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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
- ------------------------------------------ -------
(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 X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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. []
The aggregate market value of Common Stock held by non-affiliates of
the registrant on March 8, 1999, was approximately $20.7 million. 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 8, 1999, the registrant had 12,100,350 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
Proxy Statement for the 1999 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.
PART I
ITEM 1. BUSINESS
GENERAL
Big Dog Holdings, Inc. and its subsidiaries ("Big Dogs" or the
"Company") develops, markets and retails a branded, lifestyle collection of
unique, high-quality, popular-priced consumer products, including activewear,
casual sportswear, accessories and gifts. BIG DOGS-Registered Trademark- is an
All-American, family-oriented brand that the Company believes has established a
unique niche in its dedication to providing quality, value and fun. Big Dogs
products were first sold in 1983, and operations remained limited through 1992
when the current controlling stockholders acquired the BIG DOGS-Registered
Trademark- brand and related assets. Following the acquisition, Big Dogs
initiated a strategy of leveraging the brand through dramatic expansion of its
product line and rapid growth in its retail stores. The number of the Company's
stores has grown from 5 in 1993 to 177 as of December 31, 1998.
The Company's collection is centered around its signature BIG
DOGS-Registered Trademark- name, logo and "Big Dog" characters and is designed
to appeal to a broad range of customers when they are in the "Big Dog state of
mind." The BIG DOGS-Registered Trademark- 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 the
Company's 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"-Registered Trademark-, "Unless You're the
Lead Dog, the Scenery Never Changes," and "Lead, Follow or Get Out of the Way."
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 its 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. Big Dogs accomplishes this primarily
through (i) selling its 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-Registered Trademark- brand is designed to appeal to men,
women and children of all ages, particularly baby boomers and their kids, when
they are engaged in leisure or recreational activities. Furthermore, the Company
believes that the millions of dog and other pet owners in the United States, as
well as children, have a strong natural affinity toward the dog-related images
and themes in Big Dogs graphics. In addition, the Company believes that the
positive image the brand brings to being a "Big Dog" has a special appeal to
large-size customers. The Company's apparel products, which include a wide
variety of basic apparel and related products, are developed 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-Registered
Trademark-line of activewear and casual sportswear for men and women, the
Company has expanded its LITTLE BIG DOGS-TM- line of infants' and children's
apparel and its BIG BIG DOGS-TM- line of big-size apparel. The Company has also
expanded its non-apparel products, including plush animals, stationery and pet
products, which feature Big Dog graphics and are developed to complement its
apparel.
The Company reinforces its brand image by distributing BIG
DOGS-Registered Trademark- products primarily through its own retail stores.
This distribution strategy enables the Company to present a complete selection
of its merchandise in a creative and fun environment. In addition, this strategy
enables it to more effectively reach its targeted customers by locating stores
in tourist-oriented and other casual environments where it believes consumers
are more likely to be in the "Big Dog state of mind." The Company operates its
retail stores in both outlet and full-price formats, depending on the location.
In addition to its retail stores, Big Dogs markets its products through other
channels, including its catalog, better wholesale accounts and the internet.
BUSINESS STRATEGY
Big Dogs' mission is to build a brand that is recognized throughout the
world for providing high quality, good value and fun and functional products. To
achieve this goal, the Company has adopted the following operating strategies:
PROMOTE THE BIG DOG SPIRIT OF FUN. A key and unique element in the
Company's brand image is its focus on fun. This spirit of fun revolves around
the Company's Big Dog character that has broad appeal to men, women and children
of all ages. The Company fosters this spirit by creating positive, humorous,
topical and inspiring graphics and slogans which it applies to its merchandise.
More than just a logo, the Big Dog represents the leader, athlete, child,
comedian, musician, boss, traveler, parent and dog lover in everyone. 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. Big Dogs' focus on fun is further enhanced by the lively,
enjoyable atmosphere in its retail stores and is also reflected in its catalog
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 its products
feature unique graphics characterized by advanced print techniques, as well as
unique appliques and embroideries on many of its apparel products. The Company
believes that this combination of quality fabrics and graphics in its apparel
products provides the customer with a product that has an exceptional look and
feel. Big Dogs is able to deliver this level of quality at reasonable prices
primarily as a result of (i) selling its own brand direct to the consumer, (ii)
low-cost product development, (iii) sourcing of basic apparel, and (iv) low
marketing costs. The Company believes that delivering quality and value is
instrumental in generating customer appeal and brand loyalty for its 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. The Company believes it has a special
competency in creating distinctive, popular graphics which it uses to
differentiate its products from those of its competitors. Big Dogs has developed
a broad assortment of classic, functional clothing ("basics") in traditional,
less fashion-forward colors. The Company's focus on basics and its ability to
leverage its graphics across multiple product categories have allowed the
Company to eliminate the need for a traditional buyer or design staff, and
thereby lower its product development costs compared to most fashion apparel
companies. Furthermore, since its graphics are added in the last stage of
production, the Company is able to be more responsive to customer preferences
while also lowering its inventory risk.
TARGET A BROAD, DIVERSE CUSTOMER BASE. Big Dogs believes it has
established an All-American, family-oriented brand featuring products, graphic
themes, slogans and promotions that appeal to a broad range of consumers.
Although its marketing focus is on baby boomers and their kids, Big Dogs'
customers include men, women and children of all ages, and span a wide range of
geographic areas and income levels. Furthermore, the Company believes 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, the Company believes that the positive image the brand
brings to being a "Big Dog" has a special appeal to big-size customers.
MAINTAIN CONTROLLED DISTRIBUTION. Big Dogs sells its products primarily
through its own stores and, to a lesser extent, through its catalog and internet
sales. By selling direct to its customers, Big Dogs is able to present its
complete line of merchandise in a creative and fun environment. This also allows
it to target its customers more precisely by locating its stores in
tourist-oriented and other high-traffic areas, where the Company believes
consumers are more likely to be in the "Big Dog state of mind." Selling direct
to the consumer also allows the Company (i) to enhance its margins while still
providing customer value, (ii) to be more responsive to customer feedback,
especially with regard to new product development, (iii) to reduce its need to
build brand awareness through large-scale media advertising, and (iv) to collect
customer names for its 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 its graphic art and humor, including in-store "T-shirt walls" and
other displays that are designed to immediately put the customer in the "Big Dog
state of mind." By showcasing the Company's 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. The
Company believes the customer's shopping experience is further enhanced by the
Company's knowledgeable and enthusiastic sales staff.
EMPHASIZE GRASSROOTS MARKETING. The Company believes its most effective
marketing is its products themselves and their presentation in the Company's
retail stores and catalog. As a result, the Company has spent relatively little
on advertising. Also important to Big Dogs' marketing strategy is its targeted
"grassroots" marketing activities. These activities include local and charity
sponsorships (such as high school sports teams), community-oriented promotional
events (such as the Company's annual dog parade in Santa Barbara), and corporate
cross-promotions with leading consumer product companies (such as Nabisco and
IAMS).
The Company's continued growth will depend to a significant degree on
its ability to open and operate new stores, to increase net sales and
profitability from the Company's existing stores, and to expand its other
sources of revenue. Big Dogs' primary growth strategy is the continued expansion
of its retail stores. The Company opened 27 net new stores in 1998. The Company
opens stores in locations and venues that management believes best target its
customers and can be obtained on terms that meet its unit profitability
requirements. Depending on the location, the Company will open new stores in
either an outlet or full-price format. Although Big Dogs' traditional emphasis
has been on outlet malls, the Company has more recently increased its focus on
opening full-price, stand-alone stores in tourist and leisure locations.
