NOTES TO
CO
NSO
LIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AND BUSINESS
The
consolidated financial statements include the accounts of Big Dog Holdings, Inc.
and its subsidiaries Big Dog Sportswear (“Big Dogs”) and The Walking Company
(“TWC”), collectively the "Company". All significant intercompany accounts and
transactions have been eliminated.
Big Dogs
principally develops and markets apparel and other consumer products through
Company-operated retail stores located throughout the United States, corporate
sales accounts, catalogs and the Internet website.
TWC
principally markets and sells authentic comfort footwear and accessories through
Company-operated retail stores located throughout the United States, catalogs
and the Internet website.
CASH
AND CASH EQUIVALENTS
The
Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.
RECEIVABLES,
NET
Receivables,
net consist primarily of tenant allowances, corporate sales and credit card
transactions that remain outstanding at the end of the period. These
amounts are reflected net of any allowance for doubtful accounts. The Company
does not extend credit to its customers, except through third-party credit
cards.
INVENTORIES
Inventories,
consisting substantially of finished goods, are valued at the lower of cost
(first-in, first-out and weighted average methods) or market. The Company
continually evaluates its inventories by assessing slow moving current product
as well as prior seasons' inventory. Market value of non-current inventory is
estimated based on historical sales trends for this category of inventory, the
impact of market trends, and an evaluation of economic conditions. The Company
closely monitors its off-price sales to ensure the actual results closely match
initial estimates. Estimates are regularly updated based upon this continuing
review. Inventory adjustments incurred during the years ended
December 31, 2007 and 2006 were $559,000 and $213,000,
respectively. No adjustment was made in 2005.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated
depreciation. Depreciation and amortization of property and equipment
are provided using the straight-line method over the following useful
lives:
Store
fixtures
|
5
years
|
Machinery
and equipment
|
5
years
|
Computer
equipment
|
3
years
|
Software
|
5
years
|
Leasehold
improvements are depreciated over the lesser of the estimated useful life of the
asset or the term of the lease, whichever is shorter.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
IMPAIRMENT
OF LONG-LIVED ASSETS
|
The
Company evaluates the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. This evaluation is performed
based on the estimated undiscounted future cash flows from operating activities
compared with the carrying value of the related asset. If the
undiscounted future cash flows are less than the carrying value, an impairment
loss is recognized, measured by the difference between the carrying value and
the estimated fair value of the assets, with such estimated fair values
determined using the best information available generally based on prices for
similar assets for stores recently opened. The Company’s evaluation
for the years ended 2007, 2006 and 2005, which included all retail locations,
indicated that no asset impairment existed and therefore no write-down of assets
was recorded.
GOODWILL
AND OTHER INTANGIBLE ASSETS
Indefinite
Lived Intangibles
The
Company accounts for indefinite lived intangible assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other
Intangible Assets. The Company tests trademarks for impairment in the
fourth quarter of each year and more often as circumstances
require. As of December 31, 2007 and 2006, net trademarks totaled
$300,000 and $299,000, respectively. Based on its most recent
analysis, management does not believe any impairment of its trademark related
intangible assets existed at December 31, 2007 and 2006,
respectively.
Leasehold
Intangible Assets
In
conjunction with the Footworks acquisition in 2005 (see Note 4), the Company
acquired lease related intangible assets valued at $4,408,000, which are being
amortized over the life of the related leases. Accumulated
amortization was $1,020,000 and $583,000 at December 31, 2007 and 2006,
respectively.
The
estimate of aggregate amortization expense for the subsequent years is as
follows:
FOR
THE YEARS ENDED DECEMBER 31,
|
|
|
|
2008
|
|
$
|
437,000
|
|
2009
|
|
|
439,000
|
|
2010
|
|
|
435,000
|
|
2011
|
|
|
353,000
|
|
2012
|
|
|
359,000
|
|
Thereafter
|
|
|
1,365,000
|
|
|
|
$
|
3,388,000
|
|
Goodwill
The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets. In 2005, the Company recorded $3,131,000 of goodwill in
conjunction with the Footworks acquisition (see Note 4). All of the Company’s
goodwill is allocated to the TWC segment. The Company tests goodwill
for impairment in the fourth quarter of each year and more often as
circumstances require. Based on its most recent analysis, management
does not believe any impairment of its goodwill existed at December 31, 2007 and
2006, respectively.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE
RECOGNITION
Substantially
all of the Company's revenues are generated by its retail operations, which are
recognized at the time of sale. The Company also generates revenues
through its corporate sales, Internet and mail order catalog operations, which
are recognized at the time of shipment. Outbound shipping charges
billed to customers are included in net sales when the products are shipped for
corporate sales, Internet and mail order catalog sales. Sales tax
charged, when applicable, is not included in net sales. The Company
records an allowance for estimated returns in the period of sale based on prior
experience. Gift certificates and gift card sales are recorded as a
liability, until the certificate or card is redeemed. As the gift
certificates and gift cards do not expire, the Company does not record income
for unused gift certificates or gift cards. The Company accrues for
estimated sales returns by customers based on historical sales return
results.
INCOME
STATEMENT COMPONENTS
Cost of
goods sold consists of the cost of the product and related overhead costs
related to the product, including purchasing, inbound freight charges, warehouse
receiving costs, quality control inspection costs, internal product development
costs and shipping and other handling costs to our stores or
customers. Depreciation is not included in the calculation of cost of
goods sold.
Selling,
marketing and distribution expenses consist of expenses associated with
creating, distributing, and selling products through all channels of
distribution, including occupancy, payroll and catalog costs. The
distribution costs included in selling, marketing and distribution expense were
$5,612,000, $5,329,000 and $3,314,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
General
and administrative expenses consist of administrative salaries, corporate
occupancy costs and other corporate expenses.
VENDOR
ALLOWANCES
Vendor
allowances include allowances, rebates and cooperative advertising funds
received from vendors. The amount of these funds is determined for each fiscal
year and the majority is based on various quantitative contract terms.
Amounts received from vendors relating to the purchase of merchandise
inventories are recognized as a reduction of cost of the inventory. Amounts
that represent a reimbursement of costs incurred, such as advertising, are
recorded as a reduction to the related expense in the period that the related
expense is incurred.
STORE
PREOPENING EXPENSES
The
Company expenses store pre-opening costs as incurred, which totaled $834,000,
$311,000 and $236,000 in 2007, 2006 and 2005, respectively.
ADVERTISING
COSTS
Costs
associated with the production of our mail order catalogs are capitalized and
expensed over the expected revenue stream following the mailing of the
respective catalog, generally three months. All other advertising
costs are expensed as incurred. Advertising expense charged to
operations for the years ended December 31, 2007, 2006 and 2005 was $3,858,000,
$3,211,000 and $1,389,000, respectively. Capitalized advertising
costs related to our mail order catalogs were $278,000 and $295,000 as of
December 31, 2007 and 2006, respectively, and are included in prepaid expenses
and other current assets on the consolidated balance sheets.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEFERRED
LEASE INCENTIVES
The
Company accounts for landlord allowances in accordance with SFAS 13, “Accounting
for Leases” and FASB Technical Bulletin 88-1, “Issues Relating to Accounting for
Leases”. Accordingly, all incentives received from landlords to fund
tenant improvements are recorded as deferred liabilities and then amortized over
the related store’s lease term.
