<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997
REGISTRATION NO. 333-33027
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
BIG DOG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
-------------------
<TABLE>
<S> <C> <C>
DELAWARE 5651 52-1868665
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
-------------------
121 GRAY AVENUE
SANTA BARBARA, CALIFORNIA 93101
(805) 963-8727
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
ANTHONY J. WALL
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
BIG DOG HOLDINGS, INC.
121 GRAY AVENUE
SANTA BARBARA, CALIFORNIA 93101
(805) 963-8727
FAX: (805) 962-9460
(Name and address, including zip code and telephone and fax number, of agent for
service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY M. WEINER, ESQ. THOMAS A. BEVILACQUA, ESQ.
Kimball & Weiner LLP Brobeck, Phleger & Harrison LLP
555 S. Flower Street Two Embarcadero Place
Suite 4540 2200 Geng Road
Los Angeles, CA 90071 Palo Alto, CA 94303-0913
(213) 538-3800 (415) 424-0160
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
-------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 SEPTEMBER 16, 1997
BIG DOGS-REGISTERED TRADEMARK-
[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. Approximately $6.4 million of the proceeds to the
Company will be used to repay indebtedness to an affiliate of the Company.
See "Use of Proceeds."
(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, 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 others, prevailing retail market
conditions, merchandising strategies, timing of promotions, weather conditions,
6
<PAGE>
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 no less favorable to the Company than could have been
obtained with unrelated third 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 with unrelated third 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 and the Company's
current directors and executive officers, including Mr. Kayne, will collectively
beneficially own approximately 63.5% of the Common Stock. 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 Committee thereof appointed to administer the 1997
Plan) determines to the contrary. The issuance of Preferred
10
<PAGE>
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 ("Affiliates"), as that
term is defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), 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 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, 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
highly competitive retail environment and, despite substantial infrastructure
investments for growth, the Company achieved increases in 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 had 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 the Company's
revolving credit facility.
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 levels, 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 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, 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 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 (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 have allowed the
Company to eliminate the need for a traditional buyer or design staff, and
thereby lower its product development costs compared to most fashion apparel
companies. Furthermore, since its graphics are added in the last stage of
production, the Company is able to be more responsive to customer preferences
while also lowering its inventory risk.
TARGET A BROAD, DIVERSE CUSTOMER BASE. Big Dogs believes it has established
an All-American, family-oriented brand featuring products, graphic themes,
slogans and promotions that appeal to a broad range of consumers. Although its
marketing focus is on baby boomers and their kids, Big Dogs' customers include
men, women and children of all ages, and span a wide range of geographic areas
and income levels. Furthermore, the Company believes that the millions of dog
and other pet owners in the United States, as well as children, have a strong
natural affinity for the dog-related images and themes in Big Dogs graphics. In
addition, the Company believes that the positive image the brand brings to being
a "Big Dog" has a special appeal to 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's 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" have 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 and 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 and the Company's full-price stores and by other retailers. In
addition, the Company has tested a smaller format store which it intends to open
in certain circumstances. This smaller format will carry substantially all of
the Company's product categories, but will be more densely merchandised to
accommodate the smaller square footage. The Company 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.
34
<PAGE>
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.
35
<PAGE>
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 May 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 May 1992 and has served as
President, Chief Executive Officer and as a director since that time. From June
1992 until May 1997, Mr. Feshbach also served as Chief Financial Officer of the
Company. Mr. Feshbach co-founded Fortune Fashions 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
36
<PAGE>
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 Vice President-- Production for Stage II, an activewear company. From 1988 to
1991, he was the President of Clothing Concepts, an apparel company. 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 as President of Fortune Telecommunications, Inc., a provider of
validation and fraud control computer services
37
<PAGE>
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,
monitoring transactions with affiliates, 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."
38
<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."
39
<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 was adopted by
the Board of Directors and approved by the stockholders on August 1, 1997 and an
amended and restated version was adopted by the Board of Directors and approved
by the stockholders on September 12, 1997 (as so amended, the "1997 Plan"). The
1997 Plan was adopted 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,
40
<PAGE>
terms of exercise and expiration dates, (iii) approve the form of award
agreements, and (iv) construe and 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
41
<PAGE>
$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.
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.
42
<PAGE>
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 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 September 30, 1998. Such promissory notes bear interest at
10% per annum. 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. As of June 30, 1997, the aggregate unpaid
principal balance of all Company promissory notes held by Mr. Kayne was
$6,380,000, all of which will be repaid by the Company from its proceeds of this
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.
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 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.