Accordingly, the Company anticipates that the stores it opens in the near future
will be located in a variety of venues, including outlet malls, stand-alone
stores in tourist areas, tourist-oriented malls, regional malls and metropolitan
locations. These new markets and venues have in the past presented, and will
continue to present, competitive and merchandising challenges that are different
from those faced by the Company in its existing markets and venues.
MERCHANDISING
Big Dogs' product line features a branded, lifestyle collection of
unique, high-quality, popular-priced consumer products, including activewear,
casual sportswear, accessories and gifts. Big Dogs' 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. Big Dogs
has also in recent years further expanded its product lines to include not only
a wide variety of apparel accessories, but also a collection of gift and
consumer products. The Company continuously explores opportunities to further
leverage its brand and graphics into new product lines.
The Company's 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-Registered
Trademark-name, dog logo, graphics and slogans. In addition to its distinctive
graphics, the Company believes it has achieved recognition for the quality and
performance of its products. For example, the Company's solid nylon volley
shorts and madras plaid shorts were selected by the Atlanta Committee for the
Olympic Games to be officially licensed shorts for the 1996 Atlanta Olympics.
The majority of the Company's products range from between $4 and $45.
The following table sets forth the approximate contribution that each of the
Company's product categories made to total net sales in the Company's retail
stores for the year ended December 31, 1998:
% OF TOTAL
RETAIL STORE*
NET SALES
-------------
Adult Apparel and Accessories .................................... 56.9%
Infants' and Children's Apparel and Accessories .................. 20.7
Big-size Apparel ................................................. 14.8
Non-Apparel Products ............................................. 7.6
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Total ............................................................ 100.0%
=======
*Does not include mail order, wholesale and internet sales.
ADULT APPAREL AND ACCESSORIES. Big Dogs sells a complete line of adult
unisex activewear and casual sportswear. The Company offers screen-printed and
embroidered T-shirts and sweatshirts, in a variety of styles and colors, that
generally prominently display the Big Dogs graphics and slogans. In addition,
the Company offers 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-Registered Trademark- name and/or dog logo.
The Company's 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 Company's classic, popular items and graphics have been in the Big
Dogs line with very little change for over 10 years, the Company introduces new
apparel and other products throughout the year to ensure that the merchandise
assortments are consistent with the top sellers within its competitive market.
Big Dogs leverages its trademarks, characters and more popular graphics
by carefully translating them to a wide variety of apparel accessories,
including caps, ties, socks, sunglasses, bags, watches and wallets. These
products are developed and introduced based on their consistency with Big Dog's
brand image and whether they complement the Company's other products. The
Company's introduction of accessories not only provides an opportunity to create
add-on purchases, but also minimizes product development costs and inventory
risk by utilizing graphics and slogans that have first proven popular on the
Company's graphic T-shirts.
INFANTS' AND CHILDREN'S APPAREL AND ACCESSORIES. The LITTLE BIG
DOGS-Registered Trademark- 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
adult line in order to encourage family purchases and leverage overall product
development costs. The Company sells its LITTLE BIG DOGS-Registered
Trademark-line primarily through its retail stores and catalog, and wholesales
it to certain specialty and better department stores.
BIG-SIZE APPAREL. The Company believes that the BIG DOGS-Registered
Trademark-image and the positive emphasis the brand gives to being a "Big Dog"
have a unique appeal to consumers who wear big sizes. In the spring of 1996, the
Company significantly expanded its BIG BIG DOGS-Registered Trademark-category
targeting big-size customers. The Company's BIG BIG DOGS-TM-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 generally prominently
display the Big Dogs graphic themes and slogans. In addition, the Company 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-Registered Trademark-name and/or dog logo. The
Company sells its BIG BIG DOGS-TM-line primarily through its retail stores and
catalog and also through selected wholesale accounts and the internet.
NON-APPAREL PRODUCTS. Big Dogs further leverages its 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, mousepads and screen
savers. 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 the Company's other products. As with apparel accessories, the
graphics applied to these products have first proven popular on the Company's
T-shirts, resulting in lower product development costs and inventory risk. In
general, non-apparel items have higher gross margins than many of the Company's
other products.
MARKETING
The Company strives to maintain a consistent brand image through the
coordination of its merchandising, marketing and sales efforts. The goal of the
Company's marketing efforts is to present a distinctive image of quality, value
and fun that consumers will associate with the Company's products and thereby
enhance the BIG DOGS-Registered Trademark- brand image. The BIG DOGS brand image
has been developed with relatively little advertising, as the Company believes
its most effective marketing is its products themselves and their presentation
in the Company's retail stores and catalog. The Company's catalog serves not
only as a means of product distribution, but also as the key marketing piece for
the Company's retail stores.
Also important to the Company's marketing strategy is its targeted
"grassroots" marketing activities. These activities include local and charity
sponsorships (such as high school sports teams), community-oriented promotional
events (such as the Company's annual dog parade in Santa Barbara), and corporate
cross-promotions with leading consumer product companies (such as Nabisco and
IAMS). The Company trains and incentivizes its store managers to actively
involve their stores in local, grassroots activities. In addition, the Company
utilizes billboard advertising designed to direct customers to local Big Dogs
retail stores.
RETAIL STORES
Big Dogs seeks to create a distinctive and fun shopping environment in
its stores through the innovative display of its graphic art and humor,
including in-store "T-shirt walls" and other displays designed to immediately
put the customer in the "Big Dog state of mind." In addition, the Company's
cross-merchandising and colorful signage are designed to add excitement in the
stores and prompt add-on purchases. While maintaining a consistent Big Dog
"look" throughout the chain, many stores incorporate graphics and props which
are consistent with the store's local environment (for example, a car racing
theme in Indianapolis and an Old Spanish Days theme in Santa Barbara). By
showcasing the Company's 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 1998, the Company's retail stores contributed approximately 91% of
total net sales. As of December 31, 1998, the Company operated 177 stores in 44
states and three stores in England and Canada. 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 the
"Big Dog state of mind." In making site selections, the Company also considers 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 or country
as of the end of 1998.
State No. of Stores State No. of Stores
----- ------------- ----- -------------
Alabama 2 Missouri 3
Alaska 1 Nebraska 1
Arizona 7 Nevada 3
California 35 New Hampshire 2
Colorado 3 New Jersey 1
Connecticut 2 New Mexico 1
Delaware 2 New York 8
Florida 10 North Carolina 5
Georgia 4 Ohio 3
Hawaii 2 Oklahoma 1
Idaho 2 Oregon 5
Illinois 3 Pennsylvania 7
Indiana 4 South Carolina 4
Iowa 1 Tennessee 6
Kansas 3 Texas 6
Louisiana 1 Utah 2
Maine 2 Vermont 1
Maryland 4 Virginia 4
Massachusetts 4 Washington 5
Michigan 5 West Virginia 1
Minnesota 3 Wisconsin 2
Mississippi 2 Wyoming 1
Country No. of Stores Country No. of Stores
- ------- ------------- ------- -------------
United Kingdom 1 Canada 2
The Company operates its retail stores in both outlet and full-price
formats, depending on the location. 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. More recently, the Company
has increased its focus on opening full-price, stand-alone stores in tourist and
leisure locations. The Company anticipates that the stores it opens in the near
future will be in a variety of venues, including outlet malls, stand-alone
stores in tourist areas, tourist-oriented malls, regional malls and metropolitan
locations.