STRAIGHT-LINE
RENT
The
Company accounts for rent expense in accordance with SFAS 13, “Accounting
for Leases,” and FASB Technical Bulletin 85-3, “Accounting for Operating
Leases with Scheduled Rent Increases.” Accordingly, rent expense under the
Company’s store operating leases is recognized on a straight-line basis over the
original term of each store’s lease, inclusive of rent holiday periods during
store construction and excluding any lease renewal options.
MEDICAL
SELF-INSURANCE RESERVE
The
Company is self-insured for medical insurance coverage. The
self-insurance liability is based on the historical claims rate and is
anticipated to cover reported claims as well as incurred but not reported
claims. The Company also maintains stop loss insurance coverage which
reimburses the Company for an individual claim in excess of $130,000 and for
company-wide claims in excess of an aggregate amount. The annual aggregate
amount is determined based on a per month, per participant amount which ranges
from $283 to $749.
INCOME
TAXES
The
Company accounts for income taxes using an asset and liability approach for
measuring deferred income taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date. A valuation allowance is established, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized. The Company considers a number of factors to determine if a
valuation allowance is necessary, including historical earnings and past
experience with similar timing differences. For the three years ended
December 31, 2007, the Company determined that a valuation allowance was not
required.
Effective
January 1, 2007 the Company began accounting for uncertain tax provisions under
the provisions of Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes,
(“FIN 48”). FIN 48 prescribes a comprehensive
model for how a company should recognize and measure the impact of uncertain tax
positions on its financial statements. Determining whether an
uncertain tax position should be recognized and how to measure the amount of the
tax benefit requires significant judgment. As a result of adoption,
the Company did not record any initial amount for previously unrecognized tax
liabilities, and as of December 31, 2007, the Company did not recognize any
additional estimated liability. (See Note 7).
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.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
following reconciles the numerator and denominator of the basic and diluted
per-share computations for net (loss) income:
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
(loss) income
|
|
$
|
(3,456,000
|
)
|
|
$
|
971,000
|
|
|
$
|
4,723,000
|
|
Basic
Weighted Average Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
9,421,000
|
|
|
|
9,180,000
|
|
|
|
9,145,000
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
and warrants
|
|
|
--
|
|
|
|
351,000
|
|
|
|
581,000
|
|
Diluted
Weighted Average Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding and
Common share
equivalents
|
|
|
9,421,000
|
|
|
|
9,531,000
|
|
|
|
9,726,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive
options and warrants
|
|
|
1,425,000
|
|
|
|
--
|
|
|
|
273,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive
convertible debt
|
|
|
1,028,000
|
|
|
|
--
|
|
|
|
--
|
|
Basic
(loss)
income
earnings per share is computed by dividing net (loss)
income
earnings by
the weighted average number of common shares outstanding for the period. Diluted
(loss)
income
earnings per share reflects the potential dilution that could occur if
options were exercised or converted into common stock.
Shares
attributable to the exercise of outstanding options or conversion of convertible
notes
that are
anti
dilutive are excluded from the calculation of diluted loss per share.
Antidilutive options, warrants and convertible debt consist of stock options,
warrants and convertible debt for the respective years that had an exercise
price greater than the average market price during the year.
ACCOUNTING
FOR STOCK-BASED COMPENSATION
On
January 1, 2006, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123R,
Share-Based Payment
(“SFAS
123R”). The statement provides for, and the Company has elected to adopt the
standard using the modified prospective application under which compensation
cost is recognized on or after the required effective date for the fair value of
all future share based award grants and the portion of outstanding awards at the
date of adoption of this statement for which the requisite service has not been
rendered, based on the grant-date fair value of those awards calculated under
Statement 123 for pro forma disclosures.
Prior to
January 1, 2006, the Company accounted for its stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25,
Accounting for Stock Issued to
Employees
, and related interpretations. No stock-based employee
compensation cost was reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company recorded a $1,220,000 and
$540,000 tax benefit for the years ended December 31, 2007 and 2006,
respectively, related to the exercise of stock options for which no compensation
expense was recorded.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based
compensation for the year ended December 31, 2005 was determined using the
intrinsic value method. The following table provides supplemental information
for that period as if stock-based compensation had been recognized under SFAS
123R:
|
|
YEAR ENDED
D
ECEMBER 31,
2005
|
|
|
|
|
|
Net
income:
|
|
|
|
As
reported
|
|
$
|
4,723,000
|
|
Add: Stock-based
employee compensation expense included in reported net income, net of
related tax effects
|
|
|
---
|
|
Deduct: Total
stock-based employee compensation expense determined under fair value
method, net of related tax effects
|
|
|
(454,000
|
)
|
Pro
forma
|
|
$
|
4,269,000
|
|
Net
income per share:
|
|
|
|
|
As
reported:
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
Diluted
|
|
$
|
0.49
|
|
Pro
forma:
|
|
|
|
|
Basic
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.44
|
|
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION
OF CREDIT RISK
The
Company had $199,000, $135,000 and $845,000 of cash on deposit with a high
credit quality financial institution in excess of the Federal Deposit Insurance
Corporation limits as of December 31, 2007, 2006 and 2005,
respectively.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
estimated fair values of receivables, accounts payable and short-term borrowings
approximate their carrying values because of the short-term maturity of these
instruments.
The fair
value of the Company’s debt instruments are based on the amount of future cash
flows associated with each instrument discounted using the Company’s borrowing
rate. At December 31, 2007 and 2006, the carrying value of all financial
instruments was not materially different from fair value, as both the fixed and
variable rate debt approximated rates currently available to the
Company.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109
. FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. In addition, FIN 48 excludes income taxes from SFAS
No. 5,
Accounting for
Contingencies
. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and provides transitional guidance for treating
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after
adoption. The Company implemented FIN 48 effective January 1,
2007. The implementation had no impact on the Company’s consolidated
financial statements.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In
July 2006, the Emerging Issues Task Force promulgated Issue No. 06-3
(“Issue”),
How Taxes Collected
from Customers and Remitted to Governmental Authorities Should be Presented in
the Income Statement (i.e., Gross Versus Net Presentation)
. The Task
Force concluded that entities should present these taxes in the income statement
on either a gross or a net basis based upon their accounting policy. However,
this Issue states that if such taxes are significant, and are presented on a
gross basis, the amounts of those taxes should be disclosed. This Issue should
be applied to financial reports for interim and annual reporting periods
beginning after December 15, 2006. Since the Company currently records
taxes on a net basis (i.e., sales tax is not included in sales, but is instead
recorded as a liability under accrued expenses), the adoption of this Issue did
not have a material impact on the Company’s consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This
statement provides guidance for using fair value to measure assets and
liabilities. The statement also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The statement applies whenever other
statements require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new circumstances. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. There are numerous previously issued statements dealing with fair values
that are amended by SFAS No. 157. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 157 will have
on the Company’s consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”)
No. 108,
Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
. SAB No. 108 (a.k.a. SAB Topic 1.N)
addresses quantifying the financial statement effects of misstatements or, more
specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial
statements. SAB No. 108 does not change the SEC staff’s previous positions in
SAB No. 99,
Materiality
(a.k.a. SAB Topic
1.M) regarding qualitative considerations in assessing the materiality of
misstatements. SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 did not have a material
impact on the Company’s consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities.
