250 4,601
Net (loss) income................................... (2,750) 559 1,947 2,881
Net (loss) income per share
Basic and diluted.................................. $ (0.33) $ 0.07 $ 0.24 $ 0.35
Weighted average shares outstanding
Basic.............................................. 8,393 8,330 8,264 8,243
Diluted............................................ 8,393 8,330 8,265 8,248
Chief Executive Officer Certification
I, Andrew D. Feshbach, Chief Executive Officer of Big Dog Holdings, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Big Dog Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2005
By: /s/ Andrew D. Feshbach
------------------------------------------
Andrew D. Feshbach
President & Chief Executive Officer
Chief Financial Officer Certification
I, Roberta J. Morris, Chief Financial Officer of Big Dog Holdings, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Big Dog Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 31, 2005
By: /s/ Roberta J. Morris
------------------------
Roberta J. Morris
Chief Financial Officer
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
Additions
---------
Balance at Charged to Write-offs,
---------- ---------- ----------
Beginning of Costs and Net of Balance at
----------- --------- ------ ----------
Year Expense Recoveries End of Year
---- ------- ---------- -----------
Year ended December 31, 2002 Reserves and
allowances deducted from asset accounts:
Allowance for uncollectible accounts
receivable......................................$ 588,000 $ 68,000 $ (455,000) $ 201,000
Year ended December 31, 2003
Reserves and allowances deducted
from asset
accounts:
Allowance for uncollectible accounts
receivable.......................................$ 201,000 $ (25,000) $ (80,000) $ 96,000
Year ended December 31, 2004
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts
receivable.......................................$ 96,000 $ 87,000 $ (180,000) $ 3,000