The Company's outlet mall stores average approximately 2,700 square
feet. The Company's outlet stores offer a complete and current line of the
Company's products priced approximately 25% less than the same items are sold
for in the Company's catalog and the Company's full-price stores and by other
retailers. In addition, the Company has tested a smaller format store which it
intends to open in certain circumstances. This smaller format will carry
substantially all of the Company's product categories, but will be more densely
merchandised to accommodate the smaller square footage. The Company opened 27
net new stores during 1998. The Company's cost to open a typical factory outlet
store in 1998, including leasehold improvements and furniture and fixtures, was
approximately $67,000 (net of tenant improvement allowances), a reduction of
approximately $2,000 per store compared to the prior year. Of the 27 net new
stores in 1998, 16 were in regional malls and other non-outlet locations. The
Company's cost to open these stores was approximately $134,000 (net of tenant
improvement allowance). The average per store initial inventory (partially
financed by trade payables) for the new 1998 stores was approximately $67,000
and pre-opening expenses averaged approximately $16,000 per store. The average
total cost to build new stores will vary in the future, depending on various
factors, including local construction costs, changes in store format and design
and tenant improvement allowances.
Big Dogs store operations are managed by an Executive Vice
President--Retail, three regional managers and approximately 25 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. The Company
seeks to further enhance its customers' shopping experience by developing a
knowledgeable and enthusiastic sales staff to distinguish Big Dogs from its
competition. In this regard, the Company has implemented employee training and
incentive programs and encourages its sales associates to be friendly and
courteous and to guide customers to graphics and products that tie into their
individual interests. The Company believes its commitment to customer service
enhances its ability to generate repeat business and to attract new customers.
The Company also believes that the fun nature of its products and the growth of
the Company create employee enthusiasm and positive morale that in turn enhance
customer service and contribute to the fun shopping experience.
NON-RETAIL DISTRIBUTION
Non-retail channels of distribution, including catalog and wholesale,
and, to a lesser extent, corporate sales and premium programs, international and
internet sales, contributed approximately 9% of the Company's total net sales in
1998.
CATALOG. Introduced in late 1992, the Company's catalog is a key
marketing piece for its products and stores, and enables it to reach customers
who are not located near a Big Dogs store. The Company's proprietary mailing
list has been developed largely through sign-ups by customers in its retail
stores rather than through active prospecting. Big Dogs' proprietary mailing
list has over 700,000 active customer names. The Company's catalog sales in 1998
were approximately $4.9 million, or approximately 5% of total net sales.
WHOLESALE. During 1998, the Company sold to over 600 wholesale accounts
throughout the United States. The Company's wholesale sales in 1998 were
approximately $2.7 million, or approximately 3% of total net sales.
INTERNET. In November 1998, the Company enhanced its corporate website
to offer a few products for sale through Yahoo Shopping. Although 1998 sales
were limited, the Company believes it has significant opportunities for internet
sales because of the Company focus on graphics and apparel that is not only
character-driven but basic in design and therefore easy to describe. The Company
also believes the internet will enhance its product distribution by increasing
access to customers who do not generally visit outlet centers where the
Company's stores are primarily located. The Company is also positive about the
profitability potential on the internet, especially since Big Dogs owns its own
brand and controls its pricing and distribution.
INTERNATIONAL. Big Dogs' sales outside of the United States are
currently limited to three retail stores in England and Canada and incidental
other sales. The Company plans to expand the sale of its products
internationally through efficient, profitable and brand-enhancing means, which
may vary by country and may include retail stores, exporting to resellers,
licensing, catalog and internet sales.
OTHER BRAND LEVERAGING. Big Dogs intends to carefully evaluate and
pursue opportunities to leverage the power of the BIG DOGS-Registered
Trademark-brand through various activities that are consistent with the brand
image, which may include selective product licensing, co-branding (such as a
current co-branding program for ski jackets with Columbia Sportswear) and
entertainment and media activities.
SOURCING
DOMESTIC AND INTERNATIONAL SOURCING. The Company does not own or
operate any manufacturing facilities and sources its products through
third-party contractors with manufacturing facilities that are primarily
overseas. The Company believes that outsourcing allows it 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 the Company to leverage working capital, transfer risk and
focus its energy and resources on merchandising, marketing and sales.
Big Dogs' domestic sourcing is primarily limited to graphic T-shirts.
During the first quarter of 1998, the Company moved in-house the bulk of its
graphic T-shirt business, that had previously been provided by Fortune Fashions,
a commonly controlled company. This includes management of screen printing and
blanks, but not screen- printing operations.
The majority of Big Dogs' other products are manufactured overseas,
primarily in Asia. In order to reduce the Company's exposure to production risks
and delays arising from trade disputes, political disruption or other factors
relating to any one vendor or country, the Company utilizes a diverse group of
vendors. Big Dogs sources product from approximately 100 unaffiliated vendors,
including over 35 foreign vendors in a number of countries, with a significant
portion being produced by contractors with manufacturing facilities in China. In
order to enhance its sourcing flexibility, the Company uses purchasing agents
rather than operate its own foreign sourcing office. These agents assist the
Company in selecting and overseeing third-party vendors, sourcing fabric and
monitoring quotas and other trade regulations. The Company does not have supply
contracts with any of its suppliers. Although the loss of major suppliers could
have a significant effect on the Company's immediate operating results, the
Company believes alternate sources of merchandise for most product categories
are available at comparable prices and that it could replace these suppliers
without any long-term adverse effect on the Company.
The Company forecasts production requirements to secure necessary
manufacturing capacity and quota. Since the Company's foreign manufacturers are
located at greater geographic distances from the Company than its domestic
manufacturers, the Company generally allows greater lead-times for foreign
orders. However, due to the Company's focus on widely available basics rather
than fashion items, the Company believes these lead times do not present
significant risks.
QUALITY CONTROL. The Company's quality control program is designed to
ensure that all goods bearing BIG DOGS-Registered Trademark-trademarks meet the
Company's standards. With respect to its products, the Company, through its
employees and sourcing agents, develops and inspects prototypes of each product
prior to manufacture. For apparel products, the Company, 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.
The Company or its sourcing agents inspect the final product prior to shipment
to the Company's warehouse or at the warehouse prior to payment.
MANAGEMENT INFORMATION SYSTEMS
The Company is committed to utilizing technology to enhance its
competitive position. The Company has 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 its
stores and customers and improve the integration and efficiency of its domestic
and foreign sourcing operations. Big Dogs' MIS system 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
Novell server network and utilize Island Pacific software. The Company's
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 and e-mail 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.
The Company evaluates information obtained through daily polling, including a
daily tracking of gross margin, to implement merchandising decisions regarding
reorders, markdowns and allocation of merchandise. Wholesale 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 the Company's inventory is performed
centrally at the store, merchandise classification and SKU levels using
integrated third-party software. Utilizing its MIS capabilities, the Company's
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 the Company's retail
stores. The Company is currently implementing fuller utilization of its
merchandising information systems to capitalize on regional and seasonal trends
and on individual store characteristics.
In early 1998, Big Dogs maintained two distribution facilities: a main
facility of approximately 67,000 square feet located in Commerce, California and
a mail order warehouse and fulfillment facility of approximately 21,000 square
feet in Ventura, California. In January 1998, the Company consolidated these
operations into a new 136,000 square-foot distribution facility in Santa Fe
Springs, California. All merchandise is delivered by vendors to this new
facility, where it is inspected, entered into the Company's allocation software
system, picked and boxed for shipment to the stores or customers. The Company
ships merchandise to its 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-Registered Trademark-, BIG DOG
SPORTSWEAR-Registered Trademark-and dog logo and the trademarks BIG DOG-TM-,
LITTLE BIG DOGS-TM- and BIG BIG DOGS-TM-. In addition, the Company has
registered certain of its trademarks or has registration applications pending in
over 14 other countries. The Company regards its trademarks and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products. From time to time the Company discovers
products in the marketplace that the Company believes infringe upon its
trademark rights. The Company vigorously protects its trademarks against
infringement, including through the use of cease and desist letters,
administrative proceedings and lawsuits.