SFAS No. 159 provides companies
with an option to report many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. The FASB believes that SFAS No. 159
helps to mitigate accounting-induced volatility by enabling companies to report
related assets and liabilities at fair value, which would likely reduce the need
for companies to comply with detailed rules for hedge accounting. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities, and would require
entities to display the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance sheet. The new
statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157,
Fair Value Measurements
. This
statement is effective as of the beginning of an entity’s first fiscal year
beginning after November 15, 2007. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 159 will have
on the Company’s consolidated financial statements.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
“Business Combinations”
(“SFAS No. 141(R)”), which establishes principles and
requirements for how the acquirer of a business is to (i) recognize and
measure in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
(ii) recognize and measure the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determine what
information to disclose to enable users of its financial statements to evaluate
the nature and financial effects of the business combination. This statement
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. This replaces the guidance of
SFAS No. 141,
“Business Combinations”
(“SFAS No. 141”) which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. In addition, costs incurred by the acquirer to
effect the acquisition and restructuring costs that the acquirer expects to
incur, but is not obligated to incur, are to be recognized separately from the
acquisition. SFAS No. 141(R) applies to all transactions or other
events in which an entity obtains control of one or more businesses. This
statement requires an acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date,
measured at their acquisition-date fair values. An acquirer is required to
recognize assets or liabilities arising from all other contingencies as of the
acquisition date, measured at their acquisition-date fair values, only if it is
more likely than not that they meet the definition of an asset or a liability in
FASB Concepts Statement No. 6,
“Elements of Financial Statements.”
This Statement requires the acquirer to recognize goodwill as of the
acquisition date, measured as a residual, which generally will be the excess of
the consideration transferred plus the fair value of any noncontrolling interest
in the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Contingent consideration should be recognized at the
acquisition date, measured at its fair value at that date.
SFAS No. 141(R) defines a bargain purchase as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree, and requires the acquirer to recognize
that excess in earnings as attributable to the acquirer. This statement is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early application is prohibited. The Company is
currently evaluating the effect SFAS No. 141(R) will have on its
accounting for, and reporting of, business combinations consummated on or after
January 1, 2009.
RECLASSIFICATIONS
Certain amounts in the prior year’s
consolidated financial statements have been reclassified to conform to the
current year’s presentation.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
2.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
|
2006
|
|
Leasehold
improvements
|
|
$
|
33,435,000
|
|
|
$
|
22,411,000
|
|
Store
fixtures
|
|
|
19,660,000
|
|
|
|
19,585,000
|
|
Machinery
and equipment
|
|
|
5,436,000
|
|
|
|
7,181,000
|
|
Computer
equipment and software
|
|
|
9,802,000
|
|
|
|
9,006,000
|
|
Land
|
|
|
63,000
|
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,396,000
|
|
|
|
58,246,000
|
|
Less
accumulated depreciation and amortization
|
|
|
32,754,000
|
|
|
|
34,072,000
|
|
Property
and equipment, net
|
|
$
|
35,642,000
|
|
|
$
|
24,174,000
|
|
Depreciation
and amortization expense of property and equipment totaled $7,177,000,
$6,174,000 and $3,940,000 in 2007, 2006 and 2005, respectively.
In May
1999, the Company purchased the building which houses its downtown Santa Barbara
retail store for $1,600,000. In August 1999, the Company sold this building for
$2,119,000 and simultaneously entered into a 10-year lease. The $527,000 gain
related to the sale of this building is being deferred over the life of the
lease.
3.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
|
2006
|
|
Accrued
compensation and benefits
|
|
$
|
4,260,000
|
|
|
$
|
4,092,000
|
|
Sales
tax payable
|
|
|
1,609,000
|
|
|
|
1,880,000
|
|
Store
credits
|
|
|
618,000
|
|
|
|
576,000
|
|
Sales
return reserve
|
|
|
619,000
|
|
|
|
499,000
|
|
Gift
certificates
|
|
|
730,000
|
|
|
|
514,000
|
|
Other
current liabilities
|
|
|
857,000
|
|
|
|
774,000
|
|
Total
accrued expenses and other current liabilities
|
|
$
|
8,693,000
|
|
|
$
|
8,335,000
|
|
4.
ACQUISITIONS
FOOTWORKS
ACQUISITION
On August
31, 2005, the Company acquired substantially all of the assets of Footworks, a
division of a privately held shoe retailer. The total purchase price
was approximately $10.1 million which included the payment and issuance of cash
and notes by the Company pursuant to the definitive agreement. The
acquisition included a chain of 7 retail stores selling comfort shoes and
accessories. Footworks’ operations have historically focused on
high-visibility stores in Las Vegas, Nevada. The Company has
converted the majority of the acquired stores into “The Walking Company”
stores. Through an independent valuation, intangibles related to
below market leases acquired were valued at approximately $4.4 million and
acquired trademark intangibles were valued at approximately $0.1
million. Intangibles related to below market leases are amortized
over the remaining lease term. Goodwill recorded in connection with
the acquisition is approximately $3.1 million. The results of the
Company’s operations for the Footworks stores have been included in the
Company’s consolidated financial statements since the acquisition
date. Pro forma results of operations are not presented as the
acquisition is not considered material to the Company’s consolidated financial
statements.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
4.
ACQUISITIONS (continued)
STEVE’S
SHOES ACQUISITION
On
January 31, 2006, the Company acquired, through bankruptcy court, substantially
all of the assets and assumed certain liabilities of Steve’s Shoes, Inc.,
pursuant to an asset purchase agreement for a purchase price of approximately
$4.2 million. The Company also incurred acquisition related costs of
$0.4 million. Of this amount $2.1 million was allocated to fixed
assets, $2.6 million was allocated to inventory and $0.1 million was allocated
to liabilities. The Company assumed liabilities for $65,000 in accrued vacation,
$39,000 in outstanding sales returns and $30,000 in gift
certificates. The purchase price allocation is subject to adjustment
related to additional acquisition related costs and assumed liabilities and is
expected to be finalized in the first quarter 2007.
Under the terms of the asset purchase
agreement, TWC acquired substantially all of the assets of Steve’s Shoes, Inc.
including, but not limited to, the inventory and fixed assets of 37
stores. The primary reason for the acquisition was to continue the
growth of TWC by acquiring stores in strategic locations. During 2006
and 2007, the Company has or will be converting the majority of the acquired
stores into “The Walking Company” stores. The transaction was
accounted for under the purchase method of accounting, and accordingly the
results of operations have been consolidated in the Company’s financial
statements since acquisition on January 31, 2006.
The
Company funded the purchase price by drawing upon existing lines of credit, and
from available cash. No goodwill was recorded in connection with the
acquisition. Pro forma results of operations will not be presented as
the acquisition is not considered material (either individually or combined with
Footworks) to the Company’s consolidated financial statements.
5.
