<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 25, 1997
[INSERT LOGO]
3,500,000 SHARES
COMMON STOCK
Of the 3,500,000 shares of Common Stock offered hereby, 2,800,000 shares are
being sold by Big Dog Holdings, Inc. ("Big Dogs" or the "Company") and 700,000
shares are being sold by certain stockholders of the Company ("Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. Prior
to this offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $12.00 and $14.00 per share. See "Underwriting" for information
relating to the method of determining the initial public offering price.
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total.......................... $ $ $ $
</TABLE>
(1) Before deducting expenses, all of which are payable by the Company,
estimated at $400,000.
(2) Certain of the Selling Stockholders have granted the Underwriters a 30-day
option to purchase an aggregate of up to an additional 525,000 shares of
Common Stock solely to cover over-allotments, if any. See "Underwriting." If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Selling Stockholders will be
$ , $ and $ , respectively.
----------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that the delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson Stephens &
Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
HAMBRECHT & QUIST
NEEDHAM & COMPANY, INC.
The date of this Prospectus is , 1997
<PAGE>
DESCRIPTION OF PICTURES AND CAPTIONS:
FRONT COVER: "Ghost" image of Big Dog character.
INSIDE FRONT COVER: Photos of store interiors and catalog covers.
INSIDE FRONT GATE-FOLD: Product graphics and slogans.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
TRANSACTIONS, SEE "UNDERWRITING."
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR ANY OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 6
Use of Proceeds................................................................................ 13
Dividend Policy................................................................................ 13
Capitalization................................................................................. 14
Dilution....................................................................................... 15
Selected Consolidated Financial and Operating Data............................................. 16
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17
Business....................................................................................... 24
Management..................................................................................... 36
Certain Relationships and Related Transactions................................................. 43
Principal and Selling Stockholders............................................................. 45
Description of Capital Stock................................................................... 46
Shares Eligible for Future Sale................................................................ 51
Underwriting................................................................................... 53
Legal Matters.................................................................................. 55
Experts........................................................................................ 55
Additional Information......................................................................... 55
Index to Consolidated Financial Statements..................................................... F-1
</TABLE>
-----------------
BIG DOGS-Registered Trademark-, the dog logo and BIG DOG
SPORTSWEAR-Registered Trademark- are registered trademarks of the Company and
LITTLE BIG DOGS-TM- and BIG BIG DOGS-TM- are trademarks of the Company.
Tradenames and trademarks of other companies appearing in this Prospectus are
the property of their respective owners.
The Company intends to mail to all of its stockholders annual reports
containing financial statements audited by independent auditors for each fiscal
year and quarterly reports containing unaudited financial data for each of the
first three quarters of each fiscal year.
The Company was incorporated in Delaware in December 1993. The Company's
principal executive offices are located at 121 Gray Avenue, Santa Barbara, CA
93101, and its telephone number is (805) 963-8727. Unless otherwise indicated,
all references to "Big Dogs," "Big Dog," "Big Dog Sportswear" or the "Company"
refer to Big Dog Holdings, Inc., a Delaware corporation, and its subsidiaries
(including subsidiaries of subsidiaries).
3
<PAGE>
SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
AND ELSEWHERE IN THIS PROSPECTUS. NOTWITHSTANDING THE COMPANY'S DRAMATIC 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. UNLESS OTHERWISE INDICATED, ALL
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
[LOGO]
[LOGO]
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. 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 Company's net sales have
grown from $11.4 million in 1993 (the Company's first full year of operation) to
$68.7 million in 1996, a compound annual growth rate of 82%. The number of
Company stores has grown from 5 in 1993 to 134 as of July 31, 1997, and over the
last three years, the Company recruited a team of key executives and invested in
management information systems and other infrastructure improvements that the
Company believes have been critical in achieving this growth and positioning it
to manage its anticipated future growth. The Company attained this dramatic
growth in a highly competitive retail environment and, despite substantial
infrastructure investments, the Company achieved increases in operating income
in each full year of operation.
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 the
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 product
development costs, 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
successfully introduced and expanded its LITTLE BIG DOGS-TM- line of infants'
and children's apparel and its BIG BIG DOGS-TM- line of Big and Tall apparel.
The Company has also successfully 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. Big Dogs' traditional
emphasis has been on outlet malls because those malls are often located in
tourist areas and therefore attract significant numbers of Big Dogs' targeted
customers. More recently, the Company has increased its focus on opening full-
price, stand-alone stores in locations frequented by tourist and leisure
shoppers. The Company plans to open 30 net new stores during 1997, 13 of which
were open as of July 31, 1997, and at least 30 stores in 1998. In addition to
its retail stores, Big Dogs markets its products through other channels,
including its catalog and better wholesale accounts.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Common Stock Offered by the Company............. 2,800,000 shares
Common Stock Offered by the Selling 700,000 shares
Stockholders....................................
Common Stock Outstanding after the Offering..... 12,960,550 shares (1)
</TABLE>
<TABLE>
<S> <C>
Use of Proceeds................................. To reduce indebtedness and for working
capital and other general corporate
purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol.......... BDOG
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- ------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
--------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 3,000 $ 11,413 $ 28,404 $ 51,541 $ 68,683 $ 24,351 $ 31,143
Gross profit....................... 1,211 5,467 15,547 29,970 38,963 13,734 17,935
Operating income (loss)............ (517) 253 808 1,989 2,717 (1,927) (1,940)
Net income (loss).................. (544) (54) 392 638 635 (1,540) (1,803)
Net income (loss) per common
share............................. $ (0.06) $ (0.01) $ 0.04 $ 0.07 $ 0.06 $ (0.15) $ (0.17)
Weighted average common and common
share equivalents outstanding..... 9,225 9,225 9,225 9,728 10,230 10,038 10,491
OPERATING DATA:
Number of stores:
Open at beginning of period...... 4 5 16 51 91 91 121
Stores added (net of closures)... 1 11 35 40 30 14 11
Open at end of period............ 5 16 51 91 121 105 132
Comparable store sales increase
(decrease)........................ N/A 31.8% (1.5)% 9.0% 3.2% (4.6)% 9.6%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED (2)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................................ $ 1,650 $ 12,779
Working capital............................................................. 10,730 29,268
Total assets................................................................ 32,976 44,105
Total indebtedness.......................................................... 22,323 --
Stockholders' equity........................................................ 4,339 37,791
</TABLE>
- ---------
(1) Based on the number of shares of Common Stock outstanding at June 30, 1997.
Excludes (i) 147,500 shares of Common Stock issuable upon the exercise of
options outstanding at June 30, 1997 at a weighted average exercise price of
$4.93 per share; (ii) 282,500 shares of Common Stock issuable upon the
exercise of options granted after June 30, 1997 at an exercise price of
$12.00 per share; (iii) 240,000 shares of Common Stock issuable upon the
exercise of warrants outstanding at June 30, 1997 at a weighted average
exercise price of $3.50 per share; and (iv) 717,500 shares of Common Stock
available for future grant under the Company's 1997 Performance Award Plan,
of which the Company intends to grant options for up to 50,000 shares to
certain employees and 30,000 shares to the initial three non-employee
directors at the initial public offering price on the effective date of this
offering. See "Management--Stock and Incentive Plans" and "Description of
Capital Stock."
(2) Adjusted to reflect the sale of the 2,800,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $13.00
per share and the application of the estimated net proceeds therefrom.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), including without
limitation, statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future. 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. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In evaluating the Company's business, prospective investors should
consider carefully the following factors in addition to the other information
set forth in this Prospectus.
CHANGES IN CONSUMER PREFERENCES
The Company believes its merchandise appeals to men, women and children of
all ages, particularly baby boomers and their kids, when they are in the "Big
Dog state of mind." In addition, the Company believes that its merchandise has a
special appeal to children because of its dog-related themes and to customers
who wear large sizes because of the positive image the brand brings to being a
"Big Dog." However, the consumer products industry in general, and the apparel
industry in particular, are subject to changing consumer demands and
preferences. While the Company believes that its products historically have not
been significantly affected by fashion trends, the Company's products are
subject to changing consumer preferences. The Company's long-term success will
depend significantly on its ability to continue to produce appealing and popular
graphics and products that anticipate, gauge and respond in a timely manner to
changing consumer demands and preferences. Failure to anticipate and respond to
changes in consumer preferences could lead to, among other things, lower sales,
excess inventories, diminished customer loyalty and lower margins, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, consumer preferences could shift away
from the Company's traditional graphic and logo-oriented merchandise, and any
such shift could have a material adverse effect on the Company's business,
financial condition and results of operations. Failure of the Company's new
products or graphics to gain sufficient market acceptance may not only have the
short-term effect of low sales levels for such products, but in the long-term
may also adversely affect the image and value of the BIG DOGS-Registered
Trademark- brand name and trademarks. See "Business--Merchandising" and
"Business--Competition."
ABILITY TO ACHIEVE FUTURE GROWTH
The Company's growth strategies include opening new stores, increasing sales
in existing stores, expanding other channels of distribution, pursuit of
international sales, and selective brand leveraging through, among other things,
licensing and media activities. The Company believes that its growth has been
attributable in part to the Company's ability to open and operate new stores
successfully. 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. The Company plans to open 30 net new stores during 1997, 13
of which were open as of July 31, 1997, bringing the total number of stores to
134 as of that date. The Company plans to open at least 30 stores in 1998. The
Company's recent and planned expansion includes the opening of stores in new
geographic markets. In addition, the Company's traditional emphasis has been on
opening stores in outlet malls, though the Company plans to expand the number of
its stores in other venues. 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. 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, the Company's comparable store sales results are affected by
a variety of factors, including, among
6
<PAGE>
others, prevailing retail market conditions, merchandising strategies, timing of
promotions, weather conditions, shifts in the timing of certain holidays, and
the Company's ability to efficiently source and distribute merchandise. The
Company's comparable store sales have fluctuated in the past and the Company
believes fluctuations may continue in the future. For example, in the last ten
quarters, the Company's comparable store sales results were (2.0)%, 14.6%,
16.5%, 3.3%, (6.2)%, (3.8)%, (2.8)%, 16.1%, 16.4% and 5.5%, respectively. Past
comparable store sales results may not be indicative of future results, and
there can be no assurance that the Company's comparable store sales results will
increase or not decrease in the future. 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, 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ABILITY TO MANAGE FUTURE GROWTH
The Company's growth has resulted in an increased demand on the Company's
managerial, operational and administrative resources. The Company has recently
invested significant resources in, among other things, its management
information systems and distribution center and has hired additional key
executives. However, in order to manage currently anticipated levels of future
demand, the Company may be required to, among other things, expand its
distribution facilities, establish relationships with new manufacturers to
produce its products, and continue to expand and improve its financial,
management and operating systems. There can be no assurance that the Company
will be able to manage future growth effectively and a failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is significantly dependent on the personal
efforts, performance and abilities of its key management, particularly Andrew
Feshbach, the Company's President and Chief Executive Officer, and Douglas
Nilsen, Executive Vice President--Merchandising. The loss of the services of Mr.
Feshbach, Mr. Nilsen or the other key members of the management team, could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company does not have an employment contract with Mr.
Feshbach, Mr. Nilsen or any other members of the management team. The Company
currently maintains $5 million of keyman insurance on the life of Mr. Feshbach
payable to the Company, which may be significantly reduced following this
offering. The inability to attract and retain qualified personnel in the future
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
CONFLICTS OF INTEREST; CERTAIN RELATED TRANSACTIONS
Fred Kayne, the Chairman and majority stockholder of the Company, is the
Chairman, President and beneficial owner of 60% of the capital stock of Fortune
Fashions Inc. ("Fortune Fashions"). In addition, Mr. Feshbach, the President,
Chief Executive Officer and a director of the Company, is a director and
beneficial owner of approximately 10% of the capital stock of Fortune Fashions.
See "Management" and "Principal and Selling Stockholders." Fortune Fashions
manufactured approximately 23% of the Company's products (by dollar value of
purchases) in 1996, including over 80% of the Company's graphic T-shirts.
Fortune Fashions also produces products for other customers who compete with the
Company. While the Company believes its transactions with Fortune Fashions have
generally been on terms at least as favorable to the Company as could be
obtained from unaffiliated parties, such transactions could pose conflicts of
interest, especially if any disputes were to arise between the parties. See
"Certain Relationships and Related Transactions." The Audit Committee of the
Board of Directors of the Company will monitor transactions with Fortune
Fashions and any other related parties to ensure that the Company's overall
transactions with each such party are on terms no less favorable to the Company
than could be obtained from unaffiliated parties.
7
<PAGE>
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
Company currently relies on over 100 vendors to produce its products, with one
affiliated vendor, Fortune Fashions, producing approximately 23% of the
Company's products (by dollar value of purchases) in 1996, including over 80% of
the Company's graphic T-shirts. See "--Conflicts of Interest; Certain Related
Transactions," and "Certain Relationships and Related Transactions." The Company
has no supply contracts with its manufacturing sources and it competes with
other companies for production facilities. In the event Fortune Fashions or any
of the Company's other manufacturers are unable or unwilling to ship the
Company's products in a timely manner or continue to manufacture the Company's
products, the Company would have to rely on other current manufacturing sources
or identify and qualify new manufacturers. In such event, there can be no
assurance that the Company would be able to qualify such manufacturers for
existing or new products in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
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. Although the Company believes it maintains good controls with
respect to product specifications and quality, there can be no assurance that
its manufacturers will continue to produce products that are consistent with the
Company's standards. The Company has occasionally received, and may from
time-to-time in the future receive, shipments of product from manufacturers that
fail to conform to the Company's quality control standards. In such event,
unless the Company is able to obtain replacement products in a timely manner,
the Company risks the loss of revenue resulting from the sale of such products
and related increased administrative and shipping costs. The failure of any key
manufacturer to supply products that conform to the Company's standards could
materially and adversely affect the Company's results of operations and its
reputation in the marketplace. Although the Company believes that it has good
relationships with its principal manufacturing sources, the Company's future
success is substantially dependent upon its ability to maintain such
relationships. Should the Company experience significant unanticipated demand,
the Company will be required to significantly expand its access to
manufacturing, both from current and new manufacturing sources. There can be no
assurance that such additional manufacturing capacity will be available on terms
as favorable as those obtained from current sources. See "Business--Sourcing."
In 1996, approximately 61% of the Company's products (by dollar value of
purchases) was manufactured outside of the United States, primarily in Asia. 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. A significant portion of the Company's foreign-supplied products is
produced by contractors with manufacturing facilities in China. There have been
a number of recent trade disputes between China and the United States during
which the United States has threatened to impose punitive tariffs and duties on
products imported from China and to withdraw China's "most favored nation" trade
status. The loss of most favored nation status for China, changes in current
tariff or duty structures or the adoption by the United States of other trade
policies or sanctions adverse to China could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's internal and vendor operating guidelines promote ethical and
legal business practices. 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. The
violation of labor or other laws by any manufacturer used by the Company or the
divergence of an independent manufacturer's labor practices from those generally
accepted as ethical in the United States, could have a material adverse effect
on the Company's business, financial condition and results of operations.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
Because a significant portion of the Company's products are designed for
warm weather use and a significant number of the Company's retail stores are
located in tourist areas and outdoor malls, the Company's
8
<PAGE>
business is seasonal by nature. In addition, the Company believes that because
it locates its stores largely in tourist areas and outdoor malls, which have
different visitation patterns than urban and suburban retail centers, the
Company's seasonality is somewhat different than that of many apparel retailers.
The third and fourth quarters (consisting of the summer vacation,
back-to-school, and Christmas seasons) have historically accounted for the
largest percentage of the Company's annual net sales and profits. In 1996,
excluding sales generated by stores not open for all of 1996, substantially all
the Company's operating income and approximately 28% and 33% 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 has experienced, and may continue to experience, year-over-year
fluctuations in its net sales and net income (loss) on a quarterly basis, which
is typical of many apparel and retail businesses. The Company's quarterly
results of operations may fluctuate significantly 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, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Because of these quarterly and seasonal
fluctuations, the results of operations for any quarter are not necessarily
indicative of the results that may be achieved for a full year or for any future
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality and Quarterly Results."
DEPENDENCE ON TRADEMARKS AND COPYRIGHTS
The Company uses a number of trademarks, certain of which the Company has
registered with the United States Patent and Trademark Office and in certain
foreign countries. The Company believes that its registered and common law
trademarks have significant value and that its trademarks, copyrights and other
intellectual property are instrumental in its ability to create and sustain
demand for and market its products. Accordingly, the Company devotes substantial
resources to the establishment and protection of its trademarks on a worldwide
basis. The Company believes that there are no currently pending material
challenges to the use or registration of any of the Company's trademarks. There
can be no assurance, however, that the Company's current or future use of its
primary trademarks in new, non-apparel product categories or the use of more
newly developed trademarks in all categories do not or will not violate the
proprietary rights of others, that they would be upheld if challenged or that
the Company would, in such an event, not be prevented from using its trademarks
in those categories. See "Business--Trademarks."
From time to time the Company discovers products in the marketplace that
infringe upon trademark rights held by the Company. Although the Company
aggressively pursues such infringements, it may determine that it is not cost
effective to pursue smaller infringements in all instances. In addition,
enforcement actions against infringements may be expensive and there can be no
assurance that the Company's claims will prevail. Continued sales of infringing
products could adversely impact the BIG DOGS-Registered Trademark- brand and
image, result in loss of sales and a shift of consumer preferences away from the
Company and generally have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Trademarks."
ECONOMIC CONDITIONS AND CONSUMER SPENDING
The Company's apparel and related products are sold in an industry that has
been, and will likely continue to be, subject to substantial cyclical
variations. By its focus on basic apparel, the Company believes that it is less
affected by such cycles than many fashion apparel companies. However, purchases
of the Company's apparel and related products are nevertheless discretionary for
consumers and, as a result, may be affected by adverse trends in the national
economy or one or more regional economies. The success of the Company's
operations therefore depends upon a number of factors relating to discretionary
consumer spending, including economic conditions affecting disposable consumer
income, such as employment, business conditions, future economic prospects,
interest rates and taxation. In addition, substantially all of the Company's
stores are located in tourist
9
<PAGE>
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 economic downturns, adverse weather, political
conditions, 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. Any of the factors set forth above could adversely affect
the Company's business, financial condition and results of operations.