43
<PAGE>
The Company believes that each of the above transactions was on terms no
less favorable to the Company than could have been obtained with unrelated third
parties.
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.
44
<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) -- --
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' over-allotment option. If such
option is exercised in full, (i) Fred Kayne will sell an additional 240,000
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
over-allotment option, and (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 over-allotment option. 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 over-allotment 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
over-allotment option, Mr. Kayne and Mr. Feshbach will sell additional
shares in such respective amounts in the over-allotment option, which would
reduce their shares beneficially owned after the offering to 5,826,110
(44.3%) for Mr. Kayne and 1,120,000 (8.6%) for Mr. Feshbach. Accordingly, in
any event, if the over-allotment 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 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 over-allotment option, 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 is a summary
and is subject in all respects to the provisions of the Company's Certificate of
Incorporation (the "Certificate") and Bylaws ("Bylaws"), copies of which have
been 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. 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 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
46
<PAGE>
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.
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
47
<PAGE>
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 that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, 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
Certain legal matters with respect to the Common Stock offered hereby is
being passed upon for the Company and the Selling Stockholders 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
summaries 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. The 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 (August 1, 1997 as to Note 10)
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 note 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 operations 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.
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.
F-7
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, which are
expensed as incurred.
INCOME TAXES
Deferred income taxes reflect the income tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, (b) net
operating loss and tax credit carryforwards, and (c) valuation allowances, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized (see Note 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, 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
F-8
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
will be effective for the Company beginning January 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company has determined that the adoption of SFAS No. 131 will not
have a material impact on its current disclosures.
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 credit arrangement also prohibits the payment of
dividends by the Company. The Company was in compliance with all debt covenants
as of December 31, 1996 and June 30, 1997.
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.
F-9
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM BORROWINGS (CONTINUED)
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 are 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. (See Note 10)
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, which the Board of Directors determined to be at or above the
fair market value, 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 their date of issuance, bear interest at the
rate of 7% per 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's employment 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
F-13
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
the vested shares become freely transferable, subject to securities laws
restrictions and the obligations to repay the 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>
F-14
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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>
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.
F-15
<PAGE>
BIG DOG HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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. 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
<PAGE>
DESCRIPTION OF PICTURES AND CAPTIONS:
INSIDE BACK COVER: MODEL PHOTOS, QVF LOGO AND SLOGAN "QUALITY, VALUE AND FUN FOR
THE WHOLE
FAMILY."
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses, other than underwriting
discounts, which the Company expects to incur in connection with the issuance
and distribution of the securities being registered under this registration
statement. All expenses are estimated except for the Securities and Exchange
Commission registration fee, the NASD filing fee and Nasdaq application fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 17,076
Nasdaq National Market Application Fee.................................... 49,000
NASD Filing Fee........................................................... 6,135
Blue Sky Qualification Fees and Expenses.................................. 25,000
Legal Fees and Expenses................................................... 75,000
Accounting Fees and Expenses.............................................. 100,000
Printing and Engraving Expenses........................................... 100,000
Transfer Agent's and Registrar Fees....................................... 2,000
Miscellaneous............................................................. 25,789
---------
Total................................................................. $ 400,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit, or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against expenses (including attorney's
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
To the extent that a director, officer, employee, or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in the proceeding two paragraphs, Section 145
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (CONTINUED)
requires that such person be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit, or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit, or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
Article Tenth of the Company's Amended and Restated Certificate of
Incorporation eliminates the personal liability of the directors of the Company
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as directors, with certain exceptions. In addition, the Company's Bylaws
require indemnification of directors and officers of the Company to the fullest
extent permitted by Section 145. The Company will enter into indemnification
agreements with its directors, a form of which is attached as Exhibit 10.14
hereto and incorporated herein by reference. The indemnification agreements
provide the Company's directors with further indemnification to the maximum
extent permitted by the DGCL. The Company will also obtain directors and
officers insurance to insure its directors and officers against certain
liabilities, including liabilities under the federal securities laws.
The Underwriting Agreement filed herewith as Exhibit 1.1 provides for
indemnification of the directors, certain officers, and controlling persons of
the Company by the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
See Item 17 below.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following are all securities sold by the Company since July 31, 1994:
1. On January 1, 1995, the Company issued and sold 1,800,000 shares of
its common stock (post-split) to its two then-existing stockholders for an
aggregate of $3.0 million.
2. On April 3, 1995, the Company issued and sold 67 Units to seven
investors for an aggregate purchase price of $5,025,000. Each Unit consisted
of a $60,000 unsecured promissory note of the Company and 10,000 shares of
Common Stock (post-split).