COMPETITION
Although the level and nature of competition differ among the Company's
product categories, the Company competes primarily on the basis of its brand
image, offering a unique combination of quality, value and fun, and on other
factors including product assortment, price, store location and layout, and
customer service. The markets for each of the Company's products are highly
competitive. The Company believes that its long-term competitive position will
depend upon its 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. Although the Company believes it does not
compete directly with any single company with respect to its entire range of
merchandise, within each merchandise category the Company competes with
well-known apparel and specialty retail companies such as The GAP, Eddie Bauer,
Warner Brothers Stores 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. Many of Big Dogs'
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 8, 1999, the Company had approximately 550 full-time and 650
part-time employees. The number of part-time employees fluctuates significantly
based on seasonal needs. None of the Company's employees are covered by
collective bargaining agreements and the Company considers its relations with
its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and present and past
positions of persons serving as executive officers of the Company as of March 8,
1999:
NAME AGE POSITION
- ------------------ --- ----------------------------------
Andrew D. Feshbach 38 President, Chief Executive Officer
and Director
Douglas N. Nilsen 50 Executive Vice President-
Merchandising
Anthony J. Wall 43 Executive Vice President-
Business Affairs, General Counsel
and Secretary
Andrew W. Wadhams 38 Executive Vice President - Retail
Roberta J. Morris 39 Chief Financial Officer, Treasurer
and Assistant Secretary
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 June
1992 until May 1997, Mr. Feshbach also served as Chief Financial Officer of the
Company. Mr. Feshbach co-founded Fortune Fashions Inc. ("Fortune Fashions"), a
custom manufacturer of embellished apparel (See Item 1. "Business - Sourcing")
in 1991 and has served 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 serves as a director of The Right Start, Inc., an
infant products retailer and catalog company. Mr. Feshbach has an M.B.A. from
Harvard University.
DOUGLAS N. NILSEN joined the Company in October 1995 and has served as
Executive Vice President--Merchandising since December 1995. From October 1995
until December 1995, he served as Senior Vice President of the Company. 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. From 1976 to 1990,
Mr. Nilsen was employed by Macy's California in various capacities, most
recently as Vice President of Merchandising in both the Accessories and Men's
Divisions. Mr. Nilsen has an M.B.A. from New York University.
ANTHONY J. WALL joined the Company in September 1994 and has served as
Executive Vice President since March 1996. He has also served as General Counsel
and Secretary of the Company since September 1994. He served as a director of
the Company from November 1995 until September 1997 and also as Senior Vice
President from September 1994 until March 1996. From 1981 until 1994, Mr. Wall
practiced as an attorney with Gibson, Dunn & Crutcher and, from 1990 until 1994,
was a partner in the corporate department of that firm. Mr. Wall also serves as
General Counsel of Fortune Fashions and Vice President of Fortune Financial. Mr.
Wall has a J.D. from the University of Southern California.
ANDREW W. WADHAMS joined the Company in August 1996 as Senior Vice
President--Retail and has served as Executive Vice President--Retail since
January, 1999. From January 1994 to June 1996, Mr. Wadhams served as Vice
President of Retail Operations of Imaginarium, Inc., a retailer of children's
games and educational items. From 1986 to November 1993, Mr. Wadhams was
employed in various capacities by The Gap Inc. in its Gap, GapKids, Gap
International and Banana Republic divisions, most recently as Regional
Manager--Retail Operations of Banana Republic from 1991 to 1994.
ROBERTA J. MORRIS joined the Company in August 1993 and has served as
Chief Financial Officer since March 1, 1998, having previously served as Senior
Vice President--Finance since January 1995 and as Vice President--Finance of the
Company from August 1993 to January 1995. From 1988 to August 1993, Ms. Morris
was employed by Deloitte & Touche LLP, a national accounting firm, serving as a
Senior Manager from August 1992 until August 1993. Ms. Morris is a certified
public accountant.
ITEM 2. PROPERTIES
The Company's corporate headquarters are in leased offices comprising
approximately 13,897 square feet in Santa Barbara, California, which lease
expires July 2004, with an option to extend for another 5 years. The Company
also occupies additional office and storage space of approximately 9,000 square
feet under a lease that expires July 31, 1999, and is negotiating a lease for
approximately 10,000 square feet in Santa Barbara into which it will relocate
such operations. The Company's distribution facility is located in Santa Fe
Springs, California in a building comprising approximately 136,000 square feet
under a lease that expires in January 2008. The Company has an option to extend
this lease for five years.
The Company currently leases all of its store locations. Store leases
are typically for a 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to
its business. Management believes that the outcome of the current litigation
will not have a material adverse effect upon the financial statements of the
Company.
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 the Company is traded on the NASDAQ National Market
under the symbol BDOG. The following table sets forth, for the period from the
Company's initial public offering through December 31, 1998, the high and low
"sales" price of the shares of Common Stock of the Company, as reported on the
NASDAQ National Market.
1998 1997
---------------- ----------------
High Low High Low
------- ------- -------- -----
First Quarter $ 7 1/2 $ 4 1/2 n/a n/a
Second Quarter 7 1/2 4 1/2 n/a n/a
Third Quarter
(commencing September 24, 1997) 5 5/8 2 7/8 $ 15 3/4 $ 14
Fourth Quarter 6 1/8 2 1/8 14 3/8 5
On March 8, 1999, the last sales price of the Common Stock as reported
on the NASDAQ National Market was $4 13/16 per share. As of March 8, 1999, there
were approximately 149 shareholders of record of the Company's Common Stock.
The Company paid no dividends in 1997 and 1998. In February 1999, the
Board of Directors approved an annual discretionary cash dividend to be
determined by the Board each year based on the Company's year-end sales results.
The first such annual dividend was declared in the amount of $0.10 per share and
paid in March 1999. The future amount and payment of such annual dividend will
be at the discretion of the Board and will depend upon the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board.
1998 Sales of Unregistered Securities
- -------------------------------------
On April 1 and May 21, 1998, the Company sold an aggregate of 24,000
shares of common stock to two individual accredited investors upon their
exercise of warrants that had been issued to them prior to the Company's 1997
initial public offering. The purchase price was $3.00 per share, for total
consideration of $72,000 in cash. The sales of the securities in such
transactions were exempt from registration under the Securities Act of 1933 by
virtue of Section 4(2).
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,
-------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share and operating data)
Net sales $ 100,677 $ 86,181 $ 68,683 $ 51,541 $ 28,404
Cost of goods sold 41,236 36,328 29,720 21,571 12,857
--------- --------- --------- --------- ---------
Gross profit 59,441 49,853 38,963 29,970 15,547
--------- --------- --------- --------- ---------
Selling, marketing and
distribution 47,809 39,549 32,309 24,814 12,993
General and administrative 5,276 4,738 3,937 3,167 1,746
--------- --------- -------- --------- --------
Total operating expenses 53,085 44,287 36,246 27,981 14,739
--------- --------- -------- --------- --------
Operating income 6,356 5,566 2,717 1,989 808
Interest (income) expense (350) 1,268 1,647 1,189 397
--------- --------- -------- --------- --------
Income before provision for
income taxes 6,706 4,298 1,070 800 411
Provision for income taxes 2,674 1,633 435 162 19
--------- --------- -------- --------- --------
Net income $ 4,032 $ 2,665 $ 635 $ 638 $ 392
========= ========= ======== ========= ========
Net income per share
Basic and diluted $ 0.32 $ 0.24 $ 0.06 $ 0.07 $ 0.04
========= ========= ======== ========= ========
Weighted average common shares
Basic 12,472 10,965 9,978 9,503 9,000
Diluted 12,509 11,187 10,049 9,503 9,000
OPERATING DATA:
Number of stores: (1)
Stores open at beginning of
period 150 121 91 51 16
Stores added (net of closures 27 29 30 40 35
-------- --------- ------- -------- --------
Stores open at end of period 177 150 121 91 51
Comparable stores sales increase
(decrease)(2) 0.6% 6.6% 3.5% 8.2% (0.9%)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(amounts in thousands)
BALANCE SHEET DATA:
Working capital $30,348 $35,468 $13,742 $8,030 $ 3,072
Total assets 52,994 52,584 25,773 19,011 13,647
Total indebtedness (3) 0 0 15,697 10,732 6,141
Stockholders' equity 43,187 45,541 6,142 4,737 3,094
(1) Excludes two temporary stores open for a portion of 1995, four temporary
stores open for a portion of 1996, and one temporary store open for a portion
of 1998.