SUBSTANTIAL 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. There can be no
assurance that the Company will be able to compete successfully with its
competitors in the future. Any failure to successfully compete could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
CONTROL BY EXISTING STOCKHOLDERS AND ANTITAKEOVER PROVISIONS
Upon completion of this offering, Fred Kayne will beneficially own
approximately 49.2% of the Company's outstanding Common Stock (45.9% if the
Underwriters' over-allotment option is exercised in full) and the Company's
current directors and executive officers, including Mr. Kayne, will collectively
beneficially own approximately 63.5% of the Common Stock (59.7% if the
Underwriters' over-allotment option is exercised in full). As a result, Mr.
Kayne, acting either individually or in concert with the Company's current
directors and executive officers, will be able to control the election of
directors and, in general, to determine the outcome of any matter submitted to a
vote of the Company's stockholders for approval. 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.
The Company has authorized 3,000,000 shares of Preferred Stock having such
designations, rights and preferences as may be determined from time to time by
the Board of Directors, without any vote or further action by the stockholders
of the Company. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of Preferred Stock
that may be issued in the future. In addition, under the Company's 1997
Performance Award Plan (the "1997 Plan"), upon a "Change in Control Event" (as
defined in the 1997 Plan) each option and stock appreciation right issued under
the 1997 Plan will become immediately exercisable; restricted stock issued under
the 1997 Plan will immediately vest free of restrictions; and the number of
shares, cash or other property covered by each "performance share award" issued
under the 1997 Plan will be issued to the grantee of such award, unless the
Board of Directors (or the
10
<PAGE>
Committee thereof appointed to administer the 1997 Plan) determines to the
contrary. The issuance of Preferred Stock and the grant or acceleration of
rights under the 1997 Plan could make it more difficult for a third party to
acquire the Company. The Company has no present plan to issue any of its
Preferred Stock. See "Management", "Principal and Selling Stockholders," and
"Description of Capital Stock."
NO PRIOR MARKET AND VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop
subsequent to this offering or, if developed, that it will be sustained. The
initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company, the Selling Stockholders and the
Representatives and may not be indicative of the market price for the Common
Stock after the offering. See "Underwriting." Upon commencement of this
offering, the Common Stock will be quoted on The Nasdaq National Market, which
has experienced, and is likely to continue to experience, significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the market prices for shares of common stock issued in an initial public
offering are often volatile, as are shares of companies in the apparel business,
and the price of the shares offered hereby may in particular fluctuate based
upon a number of factors, including, without limitation, quarter-to-quarter
variations in the Company's results of operations, fluctuations in the Company's
comparable store sales, announcements by other apparel, accessory and gift item
manufacturers and retailers, the condition of the overall economy and those
other factors listed in this "Risk Factors" section. Due to the foregoing and
other factors in this "Risk Factors" section, it is possible that the Company's
actual results of operations may be below investors' and research analysts'
expectations, and, as a result, research analysts may change their earnings per
share projections, both of which could have a material adverse effect on the
market price of the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,960,550 shares of
Common Stock outstanding (based upon shares of Common Stock outstanding as of
July 31, 1997 and assuming no exercise of outstanding options or warrants). Of
these shares, the 2,800,000 shares sold by the Company and the 700,000 sold by
the Selling Stockholders in this offering, plus any additional shares sold upon
exercise of the Underwriters' over-allotment option, will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Affiliates"), may generally only
be sold in compliance with the limitations of Rule 144 described below. The
remaining 9,460,550 shares of Common Stock (the "Restricted Shares") held by
existing stockholders upon completion of this offering will be "restricted"
securities within the meaning of Rule 144 and may not be sold except in
compliance with the registration requirements of the Securities Act or an
applicable exemption under the Securities Act, including an exemption pursuant
to Rule 144 or Rule 701.
All stockholders of the Company (who in the aggregate hold 10,160,550 shares
of Common Stock), all warrantholders of the Company (who in the aggregate have
the right to purchase 240,000 shares of Common Stock), and all holders of
options exercisable within 180 days after this offering (who in the aggregate
have the right to purchase 73,333 shares of Common Stock within that period),
have agreed, pursuant to Lock-Up Agreements, that they will not, without the
prior written consent of Robertson, Stephens & Company, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock beneficially owned by
them (except for shares sold in this offering) for a period of 180 days after
the date of this Prospectus. Robertson, Stephens & Company may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the Lock-Up Agreements. See "Underwriting."
Upon the expiration of the 180-day lock-up period, approximately 8,533,883
Restricted Shares will become eligible for sale in the public market pursuant to
Rule 144 or Rule 701.
11
<PAGE>
As of August 1, 1997, there were warrants outstanding for the purchase of
240,000 shares of Common Stock. The underlying shares may be resold under Rule
144 upon the expiration of either the one or two-year holding periods, which
commence upon exercise of the warrant.
As of August 1, 1997, options to purchase 92,500 shares were outstanding
under the 1997 Stock Option Plan and options to purchase 55,000 shares were
outstanding under non-plan option agreements with the Company's Chairman. Upon
expiration of the 180-day lock-up period and subject to vesting and
exercisability restrictions, all shares issued pursuant to the exercise of these
stock options may be resold pursuant to Rule 701. 73,333 of such options will be
exercisable at the end of the 180-day lock-up period. In addition, options to
purchase 282,500 shares of Common Stock were granted under the 1997 Performance
Award Plan (the "1997 Plan") as of August 1, 1997 and 717,500 shares of Common
Stock are available for future grant under the 1997 Plan. The Company intends to
file a registration statement on Form S-8 under the Securities Act 90 days after
the date of this Prospectus to register the shares issuable under the 1997 Plan.
Such registration statement is expected to become effective upon filing. After
the effective date of such registration statement, shares of Common Stock issued
under the 1997 Plan will be immediately eligible for sale in the public market,
subject to vesting and exercisability restrictions. No options granted under the
1997 Plan will become exercisable prior to August 1, 1998. See "Shares Eligible
for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
The amount by which the initial public offering price per share of Common
Stock exceeds the adjusted net tangible book value per share of the Common Stock
after this offering constitutes dilution to investors in this offering.
Investors purchasing shares of Common Stock in this offering will incur
immediate and substantial dilution of $10.10 per share at an assumed initial
public offering price of $13.00. See "Dilution." The Company has never paid
dividends on its outstanding shares of capital stock and does not anticipate
paying any dividends in the foreseeable future. See "Dividend Policy."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $13.00 per share, after deducting estimated underwriting discounts and
commissions and offering expenses, are estimated to be approximately $33.5
million. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders.
The net proceeds will be used as follows: (i) approximately $8.0 million to
repay certain promissory notes due through November 4, 2003 that bear interest
at 10% per annum, (ii) to repay outstanding advances under the Company's
revolving credit facility (which were in the principal amount of $4.9 million as
of July 31, 1997) that mature May 2, 1998 and that bear interest at the prime
rate of its bank lender (8.5% per annum as of July 31, 1997), (iii)
approximately $6.4 million to repay certain promissory notes issued to the
Company's Chairman and majority stockholder due June 30, 1999 and November 4,
2003 that bear interest at 10% per annum, and (iv) approximately $1.0 million to
repay capital lease obligations. The Company intends to use the remaining net
proceeds of this offering for working capital and other general corporate
purposes. Pending such uses, the net proceeds will be invested in short-term,
investment-grade, interest-bearing securities. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in the
foreseeable future. Any future declaration and payment of dividends will be
subject to the discretion of the Company's Board of Directors, will be subject
to applicable law and will depend upon the Company's results of operations,
earnings, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors. In addition, the Company's
revolving credit facility prohibits the payment of dividends by the Company.
13
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, on an actual basis and as adjusted to give effect
to the sale of the 2,800,000 shares of Common Stock offered by the Company
hereby based upon an assumed initial public offering price of $13.00 per share
and the application of the estimated net proceeds therefrom. This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
--------- ---------------
(in thousands, except
share and per share
amounts)
<S> <C> <C>
Total short-term debt................................................................. $ 7,409 $ --
--------- -------
--------- -------
Obligations under capital leases, net of current portion.............................. $ 514 $ --
Subordinated debt..................................................................... 14,400 --
--------- -------
Total long-term debt.............................................................. 14,914 --
--------- -------
Stockholders' equity:
Preferred stock, $.01 par value per share; 3,000,000 shares authorized; no shares
issued or outstanding actual or as adjusted.......................................
Common stock, $.01 par value per share; 30,000,000 shares authorized; 10,160,550
issued and outstanding, actual; 12,960,550 issued and outstanding, as adjusted
(1)............................................................................... 102 130
Additional paid-in capital.......................................................... 5,705 39,129
Retained earnings (deficit)......................................................... (736) (736)
Notes receivable on common stock.................................................... (732) (732)
--------- -------
Total stockholders' equity........................................................ 4,339 37,791
--------- -------
Total capitalization............................................................ $ 19,253 $ 37,791
--------- -------
--------- -------
</TABLE>
- -------
(1) Based on the number of shares of Common Stock outstanding at June 30, 1997.
Excludes (i) 147,500 shares of Common Stock issuable upon the exercise of
options outstanding at June 30, 1997 at a weighted average exercise price of
$4.93 per share; (ii) 282,500 shares of Common Stock issuable upon the
exercise of options granted after June 30, 1997 at an exercise price of
$12.00 per share; (iii) 240,000 shares of Common Stock issuable upon the
exercise of warrants outstanding at June 30, 1997 at a weighted average
exercise price of $3.50 per share; and (iv) 717,500 shares of Common Stock
available for future grant under the 1997 Plan, of which the Company intends
to grant options for up to 50,000 shares to certain employees and 30,000
shares to the initial three non-employee directors at the initial public
offering price on the effective date of this offering. See
"Management--Stock and Incentive Plans" and "Description of Capital Stock."
(2) Adjusted to reflect the sale of 2,800,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $13.00 per
share and the application of the estimated net proceeds therefrom.
14
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $4.1 million, or $0.41 per share of Common Stock. Net tangible
book value per share is equal to the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of 2,800,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $13.00 per
share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company, the adjusted net
tangible book value of the Company as of June 30, 1997 would have been $37.6
million, or $2.90 per share. This represents an immediate increase in net
tangible book value of $2.49 per share to existing stockholders and an immediate
dilution in net tangible book value of $10.10 per share to investors purchasing
shares of Common Stock in this offering. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................ $ 13.00
Net tangible book value at June 30, 1997................... $ 0.41
Increase attributable to new investors..................... 2.49
---------
Adjusted net tangible book value after the offering.......... 2.90
---------
Dilution to new investors.................................... $ 10.10
---------
---------
</TABLE>
The following table summarizes, as of June 30, 1997, the difference between
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by the new investors at the assumed initial public offering price of $13.00
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 10,160,550 78.4% $ 5,807,000 13.8% $ 0.57
New investors............... 2,800,000 21.6 36,400,000 86.2 $ 13.00
---------- ----- ----------- -----
Total................... 12,960,550 100.0% $42,207,000 100.0%
---------- ----- ----------- -----
---------- ----- ----------- -----
</TABLE>
- -------
(1) Sales by the Selling Stockholders in this offering will cause the number of
shares held by existing stockholders to be reduced to 9,460,550 shares, or
73.0% (8,935,550 shares, or 68.9%, if the Underwriters' over-allotment
option is exercised in full), of the total number of shares of Common Stock
to be outstanding after this offering, and will increase the number of
shares held by new investors to 3,500,000 shares, or 27.0% (4,025,000
shares, or 31.1%, if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock to be outstanding after
this offering. See "Principal and Selling Stockholders."
The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options or warrants. As of June 30, 1997,
387,500 shares of Common Stock were issuable upon exercise of outstanding stock
options and warrants at a weighted average exercise price of $4.04 per share, of
which options and warrants to purchase 295,000 shares were then exercisable at a
weighted average exercise price of $3.43 per share. On August 1, 1997, the
Company granted options for the purchase of 282,500 shares of Common Stock to
over 60 employees under the 1997 Plan at an exercise price of $12.00 per share.
To the extent the outstanding options are exercised and any shares of Common
Stock reserved for issuance are issued with exercise prices below the initial
public offering price, there will be further dilution to new investors. See
"Management--Stock and Incentive Plans" and "Shares Eligible for Future Sale."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The consolidated statement of operations data set forth below for each of
the years ended December 31, 1994, 1995 and 1996 and the consolidated balance
sheet data as of December 31, 1995 and 1996 have been derived from the Company's
consolidated financial statements, which statements have been audited by
Deloitte & Touche LLP, independent auditors, and are included elsewhere in this
Prospectus. The consolidated statement of operations data presented for the
seven months ended December 31, 1992 and the year ended December 31, 1993 and
the consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from the Company's audited consolidated financial statements, which are
not included in this Prospectus. The data presented as of June 30, 1996 and 1997
and for the six months ended June 30, 1996 and 1997 are derived from unaudited
consolidated financial statements included elsewhere in this Prospectus. In the
opinion of management, all unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for such periods. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year or for any future period, particularly due to the
seasonality of the Company's business. 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
Prospectus.
<TABLE>
<CAPTION>
SIX
MONTHS
SEVEN MONTHS ENDED
ENDED DECEMBER YEAR ENDED DECEMBER 31, JUNE 30,
31, ------------------------------------------ ---------
1992 (1) 1993 1994 1995 1996 1996
--------------- --------- --------- --------- --------- ---------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 3,000 $ 11,413 $ 28,404 $ 51,541 $ 68,683 $ 24,351
Cost of goods sold................................... 1,789 5,946 12,857 21,571 29,720 10,617
------ --------- --------- --------- --------- ---------
Gross profit......................................... 1,211 5,467 15,547 29,970 38,963 13,734
------ --------- --------- --------- --------- ---------
Selling, marketing and distribution expenses......... 1,166 3,873 12,993 24,814 32,309 13,685
General and administrative expenses.................. 562 1,341 1,746 3,167 3,937 1,976
------ --------- --------- --------- --------- ---------
Total operating expenses............................. 1,728 5,214 14,739 27,981 36,246 15,661
------ --------- --------- --------- --------- ---------
Operating income (loss).............................. (517) 253 808 1,989 2,717 (1,927)
Interest expense..................................... 26 306 397 1,189 1,647 667
------ --------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for income
taxes.............................................. (543) (53) 411 800 1,070 (2,594)
Provision (benefit) for income taxes................. 1 1 19 162 435 (1,054)
------ --------- --------- --------- --------- ---------
Net income (loss).................................... $ (544) $ (54) $ 392 $ 638 $ 635 $ (1,540)
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Net income (loss) per common share................... $ (0.06) $ (0.01) $ 0.04 $ 0.07 $ 0.06 $ (0.15)
Weighted average common and common share equivalents
outstanding........................................ 9,225 9,225 9,225 9,728 10,230 10,038
OPERATING DATA:
Number of stores: (2)
Open at beginning of period........................ 4 5 16 51 91 91
Stores added (net of closures)..................... 1 11 35 40 30 14
------ --------- --------- --------- --------- ---------
Open at end of period.............................. 5 16 51 91 121 105
Comparable store sales increase (decrease) (3)....... N/A 31.8% (1.5)% 9.0% 3.2% (4.6)%
<CAPTION>
1997
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 31,143
Cost of goods sold................................... 13,208
-----------
Gross profit......................................... 17,935
-----------
Selling, marketing and distribution expenses......... 17,764
General and administrative expenses.................. 2,111
-----------
Total operating expenses............................. 19,875
-----------
Operating income (loss).............................. (1,940)
Interest expense..................................... 967
-----------
Income (loss) before provision (benefit) for income
taxes.............................................. (2,907)
Provision (benefit) for income taxes................. (1,104)
-----------
Net income (loss).................................... $ (1,803)
-----------
-----------
Net income (loss) per common share................... $ (0.17)
Weighted average common and common share equivalents
outstanding........................................ 10,491
OPERATING DATA:
Number of stores: (2)
Open at beginning of period........................ 121
Stores added (net of closures)..................... 11
-----------
Open at end of period.............................. 132
Comparable store sales increase (decrease) (3)....... 9.6%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 1,141 $ 1,506 $ 3,072 $ 8,030 $ 13,742 $ 8,565 $ 10,730
Total assets.................................... 3,623 5,756 13,647 19,011 25,773 26,477 32,976
Total indebtedness (4).......................... 1,530 2,272 6,141 10,732 15,697 17,791 22,323
Stockholders' equity............................ 556 2,502 3,094 4,737 6,142 3,623 4,339
</TABLE>
- ---------
(1) The Company acquired the BIG DOGS-Registered Trademark- trademark and
related assets as of May 29, 1992 and the statement of operations reflects
results since that date. See "Business--General."
(2) Excludes two temporary stores open for a portion of 1995 and four temporary
stores open for a portion of 1996.
(3) Comparable store sales represent net sales of stores open at least one full
year. Stores are considered comparable beginning on the first day of the
first 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.
(4) Includes subordinated debt, obligations under the bank line of credit and
obligations under capital leases.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The statements contained in this Prospectus that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act, including without limitation statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
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 dramatic 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. The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained elsewhere in this
Prospectus. Certain minor differences in rounding and additions in the tables
and text of Management's Discussion and Analysis of Financial Condition and
Results of Operations result from basing the calculations on amounts as shown in
Selected Consolidated Financial and Operating Data.
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. 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 lines and rapid growth in
its retail stores. The Company's net sales have grown from $11.4 million in 1993
(the Company's first full year of operation) to $68.7 million in 1996, a
compound annual growth rate of 82%. The number of Company stores has grown from
5 in 1993 to 134 as of July 31, 1997, and over the last three years, the Company
recruited a team of key executives and invested in management information
systems and other infrastructure improvements that the Company believes have
been critical in achieving this growth and positioning it to manage its
anticipated future growth. The Company attained this dramatic growth during a
competitive retail environment and, despite substantial infrastructure
investments for growth, the Company achieved growing operating income in each
full year of operation.