SHORT-TERM BORROWINGS
In
October 2001, the Company entered into a credit facility with Wells Fargo Retail
Finance (“WFRF”), which was most recently amended in March, 2008 (the “Amended
Credit Agreement”) and previously amended in November,
2006. Subsequent to the November 2006 amendment, the Amended Credit
Agreement provides for a total commitment of $60,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to
$3,000,000. Prior to the amendment, the agreement provided for a
total commitment of $47,000,000. The Company’s ability to borrow
under the facility was determined using an availability formula based on
eligible assets. The facility was collateralized by substantially all
of the Company’s assets and requires daily, weekly and monthly financial
reporting as well as compliance with financial, affirmative and negative
covenants. The most significant of the amended financial covenants,
most recently amended in March 2008, includes compliance with a pre-defined
annual maximum capital expenditure amount and a restriction on the payment of
dividends. At December 31, 2007, the Company was not in compliance
with one of its covenants and subsequently obtained a waiver from the
WFRF. For all other periods presented, the Company was in compliance
with all covenants, as amended. This credit agreement provides for a
performance-pricing structured interest charge which was based on excess
availability levels. The interest rate ranged from the bank’s base
rate (7.25% as of December 31, 2007) or a LIBOR loan rate plus a margin ranging
up to 1.75% (6.43% as of December 31, 2007). The Company had
$2,203,000 in borrowings based on the bank’s base rate and $21,000,000 in LIBOR
loans outstanding at December 31, 2007. The Amended Credit Agreement
expires in October 2011. At December 31, 2007, the Company had
approximately $1,733,000 of outstanding letters of credit expiring through
October 2008, which includes a $1,000,000 stand-by letter of credit related to a
promissory note entered in conjunction with the acquisition of Footworks in
2005.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
6.
DEBT
Debt
consists of the following as of December 31, 2007 and 2006:
|
|
DECEMBER 31,
|
|
|
|
2007
|
|
|
2006
|
|
Convertible
debt, net of debt issuance costs of $1,155,000
|
|
$
|
17,345,000
|
|
|
|
---
|
|
Note
payable, related party
|
|
|
1,965,000
|
|
|
|
---
|
|
Wells
Fargo Retail Finance 4-year term facility
|
|
|
1,778,000
|
|
|
|
2,444,000
|
|
Bianca
of Nevada, Inc. 3-year promissory note
|
|
|
1,000,000
|
|
|
|
2,000,000
|
|
Priority
tax claim notes
|
|
|
55,000
|
|
|
|
112,000
|
|
|
|
|
22,143,000
|
|
|
|
4,556,000
|
|
Less
current installments
|
|
|
(
2,700,000
|
)
|
|
|
(
1,727,000
|
)
|
Notes
payable, excluding current installments
|
|
$
|
19,443,000
|
|
|
$
|
2,829,000
|
|
The
aggregate annual principal repayments required in respect of debt as of
December 31, 2007 are as follows:
Years
Ending December 31,
|
|
|
|
2008
|
|
$
|
2,700,000
|
|
2009
|
|
|
2,098,000
|
|
2010
|
|
|
---
|
|
2011
|
|
|
---
|
|
2012
|
|
|
18,500,000
|
|
|
|
$
|
23,298,000
|
|
CONVERTIBLE
DEBT
On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes (“Note” or
“Notes”) due March 31, 2012, interest payable quarterly. $3.0 million of the
Notes were sold to management. The Notes are convertible into fully paid and
nonassessable shares of the Company’s common stock to an aggregate of up to
1,027,777 shares at any time after the issuance date, at an initial conversion
price of $18.00 per share. Any time after the eighteen month
anniversary of the issuance date, the Company has the right to require the
holder of a Note to convert any remaining amount under a Note into common stock
if: (i) (x) the closing sale price of the common stock exceeds 175% of the
conversion price on the issuance date for each of any 20 consecutive trading
days or (y) following the consummation of a bona fide firm commitment
underwritten public offering of the common stock resulting in gross proceeds to
the Registrant in excess of $30 million, the closing sale price of the common
stock exceeds 150% of the conversion price on the issuance date for each of any
20 consecutive trading days and (ii) certain equity conditions have been met. In
circumstances where Notes are being converted either in connection with a
voluntary conversion or an exercise of the Company’s right to force conversion,
the Company has the option to settle such conversion by a net share settlement,
for some or all of the Notes. If it exercises such right, the Company is to pay
the outstanding principal amount of a Note in cash and settle the amount of
equity in such Investor’s conversion right by delivery of shares of common stock
of equal value. If the Notes are not converted before its maturity,
the Notes will be redeemed by the Company on the maturity date at a redemption
price equal to 100% of the principal amount of the notes then outstanding, plus
any accrued and unpaid interest. The offer and sale of the Notes were made in
accordance with Rule 506 of Regulation D of the Securities Act of
1933. The net proceeds from the sale of the Notes were $17,141,000
after $1,359,000 of debt issuance costs. Debt issuance costs are
being amortized over the term of the note. Amortization of debt
issuance costs totaling $204,000 is included in interest expense for the year
ended December 31, 2007 on the accompanying statements of
operations. As of December 31, 2007, the convertible note payable
balance includes unamortized debt issuance costs of $1,155,000 in the
accompanying consolidated balance sheet. The net proceeds of this
offering were used to reduce the outstanding balance of Company’s line of
credit. On June 21, 2007, the Company filed an S-3 Registration
Statement to register the 1,027,777 shares of common stock which are convertible
under the agreement and it became effective in September 2007. As of
December 31, 2007, the Company’s stock price was $14.45, which was less than the
conversion price of $18.00. Accordingly, the Company anticipates the
Notes will be settled in cash at maturity.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DEBT
(continued)
NOTES
PAYABLE, RELATED PARTY
On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO). The purchase
price was $16.00 per share, less the exercise price of the options, which ranged
from $6.50 to $10.00 per share. The $16.00 price represents a
discount of approximately 5% from the May 9, 2007 closing price of
$16.80. The net purchase price was $1,965,000. The Company
paid for the options by delivery of notes bearing interest at 7% per annum and
payable in two equal installments on April 10, 2008 and April 10,
2009. At December 31, 2007, $982,000 of the notes is classified as
current portion of long-term debt to related parties in the accompanying
consolidated balance sheet.
NOTES
PAYABLE
In
conjunction with the Company’s acquisition of Footworks in 2005, Wells Fargo
Retail Finance issued a $3,000,000 four-year term loan
facility. Monthly payments of $55,555 were due beginning in March of
2006 with the balance due at the maturity date of the loan, October
2009. The term loan interest charge is Prime plus .5% or LIBOR plus
2.75% (7.25% at December 31, 2007). At December 31, 2007, $667,000 of
the term loan facility is classified as current and is included in current
portion of long-term debt in the accompanying consolidated balance
sheet.
Additionally,
in conjunction with the acquisition of Footworks, the Company also entered into
a $3,000,000 three-year promissory note with the seller, Bianca of Nevada,
Inc. The principal on this note is payable in three annual
installments beginning August 31, 2006. The note bears an interest
rate of 5.0% and accrued interest is payable quarterly beginning December
2005. The note is partially secured by a $1,000,000 stand-by letter
of credit as the second principal installment was paid in August
2007. At December 31, 2007, $1,000,000 of the promissory note is
classified as current and is included in current portion of long-term debt in
the accompanying consolidated balance sheet.