3. On February 27, 1996, the Company issued and sold 50 Units to three
investors for an aggregate purchase price of $2,500,000. Each Unit consisted
of a $40,000 unsecured promissory note of the registrant and 3,861 shares of
Common Stock.
4. On July 29, 1996, the Company issued and sold 347,500 shares of
Common Stock to 18 officers, key employees and consultants for an aggregate
purchase price of $900,025, 5% of which was paid in cash and the balance of
which was paid by delivering promissory notes bearing interest at 7% per
annum and due in 2006. All such sales were made under the registrant's 1996
Stock Incentive Plan.
5. On November 4, 1996, the Company issued and sold 20 Units consisting
of ten A Units and ten B Units to nine investors for an aggregate purchase
price of $4,240,000. Each Unit consisted of a $200,000 unsecured promissory
note of the Company and a warrant to purchase 12,000 shares of Common Stock.
The terms of the A and B Units are the same except that the exercise price
for the warrants included in the A Units is $4.00 per share (which, pursuant
to the terms of the warrants, was automatically reduced to $3.00 as of June
30, 1997) and the exercise price for the warrants included in the B Units is
$5.00 per share (which, pursuant to the terms of the warrants, was
automatically reduced to $4.00 as of June 30, 1997).
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (CONTINUED)
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2), or Regulation D
promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the
Securities Act, as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationship with the Company or otherwise, to
information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation*
3.1A Certificate of Correction
3.2 Amended and Restated Bylaws*
4.1 Reference is hereby made to Exhibits 3.1*, 3.1A and 3.2*
4.2 Specimen Stock Certificate
5.1 Opinion of Kimball & Weiner LLP
10.1 Amended and Restated Credit Agreement dated as of June 30, 1995 between Big Dog Holdings, Inc., Big
Dog USA, Inc. and Fortune Dogs, Inc., as amended by First Amendment, dated as of February 15, 1996,
Second Amendment dated as of April 30, 1996, and Third Amendment dated as of May 3, 1997*
10.2 Form of Stockholder Agreement made as of January 2, 1996 between Big Dog Holdings, Inc. and certain
stockholders*
10.3 Forms of Notes and Warrants issued November 4, 1996*
10.4 Consulting Agreement between Big Dog Holdings, Inc. and Fortune Financial dated as of March 1, 1997*
10.5 Buy-Sell Agreement among Big Dog Holdings, Inc., Fred Kayne and Andrew D. Feshbach dated as of January
1, 1997*
10.6 1996 Stock Incentive Plan*
10.7 Form of Purchase Agreement under the Big Dog Holdings, Inc. 1996 Stock Incentive Plan*
10.8 1997 Stock Option Plan*
10.9 Form of Stock Option Agreement under the 1997 Stock Option Plan*
10.10 Amended and Restated 1997 Performance Award Plan
10.10A Form of Stock Option Agreement under 1997 Performance Award Plan
10.11 Lease Agreement between Big Dog Holdings, Inc. and State of California Public Retirement System dated
January 13, 1995*
10.12 Lease Agreement between Big Dog Holdings, Inc. and S.V.B. Properties dated as of June 1, 1994, as
amended by Lease Agreement dated as of December 1, 1994, Second Lease Amendment dated as of March 1,
1996 and Third Lease Amendment dated as of July 22, 1996*
10.13 Lease Agreement between Big Dog Holdings, Inc. and the Eldred Family Trust & Jason Eldred Trust dated
as of April 4, 1996*
10.14 Form of Indemnification Agreement*
11.1 Statement regarding computation of per share earnings (loss)*
21.1 List of Subsidiaries of Big Dog Holdings, Inc.*
23.1 Consent of Kimball & Weiner LLP (included in Opinion filed in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included in signature page)*
27.1 Financial data schedule*
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
99.1 Consent of Robert Schnell
99.2 Consent of Steven C. Good
99.3 Consent of David J. Walsh
99.4 Consent of NPD Group
</TABLE>
- -------
* Previously Filed
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement (filed herewith as
Exhibit 1.1), certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described above in Item 14 or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted against the Registrant by such director,
officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to the court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Barbara, State of California, on September 15, 1997.
<TABLE>
<S> <C> <C>
BIG DOG HOLDINGS, INC.