As of July 31, 1997, the Company operated 133 stores in 39 states and one
store in England. The Company expects its primary growth in the next few years
to come from the opening of new stores. After opening 35 and 40 stores (net of
closures) in 1994 and 1995, respectively, beginning in 1996, the Company
moderated its planned annual store openings to 30 in order to implement a new
merchandising information system, integrate new executive management, develop
and validate its smaller store format, test-market additional venues in which to
open Big Dog stores and, beginning in March 1997, implement its store
retrofitting program. The Company plans to open 30 net new stores during 1997,
13 of which were open as of July 31, 1997 and at least 30 stores in 1998. In
1997, the Company began a store retrofitting program, under which it is
installing more flexible and higher capacity wall and floor fixtures, which are
designed to better display products and improve in-stock positions on the
selling floor. As of July 31, 1997, the Company has retrofitted 32 stores and
plans to retrofit approximately 20 additional stores in the remainder of 1997.
The Company believes that much of the corporate infrastructure to absorb and
manage its anticipated growth over the next few years is in place. During the
last three years, several key executives with substantial industry experience
were recruited and joined the Big Dogs team. The Company has also strengthened
its merchandising, product development and store operations staff and, in late
1995 and early 1996, implemented a more advanced management information system
to facilitate planning and execution of its merchandising strategies. The
Company expects to leverage certain of these infrastructure investments through
the opening of new stores, as well as by selling BIG DOGS-Registered Trademark-
products through other distribution channels.
17
<PAGE>
While the Company believes the primary source of future growth will be from
new store openings, it also expects to increase sales by (A) continued
comparable store sales increases as a result of, among other things, (i)
continued new product development across all product lines; (ii) further
penetration of existing products, themes and categories, particularly in its
recently introduced children's, Big and Tall and non-apparel lines; (iii) fuller
utilization of its merchandising information systems to capitalize on regional
and seasonal trends and build sales by category; (iv) the impact of recent
additions to the Company's merchandising and store operations staff, as well as
higher productivity associated with the maturation of its existing
merchandising, product development and store management staff, and (v) the
current retrofitting program for existing stores; (B) expansion of existing
channels of distribution through a new and more focused strategy of growth; (C)
pursuit of international sales through various channels; and (D) selective brand
leveraging through licensing and media activities.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................. 45.3 41.9 43.3 43.6 42.4
--------- --------- --------- --------- ---------
Gross profit........................................ 54.7 58.1 56.7 56.4 57.6
--------- --------- --------- --------- ---------
Selling, marketing and distribution expenses........ 45.7 48.1 47.0 56.2 57.0
General and administrative expenses................. 6.1 6.1 5.7 8.1 6.8
--------- --------- --------- --------- ---------
Total operating expenses............................ 51.9 54.3 52.8 64.3 63.8
--------- --------- --------- --------- ---------
Income (loss) from operations....................... 2.8% 3.9% 4.0% (7.9)% (6.2)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
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 $31.1 million in the first six months of 1997 from $24.4 million for the same
period in 1996, an increase of $6.8 million, or 27.9%. Of the $6.8 million
increase, $5.7 million was attributable to stores not yet qualifying as
comparable stores and $1.8 million came from the 9.6% comparable store sales
increase for the period. These increases were partially offset by a $0.7 million
decline in non-retail sales. Management believes comparable store sales
increased because of continued improvements in Company operations. These
improvements include (i) the addition and maturation of key executives in store
operations, merchandising and distribution and (ii) the better merchandising
associated with the Company's utilization of its management information system
as a result of the availability of detailed data on which to base planning and
allocation decisions. In particular, continued strong growth in the Company's
recently introduced categories of children's, Big and Tall and non-apparel
products contributed to the increase. The Company also benefited from easier
comparisons to sales in the first half of 1996.
GROSS PROFIT. Gross profit increased to $17.9 million in the first six
months of 1997 from $13.7 million for the same period in 1996, an increase of
$4.2 million, or 30.6%. As a percentage of net sales, gross profit increased to
57.6% in the first six months of 1997 from 56.4% in the same period in 1996.
This increase as a percentage of net sales was primarily attributable to better
purchasing 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.
18
<PAGE>
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 $17.8 million in the first six months of 1997
from $13.7 million for the same period in 1996, an increase of $4.1 million, or
29.8%. As a percentage of net sales, these expenses increased to 57.0% in the
first six months of 1997 from 56.2% in the same period in 1996, primarily as a
result of infrastructure investments.
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 $2.1
million in the first six months of 1997 from $2.0 million in the same period in
1996. As a percentage of net sales, these expenses decreased to 6.8% in the
first six months of 1997 from 8.1% in the comparable 1996 period, reflecting the
leverage of spreading them over a larger revenue base.
INTEREST EXPENSE. Interest expense increased to $1.0 million in the first
six months of 1997 from $0.7 million in the same period in 1996, an increase of
$0.3 million, primarily as a result of an increase in amounts due under
outstanding subordinated notes and increased borrowings under of the Company's
bank line of credit.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales increased to $68.7 million in 1996 from $51.5 million
in 1995, an increase of $17.1 million, or 33.3%. Of the $17.1 million increase,
$19.6 million was attributable to stores not yet qualifying as comparable stores
and $1.2 million was attributable to the 3.2% comparable store sales increase
for the period. These increases were partially offset by a decline of $3.7
million in non-retail sales as a result of the Company's streamlining of its
catalog and wholesale operations which it initiated with the objectives of
improving their profitability and positioning them for future growth. Comparable
store sales increased in the fall and Holiday periods, which management believes
was primarily a result of fundamental improvements in store operations. These
improvements include integration of newly recruited executive management in
merchandising, store operations and distribution, utilization of the new
computer system to improve merchandising decisions and product allocation and
improvements in warehouse operations. Comparable store sales also increased as a
result of the continued growth of the three relatively new product lines
(children's, Big and Tall and non-apparel products) and new promotional
techniques.
GROSS PROFIT. Gross profit increased to $39.0 million in 1996 from $30.0
million in 1995, an increase of $9.0 million, or 30.0%. However, as a percentage
of net sales, gross profit decreased to 56.7% in 1996 from 58.1% in 1995. This
decline in gross profit as a percentage of net sales is primarily attributable
to certain inefficiencies throughout the year related to the integration of the
new merchandising information system. In addition, the Company experienced lower
than expected retail gross profit margins in the fourth quarter of 1996 due to
product mix and out-of-stock issues in December related to better than expected
sell-throughs in October and November.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses increased to $32.3 million in 1996 from $24.8 million in
1995, an increase of $7.5 million, or 30.2%. As a percentage of net sales, these
expenses decreased to 47.0% in 1996 from 48.1% in 1995. This decrease in
operating expenses as a percentage of net sales was primarily attributable to
the Company's decision to streamline its catalog operations. This decrease was
offset in part by higher occupancy costs and payroll costs as a percentage of
net sales related primarily to the timing of new store openings.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.9 million in 1996 from $3.2 million in 1995, an increase of $0.8
million or 24.3%. As a percentage of net sales, these expenses decreased to 5.7%
in 1996 from 6.1% in 1995, reflecting the leverage of spreading these expenses
over a larger revenue base.
19
<PAGE>
INTEREST EXPENSE. Interest expense increased to $1.6 million in 1996 from
$1.2 million in 1995, an increase of $0.4 million, as a result of a $6.1 million
increase in the amount of subordinated notes outstanding during the year and
increased borrowings under the Company's revolving credit facility.
PROVISION FOR INCOME TAXES. The effective tax rate in 1996 was 40.7% as
compared to 20.3% in 1995. The lower effective tax rate in 1995 was primarily
attributable to the utilization of net operating loss carryforwards. As of
December 31, 1995, the Company had fully utilized its net operating loss
carryforwards.
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales increased to $51.5 million in 1995 from $28.4 million
in 1994, an increase of $23.1 million, or 81.5%. Of the $23.1 million increase,
$21.2 million was attributable to stores not yet qualifying as comparable
stores, $1.4 million was attributable to the 9.0% comparable store sales
increase for the period, and $0.5 million was attributable to increases in
non-retail sales. The increase in comparable store sales in 1995 was based on
strong sales in a few high-volume stores within a relatively small comparable
store base.
GROSS PROFIT. Gross profit increased to $30.0 million in 1995 from $15.5
million in 1994, an increase of $14.4 million, or 92.8%. As a percentage of net
sales, gross profit increased to 58.1% in 1995 from 54.7% in 1994. Factors
contributing to the higher gross profit as a percentage of net sales include the
continued shift of the Company's business away from wholesale to higher margin
retail and catalog sales.
SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and
distribution expenses increased to $24.8 million in 1995 from $13.0 million in
1994, an increase of $11.8 million, or 91.0%. As a percentage of net sales,
these expenses increased to 48.1% in 1995 from 45.7% in 1994. These expenses
increased primarily because of a reduction in the level of wholesale operations,
which have lower selling, marketing and distribution expenses than the Company's
other operations. In addition, catalog expenses increased as a percentage of net
sales to 9.5% in 1995 from 7.6% in 1994 due to higher paper and postage costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.2 million in 1995 from $1.7 million in 1994, an increase of $1.4
million or 81.4%. As a percentage of net sales, these expenses remained constant
at 6.1% in both periods.
INTEREST EXPENSE. Interest expense increased to $1.2 million in 1995 from
$0.4 million in 1994, an increase of $0.8 million, as a result of a $4.8 million
increase in the amount of subordinated notes outstanding during the year and
increased borrowings under the Company's revolving credit facility.
PROVISION FOR INCOME TAXES. The effective tax rate was 20.3% in 1995 as
compared to 4.6% in 1994. The tax rate for both periods was lower than the
statutory rate due primarily to the utilization of net operating loss
carryforwards.
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 1996, excluding sales generated by stores not open for all of 1996,
substantially all the Company's operating income and approximately 28% and 33%
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
20
<PAGE>
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.
The following table sets forth certain data for each of the Company's last
six fiscal quarters. The quarterly data set forth below were derived from
unaudited consolidated financial statements of the Company, which in the opinion
of management of the Company contain all adjustments (consisting only of normal
adjustments) necessary for a fair presentation of such data.
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------------- ------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- -----------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 9,131 $ 15,220 $ 19,652 $ 24,680 $ 12,265 $ 18,878
Gross profit.............................. 4,812 8,922 11,311 13,918 6,670 11,265
Selling, marketing and distribution
expenses................................ 6,091 7,594 8,631 9,993 8,454 9,310
General and administrative expenses....... 979 997 976 985 1,035 1,076
Total operating expenses.................. 7,070 8,591 9,607 10,978 9,489 10,386
Income (loss) from operations............. (2,258) 331 1,704 2,940 (2,819) 879
Net income (loss)......................... (1,522) (18) 755 1,420 (2,031) 228
Net income (loss) per common share........ $ (0.15) $ (0.00) $ 0.07 $ 0.14 $ (0.19) $ 0.02
Weighted average common and common
equivalent shares outstanding........... 9,971 10,123 10,252 10,491 10,491 10,491
AS A PERCENTAGE OF NET SALES:
Gross profit.............................. 52.7% 58.6% 57.6% 56.4% 54.4% 59.7%
Selling, marketing and distribution
expenses................................ 66.7 49.9 43.9 40.5 68.9 49.3
General and administrative expenses....... 10.7 6.6 5.0 4.0 8.4 5.7
Total operating expenses.................. 77.4 56.4 48.9 44.5 77.4 55.0
Income (loss) from operations............. (24.7) 2.2 8.7 11.9 (23.0) 4.7
Net income (loss)......................... (16.7) (0.1) 3.8 5.8 (16.6) 1.2
OPERATING DATA:
Comparable store sales increase
(decrease).............................. (6.2)% (3.8)% (2.8)% 16.1% 16.4% 5.5%
Stores open at end of period.............. 95 105 113 121 121 132
</TABLE>
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the last three years and the first six months of 1997, the Company's
primary uses of cash have been to finance store openings and purchase
merchandise inventories. The Company has satisfied its cash requirements
principally from the sale of debt and equity securities and a revolving line of
credit with its bank.
Cash used in operating activities was $2.2 million and $1.8 million in 1995
and 1996, respectively, and $6.8 and $3.4 million for the first six months of
1996 and 1997, respectively. Working capital was $10.7 million at June 30, 1997
compared to $8.6 million at June 30, 1996, an increase of $2.1 million.
Inventories at June 30, 1997 were $18.8 million compared to $17.1 million at
June 30, 1996, an increase of $1.6 million. The Company's average inventories
vary throughout the year and increase in advance of its peak selling periods
during the summer, back-to-school and Christmas seasons. The Company maintains
substantially all of its inventories in finished goods rather than fabrics or
work-in-process. In addition, the Company believes that it has generally
negotiated favorable terms with its overseas vendors, who in many instances
allow the Company to pay for goods when received rather than post letters of
credit in advance.
Cash used in investment activities in 1995 and 1996 was $2.4 million and
$3.5 million, respectively, and for the six months ended June 30, 1996 and 1997
was $1.2 and $2.2 million, respectively. Cash flows used in investing activities
relate primarily to new store openings, and in 1995 and 1996, also the
acquisition and implementation of a new computer system.
Cash provided by financing activities in 1995 and 1996 was $4.5 million and
$5.2 million, respectively, and $7.3 million and $6.6 million for the first six
months of 1996 and 1997, respectively. In April 1995, the Company received net
proceeds of $5.0 million from the sale of 10% subordinated notes and Common
Stock. In February 1996, the Company received net proceeds of $2.5 million from
the sale of 10% subordinated notes and Common Stock. In November 1996, the
Company received net proceeds of $4.2 million from the sale of 10% subordinated
notes and warrants to purchase Common Stock. In addition, from time to time, the
Company's majority stockholder and Chairman advanced the Company funds in
exchange for subordinated notes, of which approximately $6.4 million in
principal amount was outstanding at June 30, 1997, all of which will be repaid
with the proceeds of this offering.
The Company has a revolving credit facility with a bank that expires in May
1998. The revolving credit facility provides for a $10.5 million revolving line
of credit that can be used for cash advances and letters of credit. Interest on
advances under the revolving credit facility is payable monthly at the bank's
prime rate (8.5% at June 30, 1997). As of June 30, 1997, the Company had $6.9
million in advances and $1.5 million of letters of credit outstanding. This
facility is collateralized by substantially all the assets of the Company and
subjects it to various restrictive covenants, including maintenance of minimum
working capital and tangible net worth level, limitations on indebtedness and a
prohibition on the payment of dividends. Amounts outstanding under this credit
facility will be repaid with the proceeds of this offering.
The Company plans to open approximately 30 net new stores in 1997, 13 of
which were open as of July 31, 1997, and at least 30 stores in 1998. The
Company's average cost to open a store in 1996, including leasehold improvements
and furniture and fixtures, was approximately $50,000 (net of tenant improvement
allowances). The average per store initial inventory (partially financed by
trade payables) for the new 1996 stores was approximately $78,000 and
pre-opening expenses averaged approximately $13,000 per store. The average total
cost to build new stores will vary in the future, depending on various factors,
including local construction expenses, changes in store format and design and
tenant improvement allowances. In addition to new store openings, the Company
had retrofitted 32 stores through July 31, 1997 at an average cost of $11,000.
The Company plans to retrofit approximately 20 stores in the second half of
1997. Capital expenditures in 1997 are estimated to be approximately $5.0
million for 1997, of which approximately $2.6 million had been expended as of
July 31, 1997, and approximately $5.0 million in 1998.
The Company believes that cash provided by operations together with funds
available under its revolving credit facility and the net proceeds from this
offering will be sufficient to fund its operations and planned
22
<PAGE>
expansion at least through the end of 1998. The Company may be required to seek
additional sources of funds for accelerated growth after that point, and there
can be no assurance that such funds will be available on satisfactory terms.
Failure to obtain such financing could delay or prevent the Company's planned
growth, which could adversely affect the Company's business, financial condition
and results of operations.
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.
23
<PAGE>
BUSINESS
[LOGO]
The following discussion contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Prospectus that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act, including without limitation statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. 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 dramatic 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.
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. 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 Company's net sales have
grown from $11.4 million in 1993 (the Company's first full year of operation) to
$68.7 million in 1996, a compound annual growth rate of 82%. The number of the
Company's stores has grown from 5 in 1993 to 134 as of July 31, 1997, and over
the last three years, the Company recruited a team of key executives and
invested in management information systems and other infrastructure improvements
that the Company believes have been critical in achieving this growth and
positioning it to manage its anticipated future growth. The Company attained
this dramatic growth in a highly competitive retail environment and, despite its
substantial infrastructure investments for growth, the Company has achieved
increases in operating income in each full year of operation.
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
24
<PAGE>
Company has successfully introduced and expanded its LITTLE BIG DOGS-TM- line of
infants' and children's apparel and its BIG BIG DOGS-TM- line of Big and Tall
apparel. The Company has also successfully 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.
Big Dogs' traditional emphasis has been on outlet malls because those malls are
often located in tourist areas and therefore attract significant numbers of Big
Dogs' targeted customers. More recently, the Company has increased its focus on
opening full-price, stand-alone stores in locations frequented by tourist and
leisure shoppers. The Company plans to open 30 net new stores during 1997, 13 of
which were open as of July 31, 1997, and at least 30 stores in 1998. In addition
to its retail stores, Big Dogs markets its products through other channels,
including its catalog and better wholesale accounts.
INDUSTRY OVERVIEW
APPAREL. 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. According to the
United States Department of Commerce, Bureau of the Census, in 1996 there were
approximately 86 million men and women ages 30 to 50, and 39 million children
ages 0 to 9 in the United States, together representing nearly half of the total
266 million U.S. population. The Company believes that, particularly within this
baby boomer market, there is an increased demand for family-oriented products,
services and activities as families seek to spend time together, including
taking vacations together and shopping together for entertainment. The Company
also believes there has been a trend toward greater "casualization" in dress and
in lifestyles generally that has led to an increased demand for more casual
apparel.