(2) Comparable store sales represent net sales of stores open at least one
full year. Effective December 31, 1997, the Company changed the way
comparable store sales were calculated, and for comparison purposes all prior
years have been restated. 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 change to this method did not
significantly affect previously reported comparable store sales percentages.
The Company believes this method better reflects the effect of one-time
promotional events and is more consistent with industry methods.
(3) Includes subordinated debt, obligations under the bank line of credit and
obligations under capital leases. All indebtedness was paid off with a
portion of the proceeds from the Company's initial public offering in
September 1997.
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 Dogs develops, markets and retails a branded, lifestyle collection
of unique, high-quality, popular-priced consumer products, including activewear,
casual sportswear, accessories and gifts. The number of Company stores has grown
from 5 in 1993 to 177 as of December 31, 1998.
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,
---------------------------------------
1998 1997 1996
------ ------ ------
Net sales.......................... 100.0% 100.0% 100.0%
Cost of goods sold................. 41.0 42.2 43.3
----- ----- -----
Gross profit....................... 59.0 57.8 56.7
Selling, marketing and distribution
expenses......................... 47.5 45.9 47.0
General and administrative expenses 5.2 5.5 5.7
----- ----- -----
Total operating expenses........... 52.7 51.4 52.8
----- ----- ------
Income from operations............. 6.3% 6.5% 4.0%
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales consist of sales from the Company's stores,
catalog, and wholesale accounts, all net of returns and allowances. Net sales
increased to $100.7 million in 1998 from $86.2 million for 1997, an increase of
$14.5 million, or 16.8%. Of the $14.5 million increase, $13.3 million was
attributable to stores not yet qualifying as comparable stores and $0.5 million
came from the 0.6% comparable store sales increase for the period. Additionally,
non-retail sales increased by $0.7 million for the year. The increase in net
sales in 1998 was attributable to continued growth in the number of stores and
in the children's and big-size apparel categories. The Company's categories of
children's and big-size apparel products continued to increase to 43.1% of total
retail net sales from 41% of total retail net sales in 1997.
GROSS PROFIT. Gross profit increased to $59.4 million in 1998 from
$49.9 million for 1997, an increase of $9.5 million, or 19.0%. As a percentage
of net sales, gross profit increased to 59.0% in 1998 from 57.8% in 1997. This
increase as a percentage of net sales was primarily attributable to better
sourcing of certain key products. Also contributing to the percentage increase
were continued improvements in merchandising, planning and allocation, which led
to better product sell-throughs and less markdowns.
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 $47.8 million in 1998 from $39.5 million in
1997, an increase of $8.3 million, or 21.0%. As a percentage of net sales, these
expenses increased to 47.5% in 1998 from 45.9% in 1997. In early 1998, the
Company moved its distribution center to a larger facility in order to build the
infrastructure necessary to accommodate growth. During the first and second
quarters of 1998, the Company did not realize this growth and, therefore, the
Company incurred a decrease in operating leverage. Subsequently, controls were
put in place and improvements were made in the third quarter. In the fourth
quarter of 1998, the Company's selling, marketing and distribution expense was
38.3% of net sales as compared to 38.5% for the same period in 1997.
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 $5.3
million in 1998 from $4.7 million in 1997. As a percentage of net sales, these
expenses decreased to 5.2% in 1998 from 5.5% in 1997, reflecting the leverage of
spreading them over a larger revenue base.
INTEREST INCOME AND EXPENSE. Interest income increased to $0.4 million
in 1998 from $1.3 million in interest expense in 1997. In October 1997, the
Company's initial public offering closed and all debt was paid off with a
portion of the net proceeds. Cash was held in a money market fund.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased to $86.2 million in 1997 from $68.7
million for 1996, an increase of $17.5 million, or 25.5%. Of the $17.5 million
increase, $13.4 million was attributable to stores not yet qualifying as
comparable stores and $3.8 million came from the 6.5% comparable store sales
increase for the period. Additionally, non-retail sales increased by $0.3
million for the year. The increase in net sales in 1997 was primarily
attributable to continued improvements in store operations and the Company's
merchandise assortments and in-stock positions as a result of better utilization
of the merchandise planning and allocation systems. In particular, continued
strong growth in the Company's recently introduced categories of children's,
big-size apparel and non-apparel products increased to 41% of total retail net
sales from 34% of total retail net sales in 1996.
GROSS PROFIT. Gross profit increased to $49.9 million in 1997 from
$39.0 million for 1996, an increase of $10.9 million, or 27.9%. As a percentage
of net sales, gross profit increased to 57.8% in 1997 from 56.7% in 1996. This
increase as a percentage of net sales was primarily attributable to better
sourcing of certain key products. Also contributing to the percentage increase
were continued improvements in merchandising, planning and allocation which led
to better product sell-throughs and less markdowns in the fourth quarter 1997 as
compared to the same period in 1996.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses increased to $39.5 million in 1997 from $32.3 million in
1996, an increase of $7.2 million, or 22.3%. As a percentage of net sales, these
expenses decreased to 45.9% in 1997 from 47.0% in 1996, primarily as a result of
operational efficiencies gained from previous infrastructure investments and
spreading them over a larger revenue base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $4.7 million in 1997 from $3.9 million in 1996. As a
percentage of net sales, these expenses decreased to 5.5% in 1997 from 5.7% in
1996, reflecting the leverage of spreading them over a larger revenue base.
INTEREST EXPENSE, NET. Interest expense, net of $0.2 million of
interest income in 1997, decreased to $1.3 million in 1997 from $1.6 million in
1996, a decrease of $0.3 million. The decrease is due to the payoff of
indebtedness from a portion of the proceeds from the Company's initial public
offering in September 1997.
SEASONALITY AND QUARTERLY RESULTS
The Company believes its seasonality is somewhat different than many
apparel retailers since a significant number of the Company's stores are located
in tourist areas and outdoor malls that have different visitation patterns than
urban and suburban retail centers. The third and fourth quarters (consisting of
the summer vacation, back-to-school and Christmas seasons) have historically
accounted for the largest percentage of the Company's annual net sales and
profits. In 1998, excluding sales generated by stores not open for all of 1998,
substantially all the Company's operating income and approximately 28% and 35%
of the Company's net sales were generated during the third and fourth quarters,
respectively. In addition, the Company has historically incurred operating
losses in its first quarter and anticipates that it will continue to do so
during the first quarter of each year for the foreseeable future.
The Company's 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 1998, the Company's primary uses of cash were for the build-out
of its new distribution facility, new stores, purchase of merchandise
inventories, payment of income taxes, and stock repurchases. The Company
satisfied its cash requirements primarily from cash flow from operations and
excess cash in 1998. In 1997, the Company satisfied its cash requirements
primarily from the proceeds from the sale of debt and equity securities,
including its initial public offering that netted proceeds of approximately
$35.6 million. Approximately $21.5 million of the net proceeds were used to
repay subordinated debt, short-term borrowings and capital lease obligations.
Remaining proceeds were used for general corporate purposes and working capital.