As part
of the acquisition of The Walking Company, TWC assumed priority tax claims
totaling approximately $627,000. The Bankruptcy Code requires that
each holder of a priority tax claim will be paid in full with interest at the
rate of six percent per year with annual payments for a period of six
years. At December 31, 2007 and 2006, $51,000 and $60,000,
respectively, of the priority tax claim note is classified as current and is
included in current portion of long-term debt in the accompanying consolidated
balance sheet. As of December 31, 2007 and 2006, the remaining notes
had a long-term balance of $4,000 and $52,000, respectively.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. INCOME
TAXES
The
(benefit from) provision for income taxes consists of the
following:
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
200
7
|
|
|
200
6
|
|
|
200
5
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,919,000
|
)
|
|
$
|
2,271,000
|
|
|
$
|
2,520,000
|
|
State
|
|
|
(539,000
|
)
|
|
|
406
,000
|
|
|
|
509
,000
|
|
Total
|
|
|
(3,458,000
|
)
|
|
|
2,677,
000
|
|
|
|
3,029
,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,241,000
|
|
|
|
(1,806,000
|
)
|
|
|
(114,000
|
)
|
State
|
|
|
53,000
|
|
|
|
(288
,000
|
)
|
|
|
(21
,000
|
)
|
Total
|
|
|
1,294,000
|
|
|
|
(
2,094
,000
|
)
|
|
|
(135
,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(benefit from) provision for income tax
|
|
$
|
(2,164,000
|
)
|
|
$
|
583
,000
|
|
|
$
|
2,894
,000
|
|
The
Company's effective income tax rate differs from the federal statutory rate due
to the following:
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
200
7
|
|
|
200
6
|
|
|
200
5
|
|
Federal
statutory income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State
taxes, net of federal benefit
|
|
|
4.3
|
|
|
|
3.6
|
|
|
|
3.9
|
|
Other,
net
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
Total
|
|
|
38.5
|
%
|
|
|
37.5
|
%
|
|
|
38.0
|
%
|
Significant
components of the Company's net deferred income tax assets are as
follows:
|
|
DECEMBER 31,
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
Allowance
for doubtful receivables and sales returns
|
|
$
|
252,000
|
|
|
$
|
199,000
|
|
Accrued
vacation
|
|
|
206,000
|
|
|
|
171,000
|
|
Inventory
uniform capitalization
|
|
|
864,000
|
|
|
|
1,760,000
|
|
Inventory
reserve
|
|
|
442,000
|
|
|
|
346,000
|
|
Depreciation
|
|
|
---
|
|
|
|
455,000
|
|
Deferred
rent
|
|
|
3,157,000
|
|
|
|
1,781,000
|
|
Deferred
gain on sale of building
|
|
|
36,000
|
|
|
|
56,000
|
|
Stock-based
compensation
|
|
|
123,000
|
|
|
|
69,000
|
|
Charitable
contribution carryover
|
|
|
662,000
|
|
|
|
374,000
|
|
Reserve
liabilities
|
|
|
93,000
|
|
|
|
81,000
|
|
Total
deferred income tax assets
|
|
|
5,835,000
|
|
|
|
5,292,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,142,000
|
)
|
|
|
---
|
|
Intangible
assets
|
|
|
(188,000
|
)
|
|
|
(71,000
|
)
|
State
income taxes
|
|
|
(424,000
|
)
|
|
|
(134,000
|
)
|
Prepaid
expenses
|
|
|
(413,000
|
)
|
|
|
(125,000
|
)
|
Total
deferred income tax liabilities
|
|
|
(2,167,000
|
)
|
|
|
(330,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
income tax asset, net
|
|
$
|
3,668,000
|
|
|
$
|
4,962,000
|
|
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. INCOME
TAXES (continued)
On
January 1, 2007, the Company adopted the provisions of FIN 48 (see
Note 1)
.
As a result of
adoption, the Company did not record any initial amount for previously
unrecognized tax liabilities. The Company does not expect the amounts of
unrecognized benefits to change significantly in the next
12 months.
As of
December 31, 2007, the Company did not recognize any additional estimated
liability.
Although
no adjustments were recorded as of December 31, 2007, effective with the
adoption of FIN 48, the Company will record any future accrued interest
resulting from unrecognized tax benefits as a component of interest expense and
accrued penalties resulting from unrecognized tax benefits as a component of
income tax expense.
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state jurisdictions. The Company’s Federal and State
income tax returns remain subject to examination for all tax years ended on or
after December 31, 2000, with regard to all tax positions and the results
reported.
On March
14, 2006, the Company received a notice of proposed adjustments from the
Internal Revenue Service ("IRS”) related to its audit of the Company’s 2002 Tax
Year. The IRS had proposed adjustments to increase the Company’s
income tax payable for the 2002 year that was under examination. The
adjustments related to the tax accounting for two short bond transactions
recorded in 2002. The Company disagreed with the audit findings and
obtained expert legal tax counsel to assist in its appeal. In
September 2007, the Company received a notice from the IRS Appeals Office
stating that they agreed with the Company’s appeal and there is no deficiency or
over-assessment with regard to the audited year. The Company had not
recorded a reduction in tax benefits in accordance with FIN 48 related to this
audit. Since the audit is now resolved as such, no further analysis
or adjustment is needed.
8.
COMMITMENTS AND CONTINGENCIES
LEASES
The
Company leases retail stores, office buildings and warehouse space under lease
agreements that expire through 2019. Future minimum lease payments
under noncancelable operating and capital leases are as follows:
|
|
Operating
|
|
|
Capital
|
|
YEARS ENDING DECEMBER
31,
|
|
Leases
|
|
|
Leases
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
37,728,000
|
|
|
$
|
841,000
|
|
2009
|
|
|
34,411,000
|
|
|
|
916,000
|
|
2010
|
|
|
29,823,000
|
|
|
|
915,000
|
|
2011
|
|
|
26,609,000
|
|
|
|
230,000
|
|
2012
|
|
|
24,832,000
|
|
|
|
---
|
|
Thereafter
|
|
|
135,315,000
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
Total
minimum
obligations
|
|
$
|
288,718,000
|
|
|
|
2,902,000
|
|
Less
amount representing
interest
|
|
|
|
|
|
|
458,000
|
|
Present
value of minimum lease payments
|
|
|
|
|
|
|
2,444,000
|
|
Less
current
portion
|
|
|
|
|
|
|
683,000
|
|
Long-term
portion
|
|
|
|
|
|
$
|
1,761,000
|
|
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
8.
COMMITMENTS AND CONTINGENCIES (continued)
The above
amounts do not include contingent rentals based on sales in excess of the
stipulated minimum that may be paid under certain leases on retail stores.
Additionally, certain leases contain future adjustments in rental payments based
on changes in a specified inflation index. The effective annual rent expense for
the Company is the total rent paid over the term of the lease, amortized on a
straight-line basis. The difference between the actual rent paid and the
effective rent recognized for financial statement purposes is reported as
deferred rent.