A majority of the Company's products is comprised of apparel in the adult,
children and Big and Tall categories. According to the NPD Group, a national
statistical research agency, $161 billion was spent on apparel at retail in
1996, of which women's apparel comprised approximately $85 billion, men's
approximately $49 billion, boys' approximately $12 billion, girls' approximately
$9 billion, and infants' and toddlers' approximately $6 billion. Furthermore,
the Company believes the demand for large-size apparel will continue to increase
as the population, particularly baby boomers, continues to age and increase in
weight. The Company believes that as a result of having developed a large and
loyal customer base and its recent investments in infrastructure, it is well-
positioned to take advantage of market and distribution opportunities.
OUTLET MALLS. Increases in sales per square foot of apparel at outlet malls
have recently outpaced sales per square foot at traditional malls. Although the
growth in sales per square foot for the full year in 1996 was higher in
traditional malls than in outlet malls, beginning in the fourth quarter of 1996,
apparel sales per square foot in outlet malls increased 4.8% over the same
period in the prior year as compared to 2.2% in traditional malls. This trend
continued in the first quarter of 1997, with apparel sales per square foot in
outlet malls increasing 9.7%, compared to 1.1% in traditional malls. The Company
believes that this increase in sales per square foot in outlet malls is due in
part to the increased presence of upscale brands in outlet malls, the continued
consumer trend toward value shopping and increased development of large, upscale
outlet malls which have become "destination" shopping locations. In addition,
the Company believes that outlet mall customers have a greater representation of
the Company's target customers, particularly baby boomers and tourist and
leisure-oriented customers, than traditional malls. Due to these purchasing
trends and customer demographics at outlet malls, outlet malls are an important
part of the Company's location strategy, as are other locations attracting
similar customer traffic.
25
<PAGE>
NON-APPAREL. In addition to apparel, the Company offers an assortment of
toys, pet products, stationery and other paper goods, gift items and other
products all bearing Big Dog graphics. The Company believes that the markets in
these product categories are very substantial and present significant
opportunities for growth.
BUSINESS STRATEGY
[LOGO]
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 and growth
strategies:
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 its (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 Dog 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 has 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 large-size customers.
MAINTAIN CONTROLLED DISTRIBUTION. Big Dogs' sells its products primarily
through its own stores and, to a lesser extent, through its catalog. 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
26
<PAGE>
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).
[LOGO]
[LOGO]
GROWTH STRATEGIES
The Company seeks to expand its business in a controlled manner that
enhances the BIG DOGS-Registered Trademark- brand. The Company believes much of
the corporate infrastructure required to absorb and manage its anticipated
growth over the next few years is in place, including (i) recent additions of
key executives with substantial industry experience to enhance the depth and
breadth of its management team, and (ii) the implementation of an advanced
management information system. In addition, the Company believes that it has
established relationships with product vendors capable of meeting its
anticipated growth requirements for the foreseeable future. Big Dogs' primary
growth strategies are:
CONTINUE STORE EXPANSION. Big Dogs' primary growth strategy is the
continued expansion of its retail stores. The Company plans to open 30 net new
stores during 1997, 13 of which were open as of July 31, 1997, and at least 30
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 and, to a
lesser extent, regional malls and metropolitan locations.
INCREASE SALES IN EXISTING STORES. The Company expects to increase sales in
its existing stores through, among other things, (i) continued new product
development across all categories; (ii) further penetration of existing
products, themes and categories, particularly in its recently introduced
children's, Big and Tall and non-apparel categories; (iii) fuller utilization of
merchandising information systems to capitalize on regional and seasonal trends
and build sales by category; (iv) the impact of recent additions to the
Company's merchandising and store operations staff, as well as higher
productivity associated with the maturation of its existing merchandising,
product development and store management teams; and (v) the current retrofitting
program for existing stores, which includes the introduction of more flexible
and higher capacity wall and floor fixtures that better display product and
improve in-stock positions on the selling floor. The Company plans to retrofit
approximately 52 stores during 1997, 32 of which were completed as of July 31,
1997, and over 40 stores in 1998.
EXPAND NON-RETAIL CHANNELS OF DISTRIBUTION. Big Dogs continues to focus on
the expansion of its catalog and traditional wholesale channels, as well as
other existing and potential channels of distribution, including corporate
sales, premium programs, internet sales and strategic relationships with
non-apparel wholesale
27
<PAGE>
accounts. Although after streamlining its catalog and wholesale operations in
late 1996 the revenues of those operations declined in the first half of 1997,
the Company believes that these and other channels of distribution present
significant opportunities for profitable expansion.
PURSUE INTERNATIONAL OPPORTUNITIES. Big Dogs products are not currently
sold outside the United States, with the exception of one store in England and
incidental other sales. The Company plans to expand the worldwide sale of its
products through a variety of means, which may vary by country, and may include
retail stores, exporting to resellers, licensing and catalog sales. The Company
believes that there is a significant potential international market for Big Dog
products due to their unique brand image, strong American association and
tourist orientation.
EXPLORE SELECTIVE 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 its brand image, which may include selective product licensing, co-branding
and entertainment and media activities.
MERCHANDISING
[LOGO]
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 recently introduced collections for infants and children and the Big and
Tall 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.
Prices for most of the Company's products range from $1 to $100, with the
large majority of products selling for between $5 and $30. 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, 1996:
<TABLE>
<CAPTION>
% OF TOTAL RETAIL
STORE
NET SALES
---------------------
<S> <C>
Adult Apparel and Accessories................................ 66.4%
Infants' and Children's Apparel and Accessories.............. 16.4
Big and Tall Apparel......................................... 8.8
Adult and Children's Non-Apparel Products (1)................ 8.4
------
Total.................................................... 100.0%
------
------
</TABLE>
- -------
(1) Approximately one-half of non-apparel product sales are of products that are
primarily child-related, such as toys.
ADULT APPAREL AND ACCESSORIES. Big Dogs has 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 and sport 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
28
<PAGE>
from season-to-season and year-to-year. Although the Company introduces new
apparel and other products throughout the year, certain classic, popular items
and graphics have been in the Big Dogs line with very little change for over ten
years.
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, belts, 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. See "--Managing the Creative Process."
[LOGO]
INFANTS' AND CHILDREN'S APPAREL AND ACCESSORIES. Based on the
natural appeal of dog themes to children and the sell-throughs of certain test
items, in the fall of 1995 the Company successfully introduced a line of
infants' and children's apparel and accessories under its LITTLE BIG
DOGS-Registered Trademark- brand. In 1996, sales of the Company's LITTLE BIG
DOGS-Registered Trademark- line grew to approximately 16.4% of its total retail
store net sales and the Company believes that the children's market presents a
significant opportunity. In addition to the appeal of dogs to children, the
Company believes that the black and white image of its dog character makes it
easily recognizable and appealing to very young children. Moreover, the Company
believes the recurring need to purchase new clothes for children increases the
potential for growth in this category. The Company believes these factors
provide an opportunity to increase comparable store sales.
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, such as
Nordstrom. The Company believes there is a void in the wholesale market for
moderately priced, branded children's apparel, and therefore is exploring the
expansion of the wholesale distribution of this line on a limited basis. Based
on the initial success of LITTLE BIG DOGS-Registered Trademark- apparel, and to
enable customers to assemble complete outfits for their children, the Company
has recently expanded its children's category to include accessories such as
caps, socks and sunglasses. In addition, the Company has expanded its assortment
of non-apparel items for children such as plush dogs, stickers, sportballs and
other toys (see "Adult and Children's Non-Apparel Products" below). The Company
believes that customers' ability to assemble complete outfits and the relatively
low price of the children's items provide the Company with an opportunity to
increase add-on sales.
BIG AND TALL APPAREL. The Company believes that the BIG
DOGS-Registered Trademark- image and the positive emphasis the brand gives to
being a "Big Dog" has a unique appeal to consumers who wear large sizes. In the
spring of 1996, the Company significantly expanded its BIG BIG
DOGS-Registered Trademark- category targeting Big and Tall customers. In 1996,
sales of the Company's BIG BIG DOGS-Registered Trademark- line grew to
approximately 8.8% of its total retail store net sales and the Company believes
that the Big and Tall market presents a significant opportunity for expansion.
The Company believes that this market is generally underserved and presents an
opportunity to develop strong customer loyalty due to the relatively limited
availability of large-size casual sportswear. The Company believes these factors
provide an opportunity to increase comparable store sales.
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. Products in this line are offered from size 1X
to 5X and MT to XLT. The Company sells its BIG BIG DOGS-TM- line primarily
through its retail stores, catalog and also through selected wholesale accounts,
such as Casual Male.
29
<PAGE>
ADULT'S AND CHILDREN'S 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. The Company believes that the relatively
low price of non-apparel items and their particular appeal to children provide
the opportunity to increase comparable store sales through add-on purchases.
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.
MANAGING THE CREATIVE PROCESS
The Company's product development begins with the creation of distinctive,
often topical, graphics and slogans that embody the Big Dogs image of a fun and
active lifestyle. Ideas are generated and developed by the Company's Graphics
Committee that includes the Company's President and the heads of the art,
merchandising and marketing departments. In creating new graphic themes and
ideas, this Committee closely monitors current consumer interests in various
activities such as recreational and spectator sports, hit movies and other
hobbies and leisure pursuits. Big Dogs also closely monitors sales of the
Company's existing graphics and slogans to identify trends and generate new
ideas. Once a concept is conceived, the Company's ten-person art department
develops a preliminary graphic, which is then further reviewed and refined.
Approved designs are initially applied to screen-printed T-shirts. Due to
the ready availability of blank T-shirts, the Company is able to quickly and
inexpensively respond to customer preferences and the current popularity of
particular sports, movies and other events, in some instances getting product
into its stores in as little as two weeks. In addition, since the graphics are
applied to T-shirts in the last stage of production, the Company is able to test
the popularity of new graphics before making large inventory commitments. Big
Dogs' merchandising staff closely monitors the sales of new T-shirt graphics and
evaluates the opportunity to rapidly expand their production and also profitably
leverage them onto other products. Big Dogs believes that this product
development strategy enables it to create distinctive products while limiting
its inventory risk. The Company's focus on basics and its ability to leverage
its graphics across multiple product categories has 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. In
addition to its graphics-oriented clothing and other products, the Company also
develops apparel products that simply feature the BIG DOGS name and logo,
particularly where the Company has developed strong brand identity for quality
and value and fun and functional products, such as for its Classic Shorts-TM-.
The Company's merchandising staff identifies popular, established apparel and
other products that it believes will make effective "Big Dog" products.
30
<PAGE>
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 1996, the Company's retail stores contributed approximately 88% of total
net sales. As of July 31, 1997, the Company operated 133 stores in 39 states and
one store in England. 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.
Following is a map of the Company's store locations as of July 31, 1997:
[LOGO]
[MAP]
31
<PAGE>
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. As of July 31, 1997, 119 of the Company's stores were in
outlet malls, with the balance in locations with large tourist traffic such as
the Mall of America (Minnesota), South Hampton (New York), and Laguna Beach and
Carmel (California).
The Company's outlet mall stores average approximately 3,000 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, 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 plans to open 30 net new
stores during 1997, 13 of which were open as of July 31, 1997, and at least 30
stores in 1998. The Company's average cost to open a store in 1996, including
leasehold improvements and furniture and fixtures, was approximately $50,000
(net of tenant improvement allowances). The average per store initial inventory
(partially financed by trade payables) for the new 1996 stores was approximately
$78,000 and pre-opening expenses averaged approximately $13,000 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. 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 and,
to a lesser extent, regional malls and metropolitan locations.
Big Dogs store operations are managed by a Senior Vice President--Retail,
three regional managers and 20 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, wholesale and, to a
lesser extent, corporate sales, premium programs, international and internet
sales, contributed approximately 12% of the Company's total net sales in 1996.
In the second half of 1996, the Company streamlined its catalog and wholesale
operations to focus the scope of their operations and improve their
profitability. Although in the first half of 1997 revenues for these operations
have declined, management believes that these and other channels of distribution
present significant opportunities for profitable expansion.
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 600,000
active customer names. The Company's catalog sales in 1996 were approximately
$4.2 million, or approximately 6% of total net sales, and it believes that
significant opportunities exist to expand the sales and profitability of this
business.
WHOLESALE. Although the Company does not actively solicit wholesale
accounts through a sales force, it does participate in trade shows and
distributes its products to better department stores and specialty shops such
32
<PAGE>
as Nordstrom and Mercantile Stores. During 1996, the Company sold to over 600
wholesale accounts throughout the United States. In addition, the Company is
exploring distribution through a range of non-traditional apparel retailers such
as theme parks and pet product retailers. The Company's wholesale sales in 1996
were approximately $2.9 million, or approximately 4% of total net sales.
INTERNATIONAL. Big Dogs products are not currently sold outside of the
United States, with the exception of one store in England and incidental other
sales. The Company plans to expand the sale of its products worldwide through
efficient, profitable and brand-enhancing means, which may vary by country and
may include retail stores, exporting to resellers, licensing and catalog sales.
The Company believes that there is a significant potential international market
for Big Dog products due to their unique brand image, strong American
association and tourist orientation.
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.
Substantially all of its graphic T-shirts are purchased from a commonly
controlled company, Fortune Fashions, based near Los Angeles, California.
Fortune Fashions purchases blank T-shirts and other products and provides screen
printing and embroidery services to the Company for these products. In 1996, the
Company purchased over 80% of its graphic T-shirts and certain other products
from Fortune Fashions, constituting 23% of the Company's total 1996 product
purchases (in dollar volume of purchases). The Company believes that the
services provided by Fortune Fashions are readily available elsewhere and that
it could replace Fortune Fashions as a vendor without significant disruption to
the Company's operations. See "Certain Relationships and Related Transactions."
The majority of Big Dogs' other products are manufactured overseas. Big Dogs
sources product from over 100 unaffiliated vendors, including over 35 foreign
vendors in 18 countries. The Company believes that utilizing a diverse group of
vendors reduces the Company's exposure to production risks and delays relating
to any one vendor or country. In order to enhance its sourcing flexibility, the
Company uses purchasing agents rather than operating 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
33
<PAGE>
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. During 1996,
less than 1.5% of the Company's products were returned by its customers due to
defects.
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.
Big Dogs maintains 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. All merchandise is delivered by vendors to these
facilities, 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, providing a steady flow
of merchandise.
TRADEMARKS
[LOGO]
The Company utilizes a variety of trademarks which it owns, including the
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-. The Company has 30 registered
trademarks and 15 pending registration applications in a wide variety of product
categories for these and other trademarks in the United States. In addition, the
Company has 21 registered trademarks and 14 pending registration applications in
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. The Company vigorously protects its trademarks
against infringement, including through the use of cease and desist letters,
administrative proceedings and lawsuits.
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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. There can be no
assurance that the Company will be able to compete successfully with its
competitors in the future. Any failure to successfully compete could have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
At July 31, 1997, the Company had approximately 460 full-time and 530
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.
PROPERTIES
The Company's corporate headquarters are located in Santa Barbara,
California in two leased buildings comprising approximately 23,000 square feet
under leases that expire in December 1997 and July 1999, respectively. The
Company has options to extend these leases for six years and five years,
respectively. The Company's distribution facilities are located in Ventura and
Commerce, California in two leased buildings comprising approximately 88,000
square feet under leases that expire in April 1999 and August 1998,
respectively. The Company has options to extend these leases for five years and
four years, respectively. The Company believes that its currently occupied space
adequately meets it needs in the near term and it does not expect difficulties
in obtaining additional space on reasonable terms as the need arises.
The Company 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.
LITIGATION
The Company is not involved in any legal proceedings other than certain
actions arising in the ordinary course of its business. While the outcome of
such proceedings and threatened proceedings cannot be predicted with certainty,
in the opinion of management, the ultimate resolution of these matters
individually or in the aggregate will not have a material adverse effect on the
Company's business, financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and certain other key employees of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Fred Kayne........................ 59 Chairman of the Board
Andrew D. Feshbach................ 36 President, Chief Executive Officer and Director
Douglas N. Nilsen................. 49 Executive Vice President--Merchandising
Anthony J. Wall................... 41 Executive Vice President--Business Affairs, General Counsel,
Secretary and Director
Andrew W. Wadhams................. 36 Senior Vice President--Retail
Jeffrey Cowen..................... 44 Senior Vice President--Production
Jonathan S. Howe.................. 44 Chief Financial Officer and Treasurer
Roberta J. Morris................. 37 Senior Vice President--Finance, Assistant Treasurer and
Assistant Secretary
Steven C. Good (1)................ 55 Director
Robert H. Schnell (1)............. 57 Director
David J. Walsh (1)................ 37 Director
</TABLE>
- -------
(1) Messrs. Good, Schnell and Walsh have agreed to become directors immediately
after the completion of this offering.
FRED KAYNE co-founded the Company in June 1992 and has served as Chairman of
the Company since that time. Mr. Kayne co-founded Fortune Fashions, a custom
manufacturer of embellished apparel for the tourist industry, in 1991 and has
served as Chairman and President since that time. Mr. Kayne also founded Fortune
Financial, a private merchant banking firm, in 1986 and has served as its
Chairman and President since that time. Mr. Kayne founded Cottonsmith
Incorporated, an international fabric and apparel sourcing company, in 1993 and
has served as its Chairman and President since that time. From 1985 to 1986, Mr.
Kayne served as a managing director and a member of the Board of Directors of
Bear Stearns & Co. Inc., and from 1978 until 1985 was a partner of its
predecessor partnership, Bear Stearns & Co. Mr. Kayne co-founded First Los
Angeles Bank in 1973 and served as a director of the bank until 1984. Mr. Kayne
serves as a director of The Right Start, Inc. ("The Right Start"), an infant
products retailer and catalog company. Mr. Kayne has a Bachelor of Science
degree in engineering from the Massachusetts Institute of Technology.