In March 1998, the Company's Board of Directors authorized the Company to
repurchase up to $10 million of its common stock. As of December 31, 1998, the
Company had repurchased 1,083,200 shares for $6,494,000.
Cash provided by operating activities was $3.1 million and $7.3 million
in 1998 and 1997, respectively. The $4.2 million decrease in cash provided from
operations is primarily attributable to the increase in inventories. At December
31, 1998 and 1997 inventories were $23.3 million and $16.7 million,
respectively. The 1998 increase is attributable to opening 27 net new stores,
forward inventory purchases as well as increased inventory levels purchased for
use in the management of the graphic T-shirt, mail order and wholesale
businesses.
Cash used in investment activities in 1998 and 1997 was $6.8 million
and $5.3 million, respectively. Cash flows used in investment activities during
1998 related primarily to the build-out of 27 net new store openings and the
Company's new distribution facility of approximately $3.2 million and $1.6
million, respectively. Cash used in financing activities during 1998 was $6.4
million compared to cash provided by financing activities of $20.8 million
during 1997. In 1998 the Company repurchased 1,083,200 shares of its common
stock. In 1997, the Company received approximately $35.6 million from its
initial public offering, repaid subordinated debt, its revolving credit
facility, and capital lease obligations and received $0.7 million from the
exercise of stock options and warrants.
The Company has a borrowing arrangement with a bank whereby the Company
may, from time to time and upon approval from the bank, borrow up to $8 million.
Such borrowings may be used for cash advances and letters of credit. The
borrowing arrangement provides for interest at the bank's prime rate less 3/8%
or 250 basis points over the LIBOR rate and is collateralized by substantially
all the assets of the Company. As of December 31, 1998, the Company had no
advances and $1.1 million of letters of credit outstanding.
In 1998, the Company's average cost to build a new store, including
leasehold improvements, furniture and fixtures and landlord allowances, was
approximately $103,000. The average total cost to build new stores will vary in
the future, depending on various factors, including square footage, changes in
store design, local construction costs and landlord allowances. The Company's
average initial inventory for new stores opened in 1998 was approximately
$67,000. The Company's initial inventory for new stores will vary in the future
depending on various factors, including store concept and square footage. The
Company believes that its existing cash balances and cash generated from
operations will be sufficient to fund its operations and planned expansion
through 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will adopt
SFAS No. 133 in the year ending December 31, 2000. The Company anticipates that
the adoption of SFAS No. 133 will not have a material impact on the Company's
financial statements.
YEAR 2000
The Year 2000 issue is the result of computer programs being written to
use two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in systems failure or miscalculations causing
disruptions of operations.
In March 1999, the Company completed the upgrading of its major
software systems to a new release which has been certified as Year 2000
compliant. The Company has substantially completed the internal testing of its
information technology systems and will continue to monitor such systems through
the summer of 1999. The Company has also addressed internally its
non-information technology related systems and believes that there is expected
to be no significant operational problems relating to the Year 2000 issues. The
costs of the Company's year 2000 compliance project are not expected to be
material to the Company's financial position.
The Company has requested all third-party vendors to certify year 2000
compliance. The Company does not expect any material adverse impact on its
business operations by the failure of any of its vendors to complete any
required changes related to the year 2000 date conversion.
INFLATION
The Company does not believe that inflation has had a material effect
on operations in the past year. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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 the Company's 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 and costs, the impact of year 2000 compliance and inflation
risks. Uncertainties to which the foregoing and other aspects of the Company's
business may be subject include those discussed below in regard to factors that
may effect quarterly results discussed below, the factors affecting the costs of
building new stores, and other risks and uncertainties discussed below. All
forward-looking statements in this document are based upon information available
to the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements. Notwithstanding the Company's growth
in sales and profitability during recent periods, the Company faces significant
risks and, as a result, there can be no assurance that the Company's historical
growth will be indicative of future performance.
Other factors that could cause actual results to differ materially from
the forward-looking statements contained in this report, as well as affect the
registrant's ability to achieve its financial and other goals, include, but are
not limited to, the following:
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 the Company believes its products
historically have not been significantly affected by fashion trends, the
Company's products are subject to changing consumer preferences. The Company's
success will depend significantly on its ability to continue to produce popular
graphics and products that anticipate, gauge and respond in a timely manner to
changing consumer demands and preferences. In addition, consumer preferences
could shift away from the Company's traditional graphic and logo-oriented
merchandise.
ABILITY TO ACHIEVE FUTURE GROWTH. The Company's continued growth will
depend to a significant degree on its ability to open and operate profitable new
stores, to increase net sales and profitability of the Company's existing
stores, and to expand its other sources of revenue. There can be no assurance
that new stores will achieve sales and profitability levels consistent with
existing stores. The Company's retail expansion is dependent on a number of
factors, including the Company's ability to locate and obtain favorable store
sites, and to negotiate acceptable lease terms. In addition, there can be no
assurance that the Company's strategies to increase other sources of revenue,
which may include expansion of its catalog business, wholesale business,
internet business, corporate sales, international sales, licensing, co-branding
and media and entertainment activities, will be successful or that the Company's
overall sales or profitability will increase or not be adversely affected as a
result of any such expansion.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is
significantly dependent on the performance of its key management, particularly
Chief Executive Officer Andrew Feshbach and Executive Vice
President--Merchandising, Doug Nilsen.
DEPENDENCE ON THIRD-PARTY AND FOREIGN MANUFACTURERS. The Company does
not own or operate any manufacturing facilities and is therefore dependent on
third parties for the manufacture of its products. The loss of major suppliers,
or the failure of such suppliers to timely delivery the Company's products or to
meet the Company's quality standards, could adversely affect the Company's
ability to deliver products to its customers in a timely manner.
The majority of the Company's products are purchased from vendors with
manufacturing facilities located outside the United States, primarily in Asia
and particularly in China. The Company's operations could be adversely affected
by events that result in disruption of trade from foreign countries in which the
Company's suppliers are located.
The Company's staff or agents periodically visit and observe the
operations of its foreign and domestic manufacturers, but the Company does not
control such manufacturers or their labor practices. Therefore the Company
cannot necessarily prevent legal or ethical violations by its independent
manufacturers, and it is uncertain what impact such violations would have on the
Company.
SUBSTANTIAL COMPETITION. The markets for each of the Company's products
are highly competitive. The Company believes that its long-term competitive
position will depend upon its 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.
FACTORS AFFECTING STORE TRAFFIC. The large majority of the Company's
stores are located in tourist areas, tourist-serving areas and outlet malls, and
the Company's sales depend on a high level of traffic in these locations. The
Company, therefore, depends on the ability of these tourist destinations and
malls to continue to generate a high volume of consumer traffic in the vicinity
of the Company's stores. Tourism and outlet mall traffic may be adversely
affected by domestic and international economic downturns, adverse weather,
natural disasters, changing consumer preferences, highway or surface street
traffic, the closing of high-profile stores near the Company's stores and
declines in the desirability of the shopping environment in a particular tourist
destination or mall.
RELIANCE ON INFORMATION SYSTEMS. The Company relies on various
information systems to manage its operations and regularly makes investments to
upgrade, enhance or replace such systems. Substantial disruptions affecting the
Company's information systems could have an adverse affect on its business.
CONTROL BY EXISTING STOCKHOLDERS AND ANTI-TAKEOVER PROVISIONS. As of
March 8, 1999, the Chairman of the Board, Fred Kayne, beneficially owned
approximately 49.6% of the Company's outstanding Common Stock and the Company's
current directors and executive officers, including Mr. Kayne, collectively
beneficially own over 50%. 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 the Company's stockholders. This concentration of
ownership, together with the anti-takeover effects of certain provisions of the
Delaware General Corporation Law and the Company's Certificate of Incorporation
and Bylaws, may have the effect of delaying or preventing a change in control of
the Company, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the
prevailing market price of the Common Stock.