Rent
expense for 2007, 2006 and 2005, totaled $37,702,000, $33,659,000 and
$26,478,000, respectively, and includes a lease termination fee of $491,000
recorded in 2007 related to the relocation of the Company’s distribution center
(described below) and contingent rentals of $787,000, $681,000 and $586,000 for
2007, 2006, and 2005, respectively, which are included in operating expenses in
the consolidated statements of income. The cost of equipment under
capital leases at December 31, 2007 and 2006 was $3,044,000 and $432,000,
respectively, and accumulated depreciation for such equipment at December 31,
2007 and 2006 was $363,000 and $210,000, respectively.
In the
first quarter 2007, the Company entered into a $2,973,000 four-year capital
lease agreement to finance equipment purchased for the Company’s new
distribution center located in North Carolina. The capital lease
agreement requires monthly payments of approximately $75,000 through March 2011
and includes a dollar purchase option at the end of the
term. Depreciation expense of equipment purchased under this capital
lease is included in selling, marketing and distribution expense in the
accompanying consolidated statement of operations.
In
January 2007, the Company terminated their lease of a 143,000 square foot
facility in Santa Fe Springs, California and as a result paid a $491,000
termination fee. The Company’s distribution center was housed in this
facility prior to its relocation to a larger facility in Charlotte, North
Carolina. The termination of the lease was recorded in accordance
with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities”. Under SFAS 146, liabilities arising from exit or
disposal activities are recognized only when incurred, and measured at their
fair value.
LITIGATION
In
Marlene Korman v. The Walking Company, TWC was sued in the Eastern
District of Pennsylvania in a purported class action lawsuit under the Fair and
Accurate Credit Transactions Act (“FACTA”) because the plaintiff received a
receipt with the expiration date from her debit credit card on it. The plaintif
alleges that that was a “willful” violation of FACTA, entitling her and the
other members of the class to statutory damages of $100 to $1,000 per
person. The Company has denied the complaint and is defending the
action. The Company cannot predict the likelihood of a favorable or
unfavorable outcome in this matter, but at this time does not believe that the
outcome of such litigation will have a material adverse impact on our operations
or financial condition.
From time
to time the Company is involved in other pending or threatened litigation
incidental to its business. The Company believes that the outcome of such
litigation will not have a material adverse impact on its consolidated
operations or financial condition.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.
STOCKHOLDERS' EQUITY
COMMON
STOCK
The
Company is authorized to issue 30,000,000 shares of common stock. As
of December 31, 2007 and 2006, the Company had 11,187,608 and 10,973,264 of
common stock issued, respectively.
In March
1998, the Board of Directors authorized the repurchase of up to $10,000,000 of
its common stock. The Company has repurchased 1,710,598 shares totaling
$9,446,000 as of December 31, 2007 and 2006.
On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes due March
31, 2012, interest payable quarterly. The Notes are convertible into fully paid
and nonassessable shares of the Company’s common stock to an aggregate of up to
1,027,777 shares at any time after the issuance date, at an initial conversion
price of $18.00 per share. On June 21, 2007, the Company filed
an S-3 Registration Statement to register the 1,027,777 shares of common stock
which are convertible under the agreement and it became effective in September
2007. As of December 31, 2007, the Company’s stock price was $14.45,
which was less than the conversion price of $18.00. Accordingly, the
Company anticipates the Notes will be settled in cash at
maturity. See Note 6. Debt.
The
Company’s credit agreement prohibits the payment of dividends. The Company did
not pay a dividend in 2007 and 2006, and does not expect to pay dividends in the
future.
PREFERRED
STOCK
The
Company is authorized to issue 3,000,000 shares of preferred
stock. As of December 31, 2007 and 2006, the Company did not have any
preferred stock issued or outstanding. Under the Company’s
Certificate of Incorporation, the Board of Directors is authorized to fix the
terms of the preferred stock provided for in such Certificate.
STOCK
OPTIONS
In August
1997, the Company adopted the 1997 Performance Award Plan to attract, reward and
retain officers and employees. The maximum number of shares reserved for
issuance under this plan was 1,000,000. In February 1998, the Company amended
the 1997 Performance Award Plan (the “Plan”) to increase the maximum number of
shares reserved for issuance under the Plan to 2,000,000. The Company
amended the Plan again in April 2002 to increase the maximum number of shares
reserved for issuance under the Plan to 3,000,000. Awards under this Plan may be
in the form of nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, performance shares, stock bonuses, or
cash bonuses based upon performance.
On
January 1, 2006, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123R,
Share-Based Payment
(“SFAS
123R”). This statement establishes standards surrounding the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. The statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions,
such as the options issued under the Company’s Stock Option Plans. The statement
provides for, and the Company has elected to adopt the standard using the
modified prospective application under which compensation cost is recognized on
or after the required effective date for the fair value of all future share
based award grants and the portion of outstanding awards at the date of adoption
of this statement for which the requisite service has not been rendered, based
on the grant-date fair value of those awards calculated under Statement 123 for
pro forma disclosures. The Company’s stock option compensation expense was
$167,000 and $211,000 for years ended December 31, 2007 and 2006,
respectively, and is included in operating expenses in the accompanying
consolidated statements of income. The Company also recorded a related tax
benefit of $64,000 and $79,000 in 2007 and 2006, respectively, and a deferred
tax asset of $123,000 and $69,000 is recorded for years ended December 31, 2007
and 2006, respectively. In addition, the Company recorded a tax
benefit of $1,220,000 and $540,000 related to options for which no compensation
expense was recorded.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.
STOCKHOLDERS’ EQUITY (continued)
The fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model. This model incorporates certain assumptions for inputs
including a risk-free market interest rate, expected dividend yield of the
underlying common stock, expected option life and expected volatility in the
market value of the underlying common stock. The Company used the following
assumptions for options granted in the years ended December 31, 2005. There were
no options granted in the years ended December 31, 2006 and 2007.
Expected
volatility
|
|
|
35
|
%
|
Expected
lives
|
|
7 yrs.
|
|
Risk-free
interest rate – high
|
|
|
4.28
|
%
|
Risk-free
interest rate – low
|
|
|
3.95
|
%
|
Expected
dividend yield
|
|
none
|
|
Expected
volatilities are based on the historical volatility of the Company’s common
stock. The risk free interest rate is based upon quoted market yields
for United States Treasury debt securities. The expected dividend yield is zero
as the Company is subject to a debt covenant prohibiting the payment of
dividends. Expected term is derived from the historical option
exercise behavior.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.
STOCKHOLDERS’ EQUITY (continued)
The
following table summarizes stock option activity during the years ended
December 31, 2005, 2006 and 2007:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance
at January 1, 2005
|
|
|
2,081,650
|
|
|
|
4.98
|
|
|
|
|
|
|
|
Granted
|
|
|
112,250
|
|
|
|
6.93
|
|
|
|
|
|
|
|
Exercised
|
|
|
(75,250
|
)
|
|
|
4.30
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(33,150
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
2,085,500
|
|
|
$
|
5.10
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(188,984
|
)
|
|
|
5.07
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,650
|
)
|
|
|
4.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,891,866
|
|
|
$
|
5.39
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(214,344
|
)
|
|
|
5.53
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(252,666
|
)
|
|
|
7.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,424,856
|
|
|
$
|
4.55
|
|
|
|
4.33
|
|
|
$
|
14,111,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at December 31, 2007
|
|
|
1,408,336
|
|
|
$
|
4.55
|
|
|
|
4.30
|
|
|
$
|
13,946,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
1,259,656
|
|
|
$
|
4.56
|
|
|
|
4.06
|
|
|
$
|
12,459,000
|
|
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.