ANDREW D. FESHBACH co-founded the Company in June 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 in 1991 and has served as a
director since that time, and, from 1991 until June 1992, served as its Chief
Financial Officer. From 1988 until 1990, Mr. Feshbach was a partner in Maiden
Lane Associates, Ltd., a merchant banking subsidiary of AmBase Corporation
specializing in leveraged buy-outs ("Maiden Lane"). From 1984 until 1988, Mr.
Feshbach served as Vice President of Corporate Finance with Bear Stearns & Co.
Inc. From 1990 until the present, he has served as a Vice President of Fortune
Financial. Mr. Feshbach serves as a director of The Right Start. 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
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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 served as General Counsel and
Secretary of the Company since September 1994 and as a director of the Company
since November 1995. From September 1994 until March 1996, he served as Senior
Vice President of the Company. 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 Vice President
and 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. 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.
JEFFREY COWEN joined the Company in November 1994 as Senior Vice
President--Production. From May 1994 to September 1994, Mr. Cowen served as Vice
President--Sales and Production for Global Vision, an apparel sourcing company.
From May 1992 to May 1994, he served as Vice President of Production and Global
Sourcing for B.U.M. Equipment, an apparel company. From 1991 to 1992, he served
as general merchandising manager for Stage II, a large group of retail stores in
South Africa. From 1988 to 1991, he was the owner/operator of a clothing company
in South Africa. From 1985 to 1988, he served as Director of Merchandising for
Gotcha Sportswear.
JONATHAN S. HOWE joined the Company in May 1997 as Chief Financial Officer
and Treasurer. From May 1997 to the present, Mr. Howe has served as Chief
Financial Officer of Fortune Fashions. From March 1996 to the present, Mr. Howe
has served as Senior Vice President of Fortune Financial. From August 1994 until
March 1996, Mr. Howe was a Vice President of SSI Investment Management Inc., an
investment advisory firm. From June 1992 to August 1994, Mr. Howe was an
independent financial consultant. Mr. Howe has an M.B.A. from the University of
Southern California.
ROBERTA J. MORRIS joined the Company in August 1993 and has served as Senior
Vice President--Finance since January 1995. She served 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.
STEVEN C. GOOD has agreed to become a director immediately after the
completion of this offering. Mr. Good founded Good, Swartz & Berns, an
accountancy corporation, in 1993 and is the senior partner of that firm. From
1976 to 1993, Mr. Good was a partner in the firm of Block, Good and Gagerman, an
accounting firm that he co-founded in 1976. Mr. Good co-founded CU Bancorp in
1982 and served as its Chairman from 1982 through 1989. Mr. Good serves as a
director of Opto Sensors, Incorporated and of Arden Realty Company.
ROBERT H. SCHNELL has agreed to become a director immediately after the
completion of this offering. From October 1986 until its sale in August 1994,
Mr. Schnell served as Chairman of the Board of Cosmar Corporation, a designer
and, through an affiliated company, manufacturer of artificial nail and nail
care products. Since September 1994, Mr. Schnell has been a private investor.
From 1978 to 1985, Mr. Schnell served as Group Vice President and General
Manager of the Health and Beauty Aids Division of Charles of the Ritz, a
division of Squibb, which manufactured and marketed fragrances and other
consumer products. From 1970 to 1977, Mr. Schnell served as Vice President of
Sales for Prince Matchiabelli, a division of Chesebrough Ponds.
DAVID J. WALSH has agreed to become a director immediately after the
completion of this offering. Since January 1994, Mr. Walsh has served as Senior
Vice President-Strategic Planning of Transaction Network Services, Inc., a
provider of data communications services. From 1991 through January 1994, Mr.
Walsh served
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<PAGE>
as President of Fortune Telecommunications, Inc., a provider of validation and
fraud control computer services to the telecommunications industry. From 1988 to
1991, Mr. Walsh served as a Managing Director of Maiden Lane. From 1984 to 1988,
Mr. Walsh was a Principal in the Mergers and Acquisitions Group of Ernst &
Young, a national accounting and consulting firm. Mr. Walsh has an M.B.A. from
Harvard University.
No executive officer or director of the Company has a family relationship
with any other executive officer or director.
BOARD OF DIRECTORS
The Company's Board of Directors is currently comprised of Messrs. Kayne,
Feshbach and Wall. Immediately after completion of this offering, Mr. Wall
intends to resign from the board and the Company intends to appoint not less
than three directors, including Messrs. Good, Schnell and Walsh, who are neither
officers nor employees of the Company. The Company's Certificate of
Incorporation divides the Company's Board of Directors into three classes, with
the members of each class serving for terms of office expiring at the third
annual meeting of stockholders following their election and until successors are
duly qualified. The initial terms of the Class I, Class II and Class III
directors expire at the annual meetings of stockholders in 1998, 1999 and 2000,
respectively.
Upon the appointment of the additional directors, the Board of Directors
will establish an Audit Committee and a Compensation Committee, comprised of
non-employee directors. The Audit Committee will be responsible for recommending
to the Board of Directors the engagement of the independent auditors, the scope
and results of the audits, the internal accounting controls of the Company,
audit practices and the professional services furnished by the independent
auditors. The Compensation Committee will be responsible for reviewing and
approving all compensation arrangements for officers of the Company, including
the administration of the Company stock option and other employee benefit plans.
DIRECTOR COMPENSATION
Directors of the Company currently receive no compensation for serving on
the Board of Directors, except that in March 1996 the Company granted Mr. Kayne
a stock option for the purchase of 35,000 shares of Common Stock exercisable at
$2.59 per share and in August 1996 granted him a stock option for the purchase
of 20,000 shares of Common Stock exercisable at $4.00 per share for serving as
Chairman. Following the completion of this offering, Mr. Kayne will be paid
$120,000 per year for serving as Chairman, and the other non-employee directors
who join the Board will receive a fee of $10,000 per year for their services.
All non-employee directors will be reimbursed for expenses incurred in
connection with their attendance at board or committee meetings. In addition,
each non-employee director joining the Board of Directors after this offering,
other than Mr. Kayne, will receive stock options under the Company's 1997 Plan.
See "--Stock and Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1996. Mr. Kayne and
Mr. Feshbach, the Company's Chairman and Chief Executive Officer, respectively,
determined executive compensation during 1996. Mr. Feshbach also serves as a
director and Executive Vice President of Fortune Fashions and Mr. Kayne also
serves as Chairman and President of Fortune Fashions. See "Certain Relationships
and Related Transactions."
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation, earned by the Company's
Chief Executive Officer and each of the Company's three other most highly
compensated executive officers or employees whose salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 1996. The persons named in the
table are sometimes referred to herein as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS
--------------------------------------------- -----------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK ALL OTHER
POSITION SALARY ($) BONUS ($) COMPENSATION ($)(2) (#) COMPENSATION ($)
- ------------------------- ----------- ----------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Andrew D. Feshbach ...... $ 200,000 -- $ 26,011 -- --
President and Chief
Executive Officer
Douglas N. Nilsen ....... $ 147,000 $ 10,000 -- 20,000 --
Executive Vice
President
Jeffrey Cowen ........... $ 150,000 $ 4,000 -- -- --
Senior Vice President
Anthony J. Wall ......... $ 104,000 -- -- 20,000 --
Executive Vice
President, General
Counsel and Secretary
</TABLE>
- -------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company, and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) Other annual compensation for Mr. Feshbach includes a car allowance in the
amount of $21,955 for the fiscal year ended December 31, 1996.
STOCK AND INCENTIVE PLANS
1996 STOCK INCENTIVE PLAN. The 1996 Stock Incentive Plan (the "1996 Plan")
was adopted by the Board of Directors and approved by the stockholders on June
1, 1996. In July 1996, the Company sold 347,500 shares of restricted Common
Stock (the "Restricted Stock") to 18 executives, officers, senior managers and
consultants (the "Participants"). Participants paid for 95% of the purchase
price by issuing a promissory note bearing interest at 7% per annum to the
Company. One-third of the Restricted Stock was vested upon the date of sale and
the remaining two-thirds vests in two equal annual installments on the first and
second anniversary of the date of sale. Non-vested shares may not be sold or
otherwise transferred. Prior to this offering, vested shares of Restricted Stock
may only be sold or otherwise transferred with the consent of the Board. Upon
the completion of this offering, vested shares become freely transferable,
subject to restriction under (i) applicable securities laws, (ii) an escrow
agreement which provides that even after the offering no vested shares may be
transferred without first repaying the interest and principal due under the
promissory note the stockholder issued to finance the purchase, and (iii) the
Lock-Up Agreements with the Underwriters in this offering. See "Shares Eligible
for Future Sale."
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<PAGE>
The Company has the right to repurchase the Restricted Stock (the "Purchase
Option") upon the termination of employment, whether voluntary or involuntary,
with or without cause. All of the Restricted Stock is subject to the Purchase
Option until the completion of this offering. After completion of this offering,
the Purchase Option expires as to vested shares.
Whether Restricted Stock has become vested also determines the repurchase
price that must be paid for the Restricted Stock if the Purchase Option is
exercised. If the Company exercises the Purchase Option upon termination of a
Participant's employment, the Participant's unvested shares may be purchased at
his or her original purchase price. Vested shares subject to the Purchase Option
must be purchased at their then fair market value as determined in the
discretion of the Board of Directors, which determination is binding on the
stockholder.
No further grants will be made under the 1996 Plan but any unvested
Restricted Stock will continue to be governed by its terms after this offering.
1997 STOCK OPTION PLAN. The 1997 Stock Option Plan (the "Old Plan") was
adopted by the Board of Directors and approved by the stockholders on January
31, 1997. The Old Plan provides for the grant of options that are characterized
as "nonqualified" for federal income tax purposes.
The Board of Directors has granted options for the purchase of 92,500 shares
of Common Stock to eight officers, key employees and other eligible persons
under the Old Plan. The exercise price of such options is either $5.00 or $7.50
per share (representing the fair market value of the Common Stock as of the date
of grant). Such options become exercisable in equal annual installments over a
period of three years and expire ten years from the date of grant.
No further grants will be made under the Old Plan, but it will continue to
govern the outstanding options previously granted thereunder.
1997 PERFORMANCE AWARD PLAN. The 1997 Performance Award Plan (the "1997
Plan") was adopted by the Board of Directors and approved by the stockholders on
August 1, 1997, to attract, reward and retain directors, officers, other key
employees and certain other eligible persons (collectively, "Eligible Persons")
who may be granted awards from time to time by the Company's Board of Directors
or a committee appointed by the Board of Directors (the "Compensation
Committee") or, for non-employee directors, under a formula provided in the 1997
Plan. The maximum number of shares reserved for issuance is 1,000,000, subject
to adjustment for certain changes in the Company's capital structure and other
extraordinary events. Shares subject to awards that are not paid for or
exercised before they expire or are terminated are available for other grants
under the 1997 Plan.
Awards under the 1997 Plan may be in the form of nonqualified stock options,
incentive stock options, stock appreciation rights ("SAR's"), limited SAR's
restricted stock, performance shares, stock bonuses, or cash bonuses based on
performance. Awards may be granted singly or in combination with other awards.
Any cash bonuses under the 1997 Plan will depend upon the extent to which
performance goals set by the Board of Directors or the Compensation Committee
are met during the performance period. Awards under the 1997 Plan generally will
be nontransferable by the holder of the award (a "Holder") (other than by will
or the laws of descent and distribution) and rights thereunder generally will be
exercisable, during the Holder's lifetime, only by the Holder, subject to such
exceptions as may be authorized by the Compensation Committee. No incentive
stock option may be granted at a price that is less than the fair market value
of the Common Stock (less than 110% of fair market value of the Common Stock on
the date of grant for certain participants) on the date of grant. Nonqualified
stock options and other awards may be granted at prices below the fair market
value of the Common Stock on the date of grant, though the Company currently has
no intention to do so.
ADMINISTRATION. The 1997 Plan will initially be administered by the Board
of Directors. After the completion of this offering, the Board of Directors
intends to appoint the Compensation Committee to administer the 1997 Plan. The
Compensation Committee will have broad authority to (i) designate recipients of
discretionary awards, (ii) determine or modify the terms and provisions of
awards, including the price, vesting provisions, terms of exercise and
expiration dates, (iii) approve the form of award agreements, and (iv) construe
and
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<PAGE>
interpret the 1997 Plan. The Compensation Committee will have the discretion to
accelerate and extend the exercisability or term and establish the events of
termination or reversion of outstanding awards.
CHANGE IN CONTROL. Upon a Change in Control Event, each option and SAR will
become immediately exercisable; restricted stock will immediately vest free of
restrictions; and the number of shares, cash or other property covered by each
performance share award will be issued to the Holder, unless the Compensation
Committee determines to the contrary. A "Change in Control Event" is defined
generally to include (i) certain changes in a majority of the membership of the
Board of Directors over a period of two years or less, (ii) the acquisition of
more than 50% of the outstanding voting securities of the Company by any person
other than Fred Kayne, the Company's principal stockholder, or one of his
affiliates, successors, heirs, relatives or certain donees, or (iii) stockholder
approval of a transfer of substantially all of the Company's assets, the
dissolution or liquidation of the Company, or a merger, consolidation or
reorganization (other than with an affiliate) whereby stockholders immediately
prior to such event own less than 50% of the outstanding voting securities of
the surviving entity after such event.
PLAN AMENDMENT; TERMINATION AND TERM. The Company's Board of Directors has
the authority to amend, suspend or discontinue the 1997 Plan at any time, but no
such action will affect any outstanding award in any manner materially adverse
to a participant without the consent of the participant. The 1997 Plan may be
amended by the Board of Directors without stockholder approval unless such
approval is required by applicable law.
The 1997 Plan will remain in existence as to all outstanding awards until
such awards are exercised or terminated. The maximum term of options, SAR's and
other rights to acquire Common Stock under the 1997 Plan is ten years after the
initial date of award, subject to provisions for further deferred payment in
certain circumstances. No award can be made after July 31, 2007.
AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS. Under the 1997 Plan, each
director who is not an officer or employee, other than Mr. Kayne (each a
"Non-Employee Director"), will be granted a nonqualified stock option to
purchase 10,000 shares of Common Stock upon becoming a Non-Employee Director at
an exercise price equal to the market price of the Common Stock at the close of
trading on that date. In addition, on the day of the annual stockholders meeting
in each calendar year beginning in 1998 and continuing for each subsequent year
during the term of the 1997 Plan, each then-continuing Non-Employee Director
will be granted a nonqualified stock option to purchase 5,000 shares of Common
Stock at an exercise price equal to the market price of the Common Stock at the
close of trading on that date. No Non-Employee Director may receive options to
purchase more than 10,000 shares of Common Stock under the 1997 Plan in any one
year. All Non-Employee Director stock options will have a 10-year term and will
become exercisable in equal annual installments over a five-year period
commencing on the first anniversary of the grant date. If a Non-Employee
Director's services are terminated for any reason other than the Non-Employee
Director's death, disability or retirement, any stock options held by such
Non-Employee Director that are exercisable will remain exercisable for six
months after such termination of service or until the expiration of the option
term, whichever occurs first. If the Non-Employee Director dies, becomes
disabled or retires, stock options held by such Non-Employee Director will, as
of the date of such death, disability or retirement, become fully exercisable
for all of the shares of Common Stock at the time subject to the option and will
remain exercisable for two years after the date of such termination of services.
Upon a Change in Control Event, each automatic option grant to a Non-Employee
Director will become immediately exercisable for all of the shares at the time
subject to that option and remain exercisable to the extent provided above,
subject to the adjustment and termination provisions of the 1997 Plan. Any
outstanding automatic option grant that is not exercised prior to a Change in
Control Event in which the Company is not to survive will terminate, unless such
option is assumed or replaced by the surviving corporation.
GRANT OF OPTIONS. On August 1, 1997, the Board of Directors of the Company
granted options under the 1997 Plan for the purchase of 282,500 shares of Common
Stock to certain Eligible Persons, at an exercise price of $12.00 per share.
Such options become exercisable in equal annual installments over a period of
five years and expire seven years from the date of grant.
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<PAGE>
PAYMENT FOR SHARES. The exercise price of options and other awards may be
paid in cash or (subject to certain restrictions) shares of Common Stock. The
Company may finance the exercise or purchase and (subject to any applicable
legal limits) offset shares to cover the exercise or purchase price and
withholding taxes.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company currently does not have any employment contracts with its Chief
Executive Officer or any other executive officers. Under the 1997 Plan, upon a
"Change in Control Event" (as defined in the 1997 Plan) each option and stock
appreciation right issued under the 1997 Plan will become immediately
exercisable; restricted stock issued under the 1997 Plan will immediately vest
free of restrictions; and the number of shares, cash or other property covered
by each "performance share award" issued under the 1997 Plan will be issued to
the grantee of such award, unless the Board of Directors (or the Committee
thereof appointed to administer the 1997 Plan) determines to the contrary.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fred Kayne, the Company's majority stockholder and Chairman of its Board of
Directors, owns 60% of the outstanding stock of Fortune Fashions. Andrew
Feshbach, the President, Chief Executive Officer and a director of the Company,
owns approximately 10% of the outstanding stock of Fortune Fashions. Fortune
Fashions is a custom manufacturer of embellished apparel for the tourist
industry. Fortune Fashions manufactured approximately 23% of the Company's
products (by dollar value of purchases) in 1996, including over 80% of the
Company's graphic T-shirts. Fortune Fashions sold approximately $8.0 million and
$4.1 million of goods, primarily graphic T-shirts, to Big Dogs during 1996 and
the first six months of 1997, respectively. The Company believes that the
overall terms of the purchases from Fortune Fashions are comparable to what
could have been obtained from an unaffiliated third party. The Company intends
to continue purchasing graphic T-shirts from Fortune Fashions in the near
future, but is exploring the economic feasibility of building or purchasing its
own screen-printing facilities or entering into other arrangements. In addition,
certain directors and executive officers of the Company are also directors
and/or executive officers of Fortune Fashions: Mr. Kayne is Chairman and
President of Fortune Fashions; Mr. Feshbach is a director of Fortune Fashions;
Jonathan Howe, Chief Financial Officer and Treasurer of Big Dogs, is also Chief
Financial Officer of Fortune Fashions; and Anthony Wall, Executive Vice
President, General Counsel, Secretary and a director of Big Dogs, is also a Vice
President and General Counsel of Fortune Fashions. See "Management." None of
these officers, other than Mr. Kayne, is significantly involved in the
day-to-day operations or management of Fortune Fashions.