VOLATILITY OF STOCK PRICE. The price of the Company's shares has and
may continue to fluctuate based upon a number of factors, including,
quarter-to-quarter variations in the Company's results of operations,
fluctuations in the Company's comparable store sales, the performance of other
manufacturers and retailers, and the condition of the overall economy.
DEPENDENCE ON TRADEMARKS. The Company uses 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. There can be no assurance, however,
that the Company will not be restricted in the future expansion of its use of
its trademarks to certain new, non-apparel product categories.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it has material exposure to losses from
market-rate sensitive instruments. The Company has not invested in derivative
financial instruments. The Company has a borrowing arrangement with a bank
whereby the Company may borrow at a floating rate. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The Company had no borrowings
under this arrangement as of December 31, 1998 and 1997, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" at Item 14(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
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers" in Part I, Item 1 hereof for information
regarding the executive officers. 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.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(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. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
3. Exhibits included or incorporated herein: See "Index to Exhibits."
(b)
Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
fiscal year covered by this report.
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 29, 1999 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, March 29, 1999
- --------------------- President and Director
Andrew D. Feshbach (Principal Executive
Officer)
/s/ROBERTA J. MORRIS Chief Financial Officer, March 29, 1999
- --------------------- Treasurer and Assistant
Roberta J. Morris Secretary (Principal
Financial and Accounting
Officer)
/s/FRED KAYNE Chairman of the Board March 29, 1999
- ---------------------
Fred Kayne
/s/STEVEN C. GOOD Director March 29, 1999
- ---------------------
Steven C. Good
/s/ROBERT H. SCHNELL Director March 29, 1999
- ---------------------
Robert H. Schnell
/s/KENNETH A. SOLOMON Director March 29, 1999
- ---------------------
Kenneth A. Solomon
/s/DAVID J. WALSH Director March 29, 1999
- ---------------------
David J. Walsh
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
PAGE
----
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997........... F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-6
Notes to the Consolidated Financial Statements......................... F-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Big Dog Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Big Dog
Holdings, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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 Big Dog Holdings, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 3, 1999
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------------
1998 1997
------------ ------------
ASSETS (Note 3)
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 13,458,000 $ 23,508,000
Receivables
Trade, net ................................................. 592,000 457,000
Other ...................................................... 314,000 294,000
Inventories (Note 7) ........................................ 23,345,000 16,714,000
Prepaid expenses and other current assets ................... 811,000 744,000
Deferred income taxes (Note 4) .............................. 872,000 144,000
------------ ------------
Total current assets ......................................... 39,392,000 41,861,000
PROPERTY AND EQUIPMENT, Net (Note 2) ......................... 12,983,000 10,232,000
INTANGIBLE ASSETS, Net........................................ 30,000 131,000
OTHER ASSETS ................................................. 589,000 360,000
------------ ------------
TOTAL ........................................................ $ 52,994,000 $ 52,584,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Note 7) ................................... $ 3,494,000 $ 2,767,000
Income taxes payable (Note 4) ............................... 2,621,000 1,395,000
Accrued expenses and other current liabilities .............. 2,928,000 2,231,000
------------ ------------
Total current liabilities .................................... 9,043,000 6,393,000
DEFERRED RENT (Note 5) ....................................... 764,000 650,000
------------ ------------
Total liabilities .......................................... 9,807,000 7,043,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Notes 6 and 8):
Preferred stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding ................................ $ -- $ --
Common stock $.01 par value, 30,000,000 shares authorized,
13,183,550 and 13,159,550 shares issued at
December 31, 1998 and 1997, respectively ................... 132,000 132,000
Additional paid-in capital .................................. 42,296,000 42,224,000
Retained earnings ........................................... 7,764,000 3,732,000
Treasury stock, 1,083,200 shares at
December 31, 1998 ......................................... (6,494,000) --
Notes receivable from common stockholders ................... (511,000) (547,000)
------------ ------------
Total stockholders' equity ................................ 43,187,000 45,541,000
------------ ------------
TOTAL ........................................................ $ 52,994,000 $ 52,584,000
============ ============
See notes to consolidated financial statements
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------ ------------
NET SALES ....................... $ 100,677,000 $ 86,181,000 $ 68,683,000
COST OF GOODS SOLD (Note 7)...... 41,236,000 36,328,000 29,720,000
- ------------- ------------ -----------
GROSS PROFIT .................... 59,441,000 49,853,000 38,963,000
------------- ------------ -----------
OPERATING EXPENSES:
Selling, marketing and
distribution.................. 47,809,000 39,549,000 32,309,000
General and administrative
(Note 7)...................... 5,276,000 4,738,000 3,937,000
------------ ------------ -----------
Total operating expenses....... 53,085,000 44,287,000 36,246,000
------------ ------------ -----------
INCOME FROM OPERATIONS .......... 6,356,000 5,566,000 2,717,000
INTEREST (INCOME) EXPENSE, NET
(Note 3)...................... (350,000) 1,268,000 1,647,000
------------- ------------ -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES .................. 6,706,000 4,298,000 1,070,000
PROVISION FOR INCOME TAXES
(Note 4) 2,674,000 1,633,000 435,000
------------ ----------- -----------
NET INCOME ...................... $ 4,032,000 $ 2,665,000 $ 635,000
============ =========== ===========
NET INCOME PER SHARE
BASIC AND DILUTED .............. $ 0.32 $ 0.24 $ 0.06
============ =========== ===========
See notes to consolidated financial statements
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES
RECEIVABLE
FROM
COMMON STOCK ADDITIONAL TREASURY STOCK COMMON
--------------------- PAID-IN RETAINED ----------------- STOCK-
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT HOLDERS TOTAL
--------- -------- ---------- --------- ------ ------- ----------- ------------
BALANCE,
JANUARY 1, 1996........ 9,670,000 $ 97,000 $ 4,208,000 $ 432,000 -- $ 4,737,000
Common stock issued
(Note 6) ............. 540,550 5,000 1,395,000 $ (855,000) 545,000
Warrants issued ....... -- -- 240,000 -- -- 240,000
Repurchased common
stock (Note 6) ....... (50,000) -- (138,000) -- 123,000 (15,000)
Net income ............ -- -- -- 635,000 -- 635,000
---------- -------- --------- --------- ---------- ------------
BALANCE,
DECEMBER 31, 1996 .... 10,160,550 102,000 5,705,000 1,067,000 (732,000) 6,142,000
Common stock issued .. 2,800,000 28,000 35,548,000 -- 35,576,000
Options exercised .... 55,000 1,000 170,000 -- -- 171,000
Warrants exercised ... 144,000 1,000 551,000 -- -- 552,000
Collections of notes
receivable ......... -- -- -- -- 185,000 185,000
Tax benefits related
to exercise of stock
options (Note 6) .... -- -- 250,000 -- -- 250,000
Net income ........... -- -- -- 2,665,000 -- 2,665,000
---------- ------- --------- --------- --------- ------------
BALANCE,
DECEMBER 31, 1997... 13,159,550 132,000 42,224,000 3,732,000 (547,000) 45,541,000
Warrants exercised 24,000 -- 72,000 -- -- 72,000
Repurchased common
stock (Note 6) .... -- -- -- -- 1,083,200 $(6,494,000) -- (6,494,000)
Collections of notes
receivable......... -- -- -- -- 36,000 36,000
Net income ......... -- -- -- 4,032,000 -- -- -- 4,032,000
---------- --------- ---------- ---------- --------- ----------- -------- ------------
BALANCE,
DECEMBER 31, 1998 .. 13,183,550 $ 132,000 $42,296,000 $7,764,000 1,083,200 $(6,494,000) $(511,000) $ 43,187,000
========== ========= =========== ========== ========= =========== ========= ============
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- ------------ -------------
Net income............................................................... $ 4,032,000 $ 2,665,000 $ 635,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 3,752,000 2,620,000 1,931,000
Provision for losses on receivables.................................... 26,000 25,000 174,000
Loss on disposition of property and equipment.......................... 123,000 37,000 35,000
Deferred income taxes.................................................. (728,000) --- 80,000
Changes in operating assets and liabilities:
Receivables.......................................................... (181,000) 194,000 (387,000)
Inventories.......................................................... (6,631,000) (1,311,000) (4,577,000)
Prepaid expenses and other assets.................................... (67,000) (266,000) (45,000)
Accounts payable..................................................... 727,000 1,532,000 (641,000)
Income taxes payable................................................. 1,226,000 1,245,000 35,000
Accrued expenses and other current liabilities....................... 697,000 420,000 740,000
Deferred rent........................................................ 114,000 162,000 258,000
----------- ---------- -----------
Net cash provided by (used in) operating activities................ 3,090,000 7,323,000 (1,762,000)
----------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (6,508,000) (5,285,000) (3,377,000)
Proceeds from sale of property and equipment............................. 13,000 --- ---
Other.................................................................... (259,000) (23,000) (108,000)
------------ ----------- ------------
Net cash used in investing activities.............................. (6,754,000) (5,308,000) (3,485,000)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................... --- 35,576,000 545,000
Repurchase of common stock............................................... (6,494,000) --- (15,000)
Proceeds from issuance of warrants....................................... --- --- 114,000
Proceeds from exercise of options........................................ --- 171,000 ---
Proceeds from exercise of warrants....................................... 72,000 552,000 ---
Collection of notes receivable........................................... 36,000 185,000 ---
Proceeds from subordinated debt.......................................... --- --- 7,900,000
Principal repayments of subordinated debt................................ --- 14,400,000) (1,774,000)
Principal repayments under capital lease obligations..................... --- (1,314,000) (344,000)
Short-term borrowings, net............................................... --- --- (1,225,000)
----------- ---------- -----------
Net cash (used in) provided by financing activities................ (6,386,000) 20,770,000 5,201,000
----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,050,000) 22,785,000 (46,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................... 23,508,000 723,000 769,000
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR..................................... $13,458,000 $23,508,000 $ 723,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................................... $ 42,000 $ 1,659,000 $ 1,521,000
Income taxes........................................................... $ 2,176,000 $ 388,000 $ 367,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company entered into capital lease obligations of $18,000 and
$533,000 for equipment for the years ended 1997 and 1996, respectively.
In 1997 the Company recorded an increase to additional paid-in-capital
of $250,000 related to tax benefits associated with the exercise of
non-qualified stock options (see Note 6).
In 1996, the Company refinanced $138,000 of capital lease obligations.
In 1996, a stockholder converted $2,226,000 of short-term subordinated
debt to $2,100,000 of long-term subordinated debt and warrants valued at
$126,000.
In July 1996, certain key employees and other individuals issued
$855,000 of long-term notes receivable to the Company as payment for common
stock (see Note 6).
In December 1996, the Company repurchased 50,000 shares of common stock
for $138,000, $123,000 of which was by the retirement of a related long-term
note receivable (see Note 6).
See notes to consolidated financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
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 wholly owned subsidiary, Big Dog USA, Inc. (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, wholesale accounts and a
catalog.
On September 25, 1997, the Company's $56,000,000 initial public offering of
4,000,000 shares of common stock at $14.00 per share was declared effective. Of
the 4,000,000 shares, the Company sold 2,800,000 shares and certain stockholders
sold 1,200,000 shares. The Company's net proceeds, after underwriting discounts
and expenses associated with the offering were approximately $35,600,000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 $9,672,000 of cash on deposit with a high credit quality
financial institution which is in excess of the Federal Deposit Insurance
Corporation limit.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of receivables and accounts payable approximate
their carrying values because of the short-term maturity of these instruments.
CASH & 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 and depreciated using the
straight-line method over their estimated useful lives, ranging from two to ten
years. Amortization of leasehold improvements is computed using the
straight-line method based upon the life of the improvement or the term of the
lease, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets are stated at cost and amortized using the straight-line
method over five years. Accumulated amortization was $665,000, and $534,000 at
December 31, 1998 and 1997, respectively.
OTHER ASSETS
Other assets include long-term deposits of $233,000 and $353,000 at
December 31, 1998 and 1997, respectively, which relate primarily to leased
facilities, including retail stores.
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. If the estimated future
cash flows (undiscounted and without interest charges) from the use of an asset
are less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value.
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SELLING, MARKETING AND DISTRIBUTION EXPENSES
Included in this classification are approximately $474,000, $547,000, and
$439,000 in 1998, 1997 and 1996, respectively, of store preopening expenses,
which are expensed as incurred.
INCOME TAXES
Deferred income taxes reflect the income tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, (b) net
operating loss and tax credit carryforwards, and (c) valuation allowances, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized (see Note 4).
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,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
Net income ............................................... $ 4,032,000 $ 2,665,000 $ 635,000
============ ============ ===========
Basic Weighted Average Shares:
Weighted average number of shares outstanding............ 12,472,000 10,965,000 9,978,000
Effect of Dilutive Securities:
Options and warrants..................................... 37,000 222,000 71,000
------------ ------------ -----------
Diluted Weighted Average Shares:
Weighted average number of shares outstanding and
common share equivalents................................. 12,509,000 11,187,000 10,049,000
============ ============ ===========
Antidilutive options...................................... 1,615,000 --- ---
Antidilutive options consist of the weighted average of stock options for
the respective years that had an exercise price greater than the average market
price during the year. Such options are therefore excluded from the computation
of diluted shares.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will adopt
SFAS No. 133 in the year ending December 31, 2000. The Company anticipates that
the adoption of SFAS No. 133 will not have a material impact on the Company's
financial statements.
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
------------------------------
1998 1997
------------ -------------
Leasehold improvements........................... $ 8,400,000 $ 5,866,000
Equipment and fixtures........................... 13,413,000 9,792,000
------------ ------------
21,813,000 15,658,000
Less accumulated depreciation and amortization... 8,830,000 5,426,000
------------ ------------
Property and equipment, net...................... $ 12,983,000 $ 10,232,000
============ ============
Depreciation and amortization expense on property and equipment totaled
$3,621,000, $2,479,000, and $1,794,000, in 1998, 1997 and 1996, respectively.
3. SHORT-TERM BORROWINGS
The Company has a borrowing arrangement with a bank whereby the Company
may, from time to time and upon approval from the bank, borrow up to $8,000,000.
Such borrowings may be used for cash advances and letters of credit. The
borrowing arrangement provides for interest at the bank's prime lending rate
less 3/8% or 250 basis points over the LIBOR rate, and is collateralized by
substantially all assets of the Company.
The Company has outstanding commitments under letters of credit totaling
$1,071,000, at December 31, 1998. The letters of credit expire through May 1,
1999.
4. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
----------- ----------- -------------
Current:
Federal $ 2,978,000 $ 1,438,000 $ 321,000
State 424,000 195,000 34,000
----------- ----------- ----------
Total 3,402,000 1,633,000 355,000
----------- ----------- ----------
Deferred:
Federal (664,000) 5,000 102,000
State (64,000) (5,000) (22,000)
----------- ----------- ----------
Total (728,000) --- 80,000
----------- ----------- ----------
Total income tax provision $ 2,674,000 $ 1,633,000 $ 435,000
=========== =========== ==========
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INCOME TAXES (continued)
The Company's effective income tax rate differs from the federal statutory
rate due to the following:
YEARS ENDED DECEMBER 31,
------------------------------------