STOCKHOLDERS’ EQUITY (continued)
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2005 was $2.73. No options were granted in the
years ended December 31, 2006 and 2007. The total intrinsic value of
options exercised during the year ended December 31, 2007, 2006 and 2005
was $2,296,000, $1,487,000, $200,000, respectively, determined as of the date of
each option exercised. The intrinsic value is the amount by which the current
market value exceeds the exercise price of the stock option.
As of
December 31, 2007, there was $199,000 of total unrecognized compensation
cost, net of a 10% expected forfeiture rate, related to unvested options granted
under the Company’s option plans. That cost is expected to be recognized on a
straight-line basis over a weighted average period of 1 year. The total grant
date fair value of shares vested during the year ended December 31, 2007
was $196,000.
Cash
received from option exercise under share-based payment arrangements for the
years ended December 31, 2007, 2006 and 2005 was $1,186,000, $959,000 and
$322,000, respectively.
On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO). The purchase
price was $16.00 per share, less the exercise price of the options, which ranged
from $6.50 to $10.00 per share. The $16.00 price represents a
discount of approximately 5% from the May 9, 2007 closing price of
$16.80. The net purchase price was $1,965,000. The Company
paid for the options by delivery of notes bearing interest at 7% per annum and
payable in two equal installments on April 10, 2008 and April 10,
2009. See Note 6. Debt.
The
following table summarizes information about stock options outstanding at
December 31, 2007:
|
|
|
OPTIONS OUTSTANDING
|
|
|
OPTIONS EXERCISABLE
|
|
RANGE
OF EXERCISE
PRICES
|
|
|
OPTIONS
OUT
STANDING
|
|
WEIGHTED-AVERAGE
REMAINING CONTRACTUAL
LIFE
|
|
WEIGHTED-AVERAGE
EXERCISE
PRICE
|
|
|
OPTIONS
EXERCIS
ABLE
|
|
|
WEIGHTED-AVERAGE
EXERCISE
PRICE
|
|
$
|
2.90
- 3.60
|
|
|
|
450,524
|
|
4.6
years
|
|
$
|
3.47
|
|
|
|
363,924
|
|
|
$
|
3.46
|
|
|
4.00
- 4.85
|
|
|
|
607,682
|
|
3.5
years
|
|
|
4.28
|
|
|
|
600,482
|
|
|
|
4.28
|
|
|
5.00
- 6.50
|
|
|
|
341,650
|
|
5.9
years
|
|
|
6.12
|
|
|
|
270,250
|
|
|
|
6.26
|
|
|
8.00
|
|
|
|
12,500
|
|
3.1
years
|
|
|
8.00
|
|
|
|
12,500
|
|
|
|
8.00
|
|
|
10.00
|
|
|
|
12,500
|
|
3.1
years
|
|
|
10.00
|
|
|
|
12,500
|
|
|
|
10.00
|
|
|
2.90
- 10.00
|
|
|
|
1,424,856
|
|
4.3
years
|
|
|
4.55
|
|
|
|
1,259,656
|
|
|
|
4.56
|
|
10.
SEGMENT INFORMATION
For the
years ended December 31, 2007, 2006 and 2005, the Company operated its business
under two reportable segments: (i) Big Dog Sportswear business, and (ii) TWC
business. The Big Dog Sportswear business includes the Company’s 115 Big Dog
retail stores (primarily located in outlet malls), corporate sales, and its
catalog and internet business selling quality sportswear. The TWC business
includes the Company’s 186 The Walking Company stores located primarily in
leading retail malls selling comfort footwear. These two retail
chains are managed separately.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
10.
SEGMENT INFORMATION (continued)
The
accounting policies of the reportable segments are consistent with the
consolidated financial statements of the Company. The Company
evaluates individual store profitability in terms of a store’s contribution
which is defined as gross margin less direct selling, occupancy, and certain
indirect selling costs. Below are the results of operations on a
segment basis for the years ended December 31, 2007, 2006 and 2005:
|
|
Big Dog Sportswear
|
|
|
The Walking Company
|
|
|
Total
|
|
Year Ended
December
31,
2007
Statements
of
Operations:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
71,133,000
|
|
|
$
|
162,135,000
|
|
|
$
|
233,268,000
|
|
Gross
margin
|
|
|
39,266,000
|
|
|
|
83,182,000
|
|
|
|
122,448,000
|
|
Depreciation
and amortization
|
|
|
1,609,000
|
|
|
|
6,005,000
|
|
|
|
7,614,000
|
|
Interest
income
|
|
|
(6,000
|
)
|
|
|
(4,000
|
)
|
|
|
(10,000
|
)
|
Interest
expense
|
|
|
1,402,000
|
|
|
|
2,853,000
|
|
|
|
4,255,000
|
|
Benefit
from provision for income taxes
|
|
|
(1,669,000
|
)
|
|
|
(495,000
|
)
|
|
|
(2,164,000
|
)
|
Net
loss
|
|
|
(2,665,000
|
)
|
|
|
(791,000
|
)
|
|
|
(3,456,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
34,611,000
|
|
|
$
|
89,011,000
|
|
|
$
|
123,622,000
|
|
(Decreases)
increases in long-term assets
|
|
|
(1,459,000
|
)
|
|
|
12,174,000
|
|
|
|
10,715,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
Statements
of
Income:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
82,923,000
|
|
|
$
|
135,681,000
|
|
|
$
|
218,604,000
|
|
Gross
margin
|
|
|
46,696,000
|
|
|
|
70,185,000
|
|
|
|
116,881,000
|
|
Depreciation
and amortization
|
|
|
1,518,000
|
|
|
|
5,006,000
|
|
|
|
6,524,000
|
|
Interest
income
|
|
|
(3,000
|
)
|
|
|
(5,000
|
)
|
|
|
(8,000
|
)
|
Interest
expense
|
|
|
765,000
|
|
|
|
1,319,000
|
|
|
|
2,084,000
|
|
(Benefit
from) provision for income taxes
|
|
|
(770,000
|
)
|
|
|
1,353,000
|
|
|
|
583,000
|
|
Net
(loss) income
|
|
|
(1,284,000
|
)
|
|
|
2,255,000
|
|
|
|
971,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
35,336,000
|
|
|
$
|
67,325,000
|
|
|
$
|
102,661,000
|
|
Increases
in long-term assets
|
|
|
3,770,000
|
|
|
|
9,190,000
|
|
|
|
12,960,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
Statements
of Income:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
92,104,000
|
|
|
$
|
87,011,000
|
|
|
$
|
179,115,000
|
|
Gross
margin
|
|
|
53,755,000
|
|
|
|
45,049,000
|
|
|
|
98,804,000
|
|
Depreciation
and amortization
|
|
|
1,363,000
|
|
|
|
2,810,000
|
|
|
|
4,173,000
|
|
Interest
income
|
|
|
(40,000
|
)
|
|
|
(4,000
|
)
|
|
|
(44,000
|
)
|
Interest
expense
|
|
|
463,000
|
|
|
|
513,000
|
|
|
|
976,000
|
|
Provision
for income taxes
|
|
|
1,225,000
|
|
|
|
1,669,000
|
|
|
|
2,894,000
|
|
Net
income
|
|
|
2,000,000
|
|
|
|
2,723,000
|
|
|
|
4,723,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
31,692,000
|
|
|
$
|
41,061,000
|
|
|
$
|
72,753,000
|
|
(Decreases)
increases in long-term assets
|
|
|
(714,000
|
)
|
|
|
10,248,000
|
|
|
|
9,534,000
|
|
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
11.