In September 1996, the Company refinanced certain outstanding notes to Mr.
Kayne by issuing a promissory note in the amount of $4,380,000 due June 30, 1998
and borrowed an additional $2,000,000 from Mr. Kayne pursuant to a second
promissory note due September 30, 1998. In addition, on October 15, 1996, the
Company borrowed an additional $2,000,000 from Mr. Kayne pursuant to a
promissory note due October 15, 1998. Such promissory notes bear interest at 10%
per annum. The aggregate unpaid principal balance of such promissory notes as of
June 30, 1997 was $6,380,000, all of which will be repaid with the proceeds of
this offering. Mr. Kayne has also guaranteed 20% of the Company's obligations
under its revolving credit facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
In November 1996, Mr. Kayne purchased 10 B Units from the Company for
$212,000 per Unit, for an aggregate purchase price of $2,120,000. Each B Unit is
comprised of a $200,000 promissory note due November 2003 bearing interest at
10% per annum and a warrant for the purchase of 12,000 shares of the Company's
Common Stock for $5.00 per share (which pursuant to the terms of the warrants,
was automatically reduced to $4.00 as of June 30, 1997). In November 1996, Mr.
Kayne also purchased one-half of an A Unit for $106,000. Each full A Unit is
comprised of a $200,000 promissory note due November 2003 bearing interest at
10% per annum and a warrant for the purchase of 12,000 shares of Common Stock
for $4.00 per share (which, pursuant to the terms of the warrants, was
automatically reduced to $3.00 as of June 30, 1997). The remaining 9 1/2 A Units
were sold to independent investors. The purchase price paid by Mr. Kayne for the
B Units was the same as that paid by the independent investors for the A Units,
though the exercise price of the warrants associated with the B Units was one
dollar higher. All of the notes associated with the A and B Units will be repaid
with the proceeds of the offering.
Mr. Kayne is the President, Chairman of the Board and majority stockholder
of Cottonsmith Incorporated, an international apparel and fabric sourcing
company ("Cottonsmith"). During 1996 and the first six months of 1997,
Cottonsmith sold approximately $64,000 and $107,000 of goods, respectively, to
Big Dogs. Big Dogs has no plans to do further business with Cottonsmith. The
Company believes that the terms negotiated with Cottonsmith for such purchases
were comparable to those that could have been obtained from an unaffiliated
third party.
Mr. Kayne is also the sole stockholder, Chairman of the Board and President
of Fortune Financial, a private merchant banking firm. Big Dogs is party to a
one-year, renewable consulting agreement with Fortune Financial, pursuant to
which Fortune Financial provides business and financial consulting services to
the Company. During 1996, Fortune Financial was paid $160,000 under such
agreement, and currently is being paid $10,000 per month. It is expected that
upon the completion of this offering this consulting agreement will be
terminated
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and that Fortune Financial will not provide significant services to Big Dogs
thereafter. Messrs. Feshbach, Wall and Howe serve as unpaid officers of Fortune
Financial.
As of January 1, 1997, the Company, Mr. Kayne and Mr. Feshbach entered into
a Buy-Sell Agreement providing that, in the event of Mr. Feshbach's death, his
estate would have the right to sell his shares of Common Stock to the Company,
which agreement will expire upon the completion of this offering.
In connection with the purchase of Common Stock from the Company under its
1996 Plan, the Company accepted promissory notes with a ten-year term bearing
interest at a rate of seven percent (7%) per annum as partial payment from
participants in the 1996 Plan. Promissory notes evidencing 1996 Plan participant
indebtedness exceeding $60,000 were executed in favor of the Company by Jonathan
Howe, Chief Financial Officer, and Andrew Wadhams, Senior Vice
President--Retail. Mr. Howe executed a note on July 29, 1996 evidencing a loan
in the principal amount of $135,328 and secured by the pledge of 55,000 shares
of Common Stock. The maximum amount of indebtedness, including accrued interest,
outstanding under the loan during 1996 was $139,376. Mr. Wadhams executed a note
on July 29, 1996 evidencing a loan in the principal amount of $123,025 and
secured by the pledge of 50,000 shares of Common Stock. The maximum amount of
indebtedness, including accrued interest, outstanding under the loan during 1996
was $126,706.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1997 and as adjusted to
reflect the sale of the shares offered hereby by (i) each person who is known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director and Named Executive Officer of the Company, (iii) each
Selling Stockholder and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated below, to the knowledge of the Company,
all persons listed below have sole voting and investment power with respect to
their shares of Common Stock, except to the extent authority is shared by
spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER OFFERING
OFFERING (1) SHARES TO BE (1)(2)
---------------------- SOLD IN ----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERING (2) NUMBER PERCENT
- ------------------------------------------------ --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Fred Kayne (3) ................................. 6,801,110 65.8% 335,000 6,466,110 49.2%
c/o Fortune Financial
1800 Avenue of the Stars
Suite 1112
Los Angeles, CA 90067
Andrew D. Feshbach (4) ......................... 1,350,000 13.3% 135,000 1,215,000 9.4%
c/o Big Dog Sportswear
121 Gray Avenue
Santa Barbara, CA 93101
Robert H. Schnell (5)........................... 351,220 3.4% 50,000 301,220 2.3%
Richard Scott................................... 135,000 1.3% 35,000 100,000 *
Andrea and Jacob Kaufman........................ 125,000 1.2% 35,000 90,000 *
Stephen Kayne................................... 125,000 1.2% 35,000 90,000 *
Anthony J. Wall................................. 115,000 1.1% -- 115,000 *
Douglas N. Nilsen............................... 100,000 * -- 100,000 *
Jeffrey Cowen................................... 70,000 * -- 70,000 *
Jonathan Hirsh.................................. 37,500 * 37,500 -- --
Lee Rosenblatt.................................. 37,500 * 37,500 -- --
United Jewish Fund.............................. -- -- (6) -- --
Robert Huebel................................... 100,000 * (6) (6) (6)
All directors and executive officers as a group
(10 persons).................................. 8,846,110 85.6 % 505,000 8,341,110 63.5 %
</TABLE>
- ---------
* Less than one (1) percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as otherwise stated herein and subject to community
property laws where applicable, the Company believes, based on information
furnished by such persons, that the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 10,160,550 shares of Common Stock outstanding as of July 31, 1997
and 12,960,550 shares of Common Stock outstanding after the completion of
this offering.
(2) Assumes no exercise of the Underwriters' overallotment option. If such
option is exercised in full, (i) Fred Kayne will sell an additional 220,000
shares and may donate an additional 200,000 shares to the United Jewish Fund
(the "Fund"), which in turn may sell such shares pursuant to the
overallotment option, (ii) Andrew Feshbach will sell an additional 75,000
shares and may donate an additional 10,000 shares to the Fund, which in turn
may sell such shares pursuant to the overallotment option, and (iii) Robert
Huebel will sell 20,000 shares. If Mr. Kayne does not donate such 200,000
shares or Mr. Feshbach does not donate such 10,000 shares to the Fund, Mr.
Kayne and Mr. Feshbach will sell such respective amounts of shares in the
overallotment option. In addition, if Mr. Kayne or Mr. Feshbach donate such
respective amounts of shares to the Fund, but the Fund then elects not to
make such shares subject to the overallotment option, Mr. Kayne and Mr.
Feshbach will sell additional shares in such respective amounts in the
overallotment option, which would reduce their shares beneficially owned
after the offering to 5,846,110 (44.5%) for Mr. Kayne and 1,120,000 (8.6%)
for Mr. Feshbach. Accordingly, in any event, if the overallotment option is
exercised in full, an aggregate of 525,000 shares will be sold pursuant
thereto.
(3) Includes warrants to purchase 120,000 shares of Common Stock and options to
purchase 55,000 shares of Common Stock that are currently exercisable. Also
includes 38,610 shares of Common Stock held in a trust for the benefit of
certain relatives, to which Mr. Kayne disclaims beneficial ownership.
(4) Includes 1,339,000 shares owned by the Feshbach Family Trust, of which Mr.
Feshbach is a co-trustee. Also includes 11,000 shares held by custodians for
certain relatives, to which Mr. Feshbach disclaims beneficial ownership.
(5) Includes 327,220 shares owned by the Robert and Renee Schnell Living Trust,
of which Mr. Schnell is co-trustee. Also includes 24,000 shares of Common
Stock subject to immediately exercisable warrants.
(6) If the Underwriters exercise their overallotment option, (i) Robert Huebel
will sell up to 20,000 shares pursuant to the option, and (ii) Fred Kayne
may donate up to 200,000 shares and Andrew Feshbach may donate up to 10,000
shares to the United Jewish Fund, which may in turn sell such shares
pursuant to the option. See Footnote (2) above.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company does not
purport to be complete and is subject in all respects to applicable Delaware law
and to the provisions of the Company's Certificate of Incorporation (the
"Certificate") and Bylaws ("Bylaws"), copies of which will be filed as exhibits
to the Registration Statement of which this Prospectus is a part. References
herein to the Company's Certificate and Bylaws refer to the Amended and Restated
Certificate of Incorporation, as filed with the Delaware Secretary of State on
August 4, 1997, and the Amended and Restated Bylaws, as adopted by the Board of
Directors of the Company on August 1, 1997, respectively. The Company was
originally incorporated on December 31, 1993.
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $0.01 par value per share, and 3,000,000 shares of Preferred
Stock, $0.01 par value per share. Immediately after the completion of this
offering, the Company estimates that there will be outstanding an aggregate of
12,960,550 shares of Common Stock, approximately 387,500 shares will be issuable
upon exercise of outstanding options and warrants and no shares of Preferred
Stock will be issued or outstanding.
COMMON STOCK
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, holders of Common Stock are entitled to receive ratably
such dividends, if, as and when declared by the Company's Board of Directors out
of funds legally available therefor. See "Dividend Policy." Holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. There are no cumulative voting rights, the absence of which will,
in effect, allow the holders of a majority of the outstanding shares of Common
Stock to elect all the directors then standing for election. The absence of
cumulative voting rights could have the effect of delaying, deterring or
preventing a change of control of the Company. According to the Delaware General
Corporation Law ("DGCL"), in the event of any liquidation, dissolution or
winding up of the Company, holders of Common Stock will be entitled to share
ratably in all assets remaining after payment of the Company's liabilities and
the liquidation preference, if any, of any outstanding shares of Preferred
Stock. Holders of Common Stock have no preemptive rights and no rights to
convert their Common Stock into any other securities and there are no redemption
provisions with respect to such shares. All of the outstanding shares of Common
Stock are and all shares of Common Stock offered in this offering will be fully
paid and non-assessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
The provisions described above will result in Fred Kayne, the majority
stockholder of the Company, retaining substantial control over the Company. See
"Risk Factors--Control by Existing Stockholders and Anti-Takeover Provisions."
Application has been made for quotation of the Common Stock on The Nasdaq
National Market under the symbol "BDOG".
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is expressly authorized, in the resolution or resolutions
providing for the issuance of any wholly unissued series of Preferred Stock, to
fix, state and express the powers, rights, designations, preferences,
qualifications, limitations and restrictions thereof, including without
limitation, the rate of dividends upon which and the times at which dividends on
shares of such series shall be payable and the preference, if any, which such
dividends shall have relative to dividends on shares of any other class or
classes or any other series of stock of the Company; whether such dividends
shall be cumulative or noncumulative, and if cumulative, the date or dates from
which dividends on shares of such series shall be cumulative; the voting rights,
if any, to be provided for shares of such series; the rights, if any, which the
holders of shares of such series shall have in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company; the rights, if any, which the holders of shares
46
<PAGE>
of such series shall have to convert such shares into or exchange such shares
for shares of stock of the Company, and the terms and conditions, including
price and rate of exchange of such conversion or exchange; the redemption rights
(including sinking fund provisions), if any, for shares of such series; and
other powers, rights, designations, preferences, qualifications, limitations and
restrictions as the Board of Directors may desire to so fix. The Board of
Directors is also expressly authorized to fix the number of shares constituting
such series and to increase or decrease the number of shares of any series prior
to the issuance of shares of that series and to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not to decrease such number below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series. The Board of Directors, without further stockholder approval,
can issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. No shares of
Preferred Stock presently are outstanding and the Company currently has no plans
to issue shares of Preferred Stock. The issuance of Preferred Stock in certain
circumstances may have the effect of delaying or preventing a change of control
of the Company without further action by the stockholders, 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 market price and the voting and other rights
of the holders of Common Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of the Certificate and Bylaws of the Company as
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, deter or prevent an attempt to obtain control of the
Company by means of a proxy contest, tender offer, merger or other transaction
that a stockholder might consider in its best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
CLASSIFIED BOARD OF DIRECTORS. The Certificate provides for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, one-third of the Board of Directors will be
elected each year. In addition, the Certificate provides that any Director or
the entire Board of Directors may be removed by the affirmative vote of the
holders of at least a majority of the combined voting power of all shares of the
Company entitled to vote generally in the election of directors, voting together
as a single class. Under the DGCL, in the case of a corporation having a
classified board and not having a provision in its Certificate to the contrary
(as is the case with the Company), stockholders may remove a director only for
cause.
Under the Bylaws, any vacancy in the Board of Directors unless and until
filled by the stockholders, however occurring, may be filled by majority vote of
the remaining directors, except that a vacancy created by the removal of a
director by the vote of the stockholders or by court order may be filled only by
the affirmative vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present. These provisions, together with
the constraints placed on calling stockholder meetings as discussed below, may
preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
47
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS. The Certificate provides that special
meetings of stockholders of the Company may be called only by the Chairman of
the Board of Directors or the President, or by the Chairman, the President or
the Secretary at the written request of a majority of the total number of
directors the Company would have if there were no vacancies on the Board. The
request shall be sent to the Chairman, the President and the Secretary and shall
state the purposes of the proposed meeting. Special meetings of holders of the
outstanding Preferred Stock may be called in the manner and for the purposes
provided in the resolutions of the Board of Directors providing for the issue of
such stock. Business transacted at special meetings shall be confined to the
purpose or purposes stated in the notice of meeting. These provisions will make
it more difficult for stockholders to take actions opposed by the Board of
Directors.
ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. The Bylaws
provide that stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at a meeting
of stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not later than the close of business
on the sixtieth (60th) day nor earlier than the close of business on the
ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event public announcement of the
date of such annual meeting is first made by the Company fewer than 70 days
prior to the date of such annual meeting, notice by the stockholder to be timely
must be received no later than the close of business on the tenth (10th) day
following the day on which such public announcement was made by the Company. The
Bylaws also specify certain requirements for a stockholder's notice to be in
proper written form. These provisions may preclude some stockholders from
bringing matters before the stockholders at an annual meeting or from making
nominations for directors at a stockholders meeting.
VOTING REQUIREMENTS REGARDING CERTAIN ACTIONS. Certain provisions of the
Certificate require the affirmative vote of the holders of at least two-thirds
of the combined voting power of all shares of the Company entitled to vote
generally in the election of directors, voting together as a single class, for
certain activities. Such an affirmative vote is required for any Business
Combination (as defined in the Certificate) (unless the Business Combination has
been approved by two-thirds of the whole Board of Directors) and for the
adoption of new Bylaws or the repeal or amendment of existing Bylaws by the
stockholders. Similarly, such a vote is required for alteration, change,
amendment, or repeal of, or adoption of any provision inconsistent with, the
provisions of the Certificate relating to classification, terms and removal of
directors, provisions relating to special meetings of stockholders, and
provisions defining certain key terms.
LIMITATION OF LIABILITY
The Certificate provides that to the fullest extent permitted by the DGCL,
as that law may be amended and supplemented from time to time, a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a Director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) under Section
174 of the DGCL, or (iv) for any transaction from which the director derived any
improper personal benefit. The effect of the provision of the Certificate is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent behavior) except in the situations described
in clauses (i) through (iv) above. The Bylaws also set forth certain
indemnification provisions. The foregoing provision of the Certificate may
reduce the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breaches of their fiduciary duties, even though such an action, if
successful, otherwise might have benefited the Company and its stockholders.
48
<PAGE>
INDEMNIFICATION AGREEMENTS
In addition, the Company plans to enter into agreements (the
"Indemnification Agreements") with each of its directors and certain of its
officers pursuant to which the Company agrees to indemnify such director or
officer against expenses, judgments, fines or amounts paid in settlement
incurred by such director or officer and arising out of his capacity as a
director, officer, employee and/or agent of the Company or other enterprise of
which he is a director, officer, employee or agent acting at the request of the
Company to the maximum extent permitted by applicable law, subject to certain
limitations. In addition, such director or officer shall be entitled to an
advance of expenses, to the maximum extent authorized or permitted by law, to
meet the obligations indemnified against, subject to certain limitations.
Finally, under Delaware law, the Company may purchase and maintain insurance for
the benefit and on behalf of its directors and officers insuring against all
liabilities that may be incurred by such director or officer in or arising out
of his capacity as a director, officer, employee and/or agent of the Company.
DELAWARE LAW AND CERTAIN CORPORATE PROVISIONS
Upon the consummation of this offering, the Company will be subject to the
provisions of Section 203 of the DGCL. Section 203 of the DGCL contains certain
provisions that may make more difficult the acquisition of control of the
Company by means of a tender offer, open market purchase, proxy fight or
otherwise. These provisions are designed to encourage persons seeking to acquire
control of the Company to negotiate with the Board of Directors. However, these
provisions could have the effect of discouraging a prospective acquirer from
making a tender offer or otherwise attempting to obtain control of the Company.
To the extent that these provisions discourage takeover attempts, they could
deprive stockholders of opportunities to realize takeover premiums for their
shares or could depress the market price of shares. Set forth below is a
description of the relevant provisions of Section 203 of the DGCL. This
description is intended as summary only and is qualified in its entirety by
reference to Section 203 of the DGCL.
In general, this statute prohibits a publicly held Delaware corporation from
engaging under certain circumstances in a "business combination" with an
"interested stockholder," for a period of three years after the date on which
the stockholder became an interested stockholder (the "Time"), unless (i) prior
to the Time the board of directors approved either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder, (ii) the stockholder owned at least 85% of the outstanding voting
stock of the corporation (excluding shares held by directors who are officers or
held in certain employee stock plans) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, or (iii) on or
subsequent to the Time, the business combination with the interested stockholder
is approved by the board of directors and also approved at a stockholders'
meeting by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the corporation's voting stock other than shares held by
the interested stockholder.
For purposes of Section 203, a "business combination" includes certain
mergers, asset sales or other transactions resulting in a financial benefit to
the interested stockholder. The Company, at its option, may exclude itself from
the coverage of Section 203 by amending its Certificate or Bylaws by action of
its stockholders to exempt itself from coverage, provided that such Bylaw or
Certificate amendment shall not become effective until 12 months after the date
it is adopted and shall not apply to any business combination between the
Company and any person who became an interested stockholder on or prior to such
adoption (unless the Company, among other things, does not have a class of
voting stock listed on a national securities exchange or on the NASDAQ Stock
Market). To date, the Company has not elected to opt out of Section 203 of the
DGCL pursuant to its terms.
In addition to the requirements of Section 203, under the Certificate, the
approval of the holders of two-thirds of the voting power in the Company is
required for certain business combinations involving the Company and "interested
stockholders," defined as persons who, together with affiliates and associates,
own (or within two years, did own) 10% or more of the Company's voting stock.
49
<PAGE>
The Certificate provides that the Company is subject to the provision of
Section 302 of the DGCL. In general, this statute allows any court of equitable
jurisdiction in the State of Delaware, upon proper application by the Company or
any of its creditors or stockholders, to order a meeting of creditors or
stockholders whenever a compromise or arrangement is proposed between the
Company and its creditors or the Company and its stockholders. Any compromise,
arrangement or reorganization of the Company that is approved by a majority in a
number representing three-fourths in value of the creditors or stockholders, as
the case may be, and sanctioned by the court to which the application was made
shall be binding on all of the creditors or stockholders, as the case may be,
and the Company.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,960,550 shares of
Common Stock outstanding (based upon shares of Common Stock outstanding as of
July 31, 1997 and assuming no exercise of outstanding options, warrants or the
Underwriters' over-allotment option). Of these shares, the 2,800,000 shares sold
by the Company and the 700,000 sold by the Selling Stockholders in this
offering, plus any additional shares sold upon exercise of the Underwriters'
over-allotment option, will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below. The remaining 9,460,550 shares of
Common Stock (the "Restricted Shares") held by existing stockholders upon
completion of this offering are "restricted" securities within the meaning of
Rule 144 and may not be sold except in compliance with the registration
requirements of the Securities Act or an applicable exemption under the
Securities Act, including an exemption pursuant to Rule 144 or Rule 701.
LOCK-UP AGREEMENTS
All stockholders of the Company (who in the aggregate hold 10,160,550 shares
of Common Stock), all warrantholders of the Company (who in the aggregate have
the right to purchase 240,000 shares of Common Stock), and all holders of
options exercisable within 180 days after this offering (who in the aggregate
have the right to purchase 73,333 shares of Common Stock), have agreed, pursuant
to Lock-Up Agreements, that they will not, without the prior written consent of
Robertson, Stephens & Company, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock beneficially owned by them (except for
shares sold in this offering) for a period of 180 days after the date of this
Prospectus. Robertson, Stephens & Company may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to the
Lock-Up Agreements. See "Underwriting."
SALES OF RESTRICTED SHARES
Upon the expiration of the 180-day lock-up period, approximately 8,533,883
Restricted Shares will become eligible for sale in the public market pursuant to
Rule 144 or Rule 701.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an Affiliate, who has beneficially owned shares for at
least one year (including the holding period of certain prior owners), will be
entitled to sell in "brokers' transactions" or to market makers, within any
three-month period commencing 90 days after the Company becomes subject to the
reporting requirements of Section 13 or 15 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), a number of shares that does not exceed
the greater of (i) one percent (1%) of the then-outstanding shares of Common
Stock (approximately 129,606 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
immediately preceding such sale, subject, generally, to the filing of a Form 144
with the Commission with respect to such sales and certain other limitations and
restrictions relating to manner of sale and availability of public information.
In addition, a person (or person whose shares are aggregated), who is not deemed
to have been an Affiliate at any time during the 90 days immediately preceding
the sale and who has beneficially owned the shares proposed to be sold for at
least two years, is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above. Further, Rule 144A under the
Securities Act as currently in effect permits the immediate sale of restricted
shares to certain qualified institutional buyers without regard to the volume
restrictions described above.
In general, under Rule 701, any employee, consultant or advisor of the
Company who purchased shares from the Company in connection with a compensatory
stock or option plan or other written compensatory agreement is entitled to
resell such shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144, and Affiliates are
entitled to sell their Rule 701 shares
51
<PAGE>
without having to comply with Rule 144's holding period restrictions, in each
case commencing 90 days after the Company becomes subject to the reporting
requirements of Section 13 or 15 of the Exchange Act.
WARRANTS
As of August 1, 1997, there were warrants outstanding for the purchase of
240,000 shares of Common Stock. The underlying shares may be resold under Rule
144 upon the expiration of either the one or two-year holding periods described
above, which commence upon exercise of the warrant.
OPTIONS
As of August 1, 1997, options to purchase 92,500 shares were outstanding
under the Old Plan and options to purchase 55,000 shares were outstanding under
non-plan option agreements with the Company's Chairman. Upon expiration of the
180-day lock-up period and subject to vesting and exercisability restrictions,
all shares issued pursuant to the exercise of these stock options may be sold
pursuant to Rule 701. Of such options, 73,333 will be exercisable at the end of
the 180-day lock-up period. In addition, options to purchase 282,500 shares of
Common Stock were granted under the 1997 Plan as of August 1, 1997 and 717,500
shares of Common Stock are available for future grant under the 1997 Plan. The
Company intends to file a registration statement on Form S-8 under the
Securities Act 90 days after the date of this Prospectus to register the shares
issuable under the 1997 Plan. Such registration statement is expected to become
effective upon filing. After the effective date of such registration statement,
shares of Common Stock issued under the 1997 Plan will be immediately eligible
for sale in the public market, subject to vesting and exercisability
restrictions. No options granted under the 1997 Plan will become exercisable
prior to August 1, 1998.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Selling Stockholders and each of the underwriters named
below (the "Underwriting Agreement"), the Company and the Selling Stockholders
have agreed to sell to each of the Underwriters, and each of the Underwriters,
for whom Robertson, Stephens & Company, Hambrecht & Quist LLC and Needham &
Company, Inc. are acting as the Representatives, severally have agreed to
purchase from the Company and the Selling Stockholders the number of shares of
Common Stock set forth opposite its name below. In the Underwriting Agreement,
the several underwriters have agreed, subject to the terms and conditions set
forth therein, to purchase all of the shares of Common Stock offered hereby, if
any are purchased. In the event of default by an Underwriter, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
nondefaulting Underwriters may be increased or the Underwriting Agreement may be
terminated.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------- ----------------
<S> <C>
Robertson, Stephens & Company LLC................................
Hambrecht & Quist LLC............................................
Needham & Company, Inc...........................................
--------
Total........................................................ 3,500,000
--------
--------
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share of Common Stock. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
Certain Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
additional 525,000 shares of Common Stock to cover over-allotments, if any, at
the initial public offering price set forth on the cover page hereof, less the
underwriting discount. If the Underwriters exercise this option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the foregoing table is of the
3,500,000 shares of Common Stock initially offered hereby.
All officers and directors of the Company, all stockholders of the Company,
all warrantholders of the Company and optionholders of the Company holding
options exercisable within 180 days of the effective date of this offering have
agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell
or grant any option to purchase or otherwise transfer or dispose of any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock or file a registration statement under the Securities Act with
respect to the foregoing or (ii) enter into any swap or other agreement or
transaction that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock, without the prior written consent of Robertson
Stephens & Company, for a period of 180 days after the date of this Prospectus.
The foregoing does not prohibit the Selling Stockholders from selling shares of
Common Stock in this offering including pursuant to the Underwriters'
over-allotment option.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of the Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
53
<PAGE>
Prior to this offering, there has been no market for the Common Stock of the
Company. The initial public offering price was determined through negotiations
among the Company, the Selling Stockholders and the Representatives. Among the
factors considered in determining the initial public offering price, in addition
to prevailing market conditions, were price/earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the Company,
certain financial information of the Company, the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the offering at or above the initial public offering price.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when the shares of Common Stock sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on The Nasdaq National Market, in the over-the-counter market, or otherwise.
Such stabilizing, if commenced, may be discontinued at any time.
Application has been made for quotation of the Common Stock on The Nasdaq
National Market under the symbol "BDOG."
54
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for the
Company by Kimball & Weiner LLP, Los Angeles, California. Certain legal matters
will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP,
Palo Alto, California.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1995 and
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three year period ended December 31,
1996 included in this Prospectus and the registration statement of which this
Prospectus is a part have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and in the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement, exhibits and schedules. Statements contained in
this Prospectus regarding the contents of any contract or any other document are
not necessarily complete and, in each such instance, reference is hereby made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. This Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza,
Washington, D.C., 20549, and at the regional offices of the Commission located
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of all or any part thereof may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Judiciary plaza, Washington,
D.C. 20549 at the prescribed rates. Also, the Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Web site is http://www.sec.gov.
55
<PAGE>
BIG DOG HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and June 30, 1997 (Unaudited)................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996, and for the six
months ended June 30, 1996 and 1997 (Unaudited).......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and
1996, and for the six months ended June 30, 1997 (Unaudited)............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996, and for the six
months ended June 30, 1996 and 1997 (Unaudited).......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Big Dog Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Big Dog
Holdings, Inc. and subsidiary (the "Company") as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
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 the Company as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 31, 1997
F-2
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- ------------- JUNE 30, 1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 3)
CURRENT ASSETS:
Cash.............................................................. $ 769,000 $ 723,000 $ 1,650,000
Receivables:
Trade, net of allowance for doubtful accounts of $67,000,
$90,000 and $99,000 at December 31, 1995 and 1996, and June
30, 1997, respectively........................................ 567,000 353,000 636,000
Other........................................................... 190,000 617,000 249,000
Inventories (Notes 1 and 9)....................................... 10,826,000 15,403,000 18,763,000
Prepaid expenses and other current assets......................... 371,000 478,000 1,315,000
Deferred income taxes (Note 6).................................... 224,000 144,000 1,277,000
------------- ------------- -------------
Total current assets.......................................... 12,947,000 17,718,000 23,890,000
PROPERTY AND EQUIPMENT, Net (Notes 1, 2 and 5)...................... 5,434,000 7,445,000 8,540,000
INTANGIBLE ASSETS, Net (Note 1)..................................... 373,000 266,000 191,000
OTHER ASSETS (Note 1)............................................... 257,000 344,000 355,000
------------- ------------- -------------
TOTAL............................................................... $ 19,011,000 $ 25,773,000 $ 32,976,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 3).................................... $ 1,225,000 $ -- $ 6,892,000
Current portion of obligations under capital leases (Note 5)...... 380,000 530,000 517,000
Accounts payable (Note 9)......................................... 1,876,000 1,235,000 4,138,000
Income taxes payable (Note 6)..................................... 364,000 400,000 --
Accrued expenses and other current liabilities (Note 4)........... 1,072,000 1,811,000 1,613,000
------------- ------------- -------------
Total current liabilities..................................... 4,917,000 3,976,000 13,160,000
DEFERRED RENT (Note 7).............................................. 230,000 488,000 563,000
OBLIGATIONS UNDER CAPITAL LEASES, Net of current portion (Note 5)... 727,000 767,000 514,000
SUBORDINATED DEBT (Note 4).......................................... 8,400,000 14,400,000 14,400,000
------------- ------------- -------------
Total liabilities............................................. 14,274,000 19,631,000 28,637,000
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 4 and 8):
Common stock $.01 par value, authorized 30,000,000 shares; issued
and outstanding 9,670,000 at December 31, 1995 and 10,160,550 at
December 31, 1996 and June 30, 1997............................. 97,000 102,000 102,000
Additional paid-in capital........................................ 4,208,000 5,705,000 5,705,000
Retained earnings (deficit)....................................... 432,000 1,067,000 (736,000)
Notes receivable from common stockholders......................... -- (732,000) (732,000)
------------- ------------- -------------
Total stockholders' equity.................................... 4,737,000 6,142,000 4,339,000
------------- ------------- -------------
TOTAL............................................................... $ 19,011,000 $ 25,773,000 $ 32,976,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES (Note 9)............... $28,404,000 $51,541,000 $68,683,000 $24,351,000 $31,143,000
COST OF GOODS SOLD (Note 9)...... 12,857,000 21,571,000 29,720,000 10,617,000 13,208,000
----------- ----------- ----------- ----------- -----------
GROSS PROFIT..................... 15,547,000 29,970,000 38,963,000 13,734,000 17,935,000
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, marketing and
distribution (Note 1)........ 12,993,000 24,814,000 32,309,000 13,685,000 17,764,000
General and administrative
(Note 9)..................... 1,746,000 3,167,000 3,937,000 1,976,000 2,111,000
----------- ----------- ----------- ----------- -----------
Total operating expenses..... 14,739,000 27,981,000 36,246,000 15,661,000 19,875,000
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS.... 808,000 1,989,000 2,717,000 (1,927,000) (1,940,000)
INTEREST EXPENSE (Notes 3, 4 and
5)............................. 397,000 1,189,000 1,647,000 667,000 967,000
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES..... 411,000 800,000 1,070,000 (2,594,000) (2,907,000)
PROVISION (BENEFIT) FOR INCOME
TAXES (Note 6)................. 19,000 162,000 435,000 (1,054,000) (1,104,000)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)................ $ 392,000 $ 638,000 $ 635,000 $(1,540,000) $(1,803,000)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON
SHARE (Note 1)................. $ 0.04 $ 0.07 $ 0.06 $ (0.15) $ (0.17)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 1)........... 9,225,000 9,728,000 10,230,000 10,038,000 10,491,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
--------------------- PAID-IN EARNINGS FROM COMMON
SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDERS TOTAL
---------- --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994......... 9,000,000 $ 90,000 $3,210,000 $ (598,000) -- $2,702,000
Net income..................... -- -- -- 392,000 -- 392,000
---------- --------- ---------- ----------- ------------- ----------
BALANCE, DECEMBER 31, 1994....... 9,000,000 90,000 3,210,000 (206,000) -- 3,094,000
Common stock issued
(Note 4)..................... 670,000 7,000 998,000 -- -- 1,005,000
Net income..................... -- -- -- 638,000 -- 638,000
---------- --------- ---------- ----------- ------------- ----------
BALANCE, DECEMBER 31, 1995....... 9,670,000 97,000 4,208,000 432,000 -- 4,737,000
Common stock issued
(Notes 4 and 8).............. 540,550 5,000 1,395,000 -- $ (855,000) 545,000
Warrants issued (Note 4)....... -- -- 240,000 -- -- 240,000
Shares reacquired (Note 8)..... (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
Net loss (Unaudited)........... -- -- -- (1,803,000) -- (1,803,000)
---------- --------- ---------- ----------- ------------- ----------
BALANCE, JUNE 30, 1997
(Unaudited).................... 10,160,550 $ 102,000 $5,705,000 $ (736,000) $ (732,000) $4,339,000
---------- --------- ---------- ----------- ------------- ----------
---------- --------- ---------- ----------- ------------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 392,000 $ 638,000 $ 635,000 $(1,540,000) $(1,803,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization................... 460,000 1,059,000 1,931,000 824,000 1,183,000
Provision for losses on receivables............. 127,000 57,000 174,000 24,000 14,000
Loss on disposition of property and equipment... -- -- 35,000 -- 37,000
Deferred income taxes........................... (155,000) (224,000) 80,000 (1,172,000) (1,133,000)
Changes in operating assets and liabilities:
Receivables................................... (516,000) 327,000 (387,000) (410,000) 71,000
Inventories................................... (4,889,000) (2,980,000) (4,577,000) (6,303,000) (3,360,000)
Prepaid expenses and other assets............. 106,000 (225,000) (45,000) (1,059,000) (838,000)
Accounts payable.............................. 2,615,000 (1,463,000) (641,000) 3,054,000 2,903,000
Income taxes payable.......................... -- 360,000 35,000 (364,000) (400,000)
Accrued expenses and other current
liabilities................................. 971,000 2,000 740,000 (24,000) (198,000)
Deferred rent................................. -- 230,000 258,000 190,000 75,000
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities....... (889,000) (2,219,000) (1,762,000) (6,780,000) (3,449,000)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (2,516,000) (2,346,000) (3,377,000) (1,188,000) (2,219,000)
Other............................................. 17,000 (18,000) (108,000) (21,000) (14,000)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities....... (2,499,000) (2,364,000) (3,485,000) (1,209,000) (2,233,000)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............ -- 1,005,000 545,000 500,000 --
Repurchase of common stock........................ -- -- (15,000) -- --
Proceeds from issuance of warrants................ -- -- 114,000 -- --
Proceeds from subordinated debt................... 3,250,000 8,270,000 7,900,000 2,000,000 --
Principal repayments of subordinated debt......... -- (3,500,000) (1,774,000) -- --
Principal repayments under capital lease
obligations..................................... -- -- (344,000) (299,000) (283,000)
Short-term borrowings, net........................ 789,000 (1,286,000) (1,225,000) 5,123,000 6,892,000
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities... 4,039,000 4,489,000 5,201,000 7,324,000 6,609,000
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH..................... 651,000 (94,000) (46,000) (665,000) 927,000
CASH, BEGINNING OF PERIOD........................... 212,000 863,000 769,000 769,000 723,000
---------- ---------- ---------- ---------- ----------
CASH, END OF PERIOD................................. $ 863,000 $ 769,000 $ 723,000 $ 104,000 $1,650,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................ $ 238,000 $1,225,000 $1,521,000 $ 631,000 $ 885,000
Income taxes.................................... $ 4,000 $ 42,000 $ 367,000 $ 475,000 $ 429,000
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company entered into capital lease obligations of $1,108,000,
$533,000, $235,000 and $18,000 for new equipment for the years ended
1995 and 1996, and the six months ended June 30, 1996 and 1997,
respectively (see Note 5).