EMPLOYEE BENEFIT PLAN
The
Company has a Retirement Savings Plan (the “Plan”), a defined contribution plan
adopted pursuant to Section 401(k) of the Internal Revenue Code. The
Plan is available to substantially all of the Company’s employees. The Company
amended the Plan in November 2000 to match each dollar deferred up to 3% of
compensation, which is limited to $1,000 annually, per
participant. Participants vest in the Company’s contribution at
varying rates of 0% to 20% per year over six years. The Company
contributed approximately $278,000, $188,000 and $187,000 in 2007, 2006 and
2005, respectively.
12.
RELATED PARTY TRANSACTIONS
On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes due March
31, 2012, interest payable quarterly. $3.0 million of the Notes were sold to
management. The Notes are convertible into fully paid and nonassessable shares
of the Company’s common stock to an aggregate of up to 1,027,777 shares at any
time after the issuance date, at an initial conversion price of $18.00 per
share. As of December 31, 2007, the Company’s stock price was $14.45,
which was less than the conversion price of $18.00. Accordingly, the
Company anticipates the Notes will be settled in cash at
maturity. See Note 6. Debt.
On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO). The purchase
price was $16.00 per share, less the exercise price of the options, which ranged
from $6.50 to $10.00 per share. The $16.00 price represents a
discount of approximately 5% from the May 9, 2007 closing price of
$16.80. The net purchase price was $1,965,000. The Company
paid for the options by delivery of notes bearing interest at 7% per annum and
payable in two equal installments on April 10, 2008 and April 10,
2009. See Note 6. Debt.
Two of
the Company's stockholders and directors have ownership interests in two former
merchandise vendors to the Company. Merchandise inventory purchased from these
related vendors totaled $35,000, $3,000 and $135,000 in 2007, 2006 and 2005,
respectively.
The
Company engaged a related party to perform retail construction
services. Construction services provided to the Company totaled
$203,000 in 2005. No construction services were provided in 2007 or
2006.
In the
normal course of business, one of the Company's officers pays for certain
operating expenses which are reimbursed by the Company. At December 31,
2007 and 2006, the related outstanding payable was $63,000 and $70,000,
respectively.
From time
to time, the Company rents a plane for its own corporate travel use from a
company where a majority stockholder and director is also the majority owner of
the Company. The Company has no obligation to use such plane for any
minimum amount, and to the extent it does use it, the Company pays for such use
on terms at least as favorable to the Company as could be obtained from an
independent third party. Costs associated with the use of such plane
totaled $268,000, $215,000 and $189,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
13.
SUBSEQUENT EVENTS
On
January 15, 2008, The Walking Company purchased substantially all of the assets
of Natural Comfort Footwear, Inc. net of certain liabilities for approximately
$3.6 million. The purchase price was funded in part through existing
working capital. Additionally, the Company entered into a $1.7
million three-year promissory note with the seller of Natural Comfort Footwear,
Inc. The entire principal on this note is payable on January 15,
2011. The note bears an interest rate of 7% and accrued interest is
payable quarterly beginning March 31, 2008. The assets include 8
store locations, inventory, trademarks, tangible personal property, and
goodwill. Proforma results of operations will not be presented as the
acquisition is not considered material to the Company’s consolidated financial
statements.
BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
14.
QUARTERLY FINANCIAL DATA (unaudited)
|
|
FIRST
QUARTER
|
|
|
SECOND
QUARTER
|
|
|
THIRD
QUARTER
|
|
|
FOURTH
QUARTER
|
|
|
|
(in
thousands, except per share)
|
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
44,224
|
|
|
$
|
55,854
|
|
|
$
|
56,554
|
|
|
$
|
76,636
|
|
Gross
profit
|
|
|
23,300
|
|
|
|
30,498
|
|
|
|
30,195
|
|
|
|
38,455
|
|
Selling,
marketing and distribution expenses
|
|
|
26,849
|
|
|
|
26,933
|
|
|
|
26,886
|
|
|
|
32,356
|
|
General
and administrative expenses
|
|
|
2,361
|
|
|
|
2,737
|
|
|
|
2,365
|
|
|
|
3,336
|
|
Total
operating expenses
|
|
|
29,210
|
|
|
|
29,670
|
|
|
|
29,251
|
|
|
|
35,692
|
|
(Loss)
income from operations
|
|
|
(5,910
|
)
|
|
|
828
|
|
|
|
944
|
|
|
|
2,763
|
|
Net
(loss) income
|
|
|
(4,135
|
)
|
|
|
(188
|
)
|
|
|
(140
|
)
|
|
|
1,007
|
|
Net
(loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.44
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.10
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,336
|
|
|
|
9,415
|
|
|
|
9,457
|
|
|
|
9,475
|
|
Diluted
|
|
|
9,336
|
|
|
|
9,415
|
|
|
|
9,457
|
|
|
|
10,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
38,671
|
|
|
$
|
53,178
|
|
|
$
|
54,127
|
|
|
$
|
72,628
|
|
Gross
profit
|
|
|
20,097
|
|
|
|
29,383
|
|
|
|
28,982
|
|
|
|
38,419
|
|
Selling,
marketing and distribution expenses
|
|
|
22,639
|
|
|
|
25,497
|
|
|
|
25,355
|
|
|
|
29,937
|
|
General
and administrative expenses
|
|
|
2,247
|
|
|
|
2,346
|
|
|
|
2,301
|
|
|
|
2,930
|
|
Total
operating expenses
|
|
|
24,886
|
|
|
|
27,843
|
|
|
|
27,656
|
|
|
|
32,866
|
|
(Loss)
income from operations
|
|
|
(4,789
|
)
|
|
|
1,540
|
|
|
|
1,326
|
|
|
|
5,553
|
|
Net
(loss) income
|
|
|
(3,160
|
)
|
|
|
641
|
|
|
|
471
|
|
|
|
3,019
|
|
Net
(loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
$
|
0.33
|
|
Diluted
|
|
$
|
(0.35
|
)
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.31
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,092
|
|
|
|
9,177
|
|
|
|
9,211
|
|
|
|
9,236
|
|
Diluted
|
|
|
9,092
|
|
|
|
9,509
|
|
|
|
9,476
|
|
|
|
9,885
|
|