In 1996, the Company refinanced $138,000 of capital lease obligations
(see Note 5).
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 8).
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 notes receivable (see Note 8).
See notes to consolidated financial statements.
F-6
<PAGE>
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.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial
statements for the six months ended June 30, 1996 and 1997 are presented on a
basis consistent with the audited consolidated financial statements and reflect
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the results thereof. The results of operation for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
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 cash on deposit with a high credit quality financial
institution which is at times in excess of the Federal Deposit Insurance
Corporation limit.
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 or the stated interest rates are indicative of market
interest rates. A reasonable estimate of fair value is not practicable for
subordinated debt due to the limited availability of similar financing.
INVENTORIES
Inventories, consisting substantially of finished goods, are stated at the
lower of cost (first-in, first-out method) or market.
F-7
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
seven 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
Intangibles assets are stated at cost and are amortized using the
straight-line method over five years. Accumulated amortization was $256,000,
$393,000 and $471,000, at December 31, 1995 and 1996, and June 30, 1997,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial and Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest charges) expected to
be generated by the asset. If the carrying value is less than the future net
cash flows, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Adoption
of this statement did not have an impact on the Company's consolidated financial
statements.
OTHER ASSETS
Other assets include long-term deposits of $210,000, $293,000 and $303,000
at December 31, 1995 and 1996 and June 30, 1997, respectively, which relate
primarily to leased retail stores.
SELLING, MARKETING AND DISTRIBUTION EXPENSES
Included in this classification are approximately $590,000, $640,000,
$439,000, $229,000 and $275,000 in 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997, respectively, of store preopening expenses.
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 6).
INCOME (LOSS) PER SHARE
Income (loss) per share is based upon the weighted average number of common
shares and dilutive equivalent shares outstanding. Pursuant to the requirements
of the Securities and Exchange Commission,
F-8
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (CONTINUED)
common shares, stock options and warrants issued by the Company during the
twelve months immediately preceding an initial public offering have been
included in the calculation of the weighted average shares outstanding as if
they were outstanding for all periods using the treasury stock method.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to
improve the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of data on an
international basis. SFAS No. 128 also makes a number of changes to existing
disclosure requirements. SFAS No. 128 is effective for financial statements
issued for periods ending after December 31, 1997, including interim periods.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- 1997
1995 1996 (UNAUDITED)
---------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements...................... $2,924,000 $ 3,926,000 $ 4,498,000
Equipment and fixtures (Note 5)............. 3,878,000 6,548,000 8,099,000
---------- ----------- -----------
6,802,000.. 10,474,000 12,597,000
Less accumulated depreciation and
amortization.............................. (1,368,000) (3,029,000) (4,057,000)
---------- ----------- -----------
Property and equipment, net................. $5,434,000 $ 7,445,000 $ 8,540,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Depreciation and amortization expense on property and equipment totaled
$340,000, $932,000, $1,794,000, $752,000 and $1,105,000 in 1994, 1995 and 1996,
and the six months ended June 30, 1996 and 1997, respectively.
3. SHORT-TERM BORROWINGS
The Company has a line of credit arrangement with a bank whereby the Company
may borrow up to $10,500,000 as cash advances and letters of credit. Outstanding
balances on the line of credit totaled $1,028,000, $0 and $6,892,000 at December
31, 1995 and 1996 and June 30, 1997, respectively. The line of credit currently
bears interest at the bank's prime lending rate, expires on May 2, 1998, and is
collateralized by substantially all assets of the Company. The short-term
borrowings bore interest at the rate of 9.25%, 8.75% and 8.5% at December 31,
1995 and 1996 and June 30, 1997, respectively. Certain stockholders of the
Company guarantee 20% of the outstanding advances under the credit arrangement.
This credit arrangement contains various restrictive covenants, including
maintenance of minimum working capital and tangible net worth levels and
limitations on indebtness. The revolving credit agreement also prohibits the
payments of dividends by the Company. The Company was in compliance with all
debt covenants as of December 31, 1996 and June 30, 1997.
F-9
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM BORROWINGS (CONTINUED)
The Company has commitments under letters of credit totaling $1,523,000 at
June 30, 1997. The letters of credit expire through December 31, 1997.
At December 31, 1995, the Company had a short-term note payable to the bank,
totaling $197,000, under the same terms as described above.
4. SUBORDINATED DEBT
In April 1995, the Company completed a private placement of 67 units to new
investors, each unit consisting of a $60,000 promissory note, which bears
interest at 10%, and 10,000 shares of common stock of Big Dog Holdings, Inc. at
$1.50 per share. Proceeds from the offering, totaling $5,025,000, consisted of
$1,005,000 from the issuance of 670,000 shares of common stock and $4,020,000
from the issuance of subordinated notes. Of the proceeds received, $3,500,000
was used to repay certain stockholder notes outstanding at December 31, 1994.
The notes are due at the earlier of April 3, 2002 or the consummation of an
initial public offering. During 1995, the Company also issued additional
subordinated debt to an existing stockholder totaling $4,250,000 which is due in
1998 and bears interest at the rate of 10% per annum.
In February 1996, the Company completed a private placement of 50 units to
investors, each unit consisting of a $40,000 promissory note which bears
interest at 10%, and 3,861 shares of common stock of Big Dog Holdings, Inc. at
$2.59 per share. Proceeds from the offering, totaling $2,500,000, consisted of
$500,000 from the issuance of 193,050 shares of common stock and $2,000,000 from
the issuance of subordinated notes. The notes are due the earlier of November 4,
2003 or the consummation of an initial public offering.
In November 1996, the Company completed a private placement of 10 "A" units
and 10 "B" units to investors. Each "A" unit consisted of a $200,000 promissory
note, which bears interest at 10%, and 12,000 redeemable "A" warrants. Each "B"
unit consisted of a $200,000 promissory note, which bears interest at 10%, and
12,000 redeemable "B" warrants. Each "A" warrant is exercisable at any time for
the purchase of one share of the Company's common stock at $3.00 per share. Each
"B" warrant is exercisable at any time for the purchase of one share of the
Company's common stock at $4.00 per share. All warrants expire in five years
from the date of grant. Proceeds from the offering, totaling $4,240,000,
consisted of $240,000 from the issuance of 120,000 "A" warrants and 120,000 "B"
warrants and $4,000,000 from the issuance of subordinated debt. The Company may
redeem all or part of any unexercised warrants at a price of $2.50 per warrant
in the event that the Company has effected a registered public offering of its
common stock and such stock trades at a price equal to or greater than 150% of
the public offering price for a period of 20 out of 30 consecutive trading days.
The notes are due the earlier of November 4, 2003 or the consummation of an
initial public offering.
At December 31, 1995 and 1996 and June 30, 1997, accrued interest on the
notes discussed above totaled $19,000, $174,000 and $209,000, respectively.
Interest expense on these notes for the years ended December 31, 1994, 1995 and
1996, and the six months ended June 30, 1996 and 1997 amounted to $208,000,
$766,000, $1,535,000, $487,000 and $714,000, respectively.
The following is the scheduled maturities of the subordinated debt:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------
<S> <C>
1998......................................................... $ 4,380,000
2002......................................................... 4,020,000
2003......................................................... 6,000,000
-----------
$14,400,000
-----------
-----------
</TABLE>
F-10
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OBLIGATIONS UNDER CAPITAL LEASES
Capital lease assets included in property and equipment in the accompanying
consolidated balance sheets amounted to $1,409,000, $1,988,000 and $2,006,000 at
December 31, 1995 and 1996 and June 30, 1997, respectively. The related
accumulated amortization amounted to $20,000, $415,000 and $619,000, at December
31, 1995 and 1996 and June 30, 1997, respectively.
Capital leases have implicit interest rates ranging from 9.3% to 14.4% per
annum with current aggregate monthly payments of approximately $57,000,
including principal and interest, and mature in 2000. The following is a
schedule of future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------
<S> <C>
1997................................................................... $ 637,000
1998................................................................... 580,000
1999................................................................... 170,000
2000................................................................... 106,000
----------
Total minimum lease payments........................................... 1,493,000
Less amount representing interest...................................... (196,000)
----------
Present value of minimum lease payments................................ $1,297,000
----------
----------
</TABLE>
6. INCOME TAXES
Significant components of the Company's net deferred income tax assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful receivables and sales returns....... $ 23,000 $ 36,000
Accrued vacation........................................... 11,000 34,000
Inventory uniform capitalization........................... 239,000 302,000
Intangible assets.......................................... 69,000 109,000
State income taxes......................................... 107,000 18,000
Alternative minimum tax credits............................ 125,000 88,000
Stockholders' accrued interest............................. -- 67,000
Other...................................................... 20,000 --
--------- ---------
Total deferred income tax assets............................. 594,000 654,000
--------- ---------
Deferred income tax liabilities:
Prepaid expenses........................................... (61,000) (59,000)
Depreciation............................................... (309,000) (451,000)
--------- ---------
Total deferred income tax liabilities........................ (370,000) (510,000)
--------- ---------
Deferred income tax asset.................................... $ 224,000 $ 144,000
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal......................................... $ 137,000 $ 324,000 $ 321,000
State........................................... 37,000 62,000 34,000
--------- --------- ---------
Total............................................. 174,000 386,000 355,000
--------- --------- ---------
Deferred:
Federal......................................... (134,000) (202,000) 102,000
State........................................... (21,000) (22,000) (22,000)
--------- --------- ---------
Total............................................. (155,000) (224,000) 80,000
--------- --------- ---------
Total income tax provision........................ $ 19,000 $ 162,000 $ 435,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's effective income tax rate differs from the federal statutory
income tax rate due to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory income tax rate....................... 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit..................... 3.7 4.7 2.4
Use of net operating loss carryforwards................. (36.7) (5.0) --
Alternative minimum credits............................. -- (15.6) --
Other, net.............................................. 3.6 2.2 4.3
----- ----- -----
Total................................................... 4.6 % 20.3 % 40.7 %
----- ----- -----
----- ----- -----
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases retail stores, office buildings and warehouse space under
lease agreements that expire through 2006. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------
<S> <C>
1997......................................................... $10,021,000
1998......................................................... 9,600,000
1999......................................................... 8,396,000
2000......................................................... 6,579,000
2001......................................................... 3,800,000
Thereafter................................................... 4,126,000
-----------
Total........................................................ $42,522,000
-----------
-----------
</TABLE>
F-12
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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
and common area charges. 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 amount paid and the effective rent recognized for financial
statement purposes is reported as deferred rent.
Rent expense for the years ended December 31, 1994, 1995 and 1996 and the
six months ended June 30, 1996 and 1997 totaled $1,784,000, $4,774,000,
$8,431,000, $4,030,000 and $5,401,000, respectively, and includes contingent
rentals of $19,000, $49,000, $79,000, $41,000 and $44,000 for the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and
1997, respectively.
LICENSE AGREEMENT
In 1994, the Company entered into a merchandise licensing agreement under
which it was obligated to make royalty payments based on sales of certain
products covered by the agreement. Under the terms of the agreement, the Company
paid $50,000 and $250,000 in royalty payments for 1995 and 1996, respectively.
No payments were made in 1994. The agreement expired on December 31, 1996.
LITIGATION
The Company is not involved in any legal proceedings other than certain
actions arising in the ordinary course of its business. While the outcome of
such proceedings and threatened proceedings cannot be predicted with certainty,
in the opinion of management, the ultimate resolution of these matters
individually or in the aggregate will not have a material adverse effect on the
Company's business, financial condition or results of operations.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
The authorized capital stock of the Company is 30,000,000 shares of $.01 par
value common stock. In 1996, the Company declared a 2-for-1 stock split effected
in the form of a stock dividend as of December 31, 1995. All share amounts have
been retroactively restated to reflect this split.
1996 STOCK INCENTIVE PLAN
In July 1996, the Company issued 347,500 shares of common stock under the
1996 Stock Incentive Plan (the "Plan"). The Plan authorized the issuance of up
to 500,000 shares of the Company's common stock to key employees and other
persons. The Plan was terminated on December 31, 1996. The shares were sold at
$2.59 per share with proceeds to the Company consisting of $45,000 in cash and
the balance of $855,000 in full recourse notes receivable. The notes receivable
are due ten years from the date of issuance, bear interest at the rate of 7%
annum, and are secured by the common stock acquired.
The Company has the option to repurchase at fair market value some or all of
the shares sold upon the termination of the employee or certain involuntary
transfers of the stock. All of the shares sold are subject to these provisions
until the Company effects an initial public offering of its common stock, at
which time the vested shares become freely transferable, subject to securities
laws restrictions and the obligations to repay the
F-13
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
purchase notes. The stock becomes vested over a two-year period, with one-third
of the shares being vested at the purchase date. On December 31, 1996, the
Company reacquired 50,000 shares at an average of $2.76 per share.
STOCKHOLDER BUY-SELL AGREEMENT
The Company has a buy-sell agreement with its President, which provides, for
among other things, that in the event of the death of the President, his estate
or other representatives shall have the right to sell all or part of his stock
to the Company at the price of $5.00 per share. Such agreement expires upon the
Company's effecting an initial public offering.
STOCK OPTIONS
In March 1996, the Company issued a five-year option to its chairman to
acquire 35,000 shares of the Company's common stock at an exercise price of
$2.59 per share. In August 1996, the Company issued an additional five-year
option to the chairman to acquire an additional 20,000 shares at an exercise
price of $4.00. The exercise prices were determined by the board of directors to
be equal to or greater than the fair value of the Company's common stock at the
date of grant.
In January 1997, the Company adopted the 1997 Stock Option Plan authorizing
the issuance of nonqualified stock options to directors, officers, employees,
consultants and others to purchase common stock at prices equal to the fair
value of the Company's shares at the grant dates. In 1997, options for 92,500
shares were granted at excercise prices from $5.00 to $7.50 per share. Such
options vest one-third each year, beginning one year after the grant date and
expire ten years from the date of grant. The 1997 Stock Option Plan was
terminated on August 1, 1997 (see Note 10).
The following summarizes stock option activity for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- ---------------
(UNAUDITED)
--------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....................... -- -- 55,000 $ 3.10
Granted................................................ 55,000 $ 3.10 92,500 6.01
--------- ----- --------- -----
Outstanding at end of period............................. 55,000 $ 3.10 147,500 $ 4.93
--------- ----- --------- -----
--------- ----- --------- -----
Options exercisable at period end........................ 55,000 85,333
Weighted-average fair value of options granted during the
period.................................................. $ 1.55 $ 1.82
</TABLE>
The following unaudited table summarizes information about stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ----------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
AT REMAINING AT JUNE 30, WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES JUNE 30, 1997 CONTRACTUAL LIFE 1997 EXERCISE PRICE
- ------------------------------------- ------------- ---------------- ------------- -------------------
<S> <C> <C> <C> <C>
$2.59-$7.50 147,500 8.8--9.9 years 85,833 $ 4.93
------------- ------ -----
------------- ------ -----
</TABLE>
F-14
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method as of the beginning of 1995. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 2 to 8 years following vesting, if applicable; no
stock price volatility; risk free interest rates of between 6.5% and 7.0%; and
no dividends during the expected term. Forfeitures are recognized as they occur.
If the computed fair values of the 1996 and 1997 awards had been amortized to
expense over the vesting period of the awards, pro forma net income (loss) would
have been reduced to the pro forma amounts indicated below. There were no stock
options granted prior to 1996.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Net income (loss):
As reported..................................... $ 635,000 $ (1,540,000) $ (1,803,000)
Pro forma....................................... 584,000 (1,567,000) (1,844,000)
Net income (loss) per common share:
As reported..................................... $ 0.06 $ (0.15) $ (0.17)
Pro forma....................................... 0.06 (0.16) (0.18)
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company's stockholders have ownership interests in certain merchandise
vendors to the Company. Merchandise inventory purchased from these related
vendors totaled $7,084,000, $6,696,000, $8,030,000, $5,458,000 and $4,201,000
for the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997, respectively. Included in the accounts payable balance
are $276,000, $62,000 and $1,449,000 due to these vendors at December 31, 1995
and 1996 and June 30, 1997, respectively. During 1996, the Company also
processed certain sales for one of these merchandise vendors and recorded
revenue of $71,000.
The Company also receives advisory, legal and consulting services from
related parties. Such expenses incurred for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997 were $220,000,
$388,000, $208,000, $140,000 and $60,000, respectively.
10. SUBSEQUENT EVENTS (UNAUDITED)
On August 1, 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 is 1,000,000.
F-15
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Awards under this plan may be in the form of unqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
performance shares, stock bonuses, or cash bonuses based upon performance. The
Company granted options under this plan relating to the purchase of 282,500
shares of Common Stock at an exercise price of $12.00 per share.
On August 1, 1997 the Board of Directors of the Company approved the
authorization of 3,000,000 shares of $0.01 par value Preferred Stock. To date,
no shares of Preferred Stock have been issued.
F-16