By: /s/ ANDREW D. FESHBACH
-----------------------------------------
Andrew D. Feshbach
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ FRED KAYNE*
- ------------------------------ Chairman of the Board September 15, 1997
Fred Kayne
President, Chief Executive
/s/ ANDREW D. FESHBACH Officer (Principal
- ------------------------------ Executive Officer) and September 15, 1997
Andrew D. Feshbach Director
/s/ ANTHONY J. WALL Executive Vice President,
- ------------------------------ General Counsel, Secretary September 15, 1997
Anthony J. Wall and Director
/s/ JONATHAN HOWE* Chief Financial Officer
- ------------------------------ (Principal Financial September 15, 1997
Jonathan Howe Officer)
Senior Vice President,
/s/ ROBERTA MORRIS* Finance
- ------------------------------ (Principal Accounting September 15, 1997
Roberta Morris Officer)
<TABLE>
<S> <C> <C>
*By: /s/ ANTHONY J.
WALL
- ------------------------------
Anthony J. Wall
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Certificate of Incorporation*
3.1A Certificate of Correction
3.2 Amended and Restated Bylaws*
4.1 Reference is hereby made to Exhibits 3.1*, 3.1A and 3.2*
4.2 Specimen Stock Certificate
5.1 Opinion of Kimball & Weiner LLP
10.1 Amended and Restated Credit Agreement dated as of June 30, 1995 between Big Dog Holdings, Inc., Big
Dog USA, Inc. and Fortune Dogs, Inc., as amended by First Amendment, dated as of February 15, 1996,
Second Amendment dated as of April 30, 1996, and Third Amendment dated as of May 3, 1997*
10.2 Form of Stockholder Agreement made as of January 2, 1996 between Big Dog Holdings, Inc. and certain
stockholders*
10.3 Forms of Notes and Warrants issued November 4, 1996*
10.4 Consulting Agreement between Big Dog Holdings, Inc. and Fortune Financial dated as of March 1, 1997*
10.5 Buy-Sell Agreement among Big Dog Holdings, Inc., Fred Kayne and Andrew D. Feshbach dated as of January
1, 1997*
10.6 1996 Stock Incentive Plan*
10.7 Form of Purchase Agreement under the Big Dog Holdings, Inc. 1996 Stock Incentive Plan*
10.8 1997 Stock Option Plan*
10.9 Form of Stock Option Agreement under the 1997 Stock Option Plan*
10.10 Amended and Restated 1997 Performance Award Plan
10.10A Form of Stock Option Agreement under 1997 Performance Award Plan
10.11 Lease Agreement between Big Dog Holdings, Inc. and State of California Public Retirement System dated
January 13, 1995*
10.12 Lease Agreement between Big Dog Holdings, Inc. and S.V.B. Properties dated as of June 1, 1994, as
amended by Lease Agreement dated as of December 1, 1994, Second Lease Amendment dated as of March 1,
1996 and Third Lease Amendment dated as of July 22, 1996*
10.13 Lease Agreement between Big Dog Holdings, Inc. and the Eldred Family Trust & Jason Eldred Trust dated
as of April 4, 1996*
10.14 Form of Indemnification Agreement*
11.1 Statement regarding computation of per share earnings (loss)*
21.1 List of Subsidiaries of Big Dog Holdings, Inc.*
23.1 Consent of Kimball & Weiner LLP (included in Opinion filed in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included in signature page)*
27.1 Financial data schedule*
99.1 Consent of Robert Schnell
99.2 Consent of Steven C. Good
99.3 Consent of David J. Walsh
99.4 Consent of NPD Group
</TABLE>
- -------
* Previously Filed
<PAGE>
EXHIBIT 3.1a
CERTIFICATE OF CORRECTION FILED TO CORRECT A CERTAIN
ERROR IN THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF BIG DOG HOLDINGS, INC. FILED IN THE OFFICE
OF THE SECRETARY OF STATE OF DELAWARE ON AUGUST 4, 1997
Big Dog Holdings, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is Big Dog Holdings, Inc.
2. That an Amended and Restated Certificate of Incorporation of Big Dog
Holdings, Inc. was filed by the Secretary of State of Delaware on August 4,
1997 and that said Certificate requires correction as permitted by Section
103 of the General Corporation Law of the State of Delaware.
3. The inaccuracy or defect of said Amended and Restated Certificate to be
corrected is as follows: the expiration dates of the classes of directors is
to be corrected.
4. Article Seventh(b) of the Amended and Restated Certificate is corrected
to read as follows:
(b) The Directors shall be classified with respect to the time for which
they severally hold office into three classes designated Class I, Class II
and Class III, as nearly equal in number as possible, as shall be provided
in the manner specified in the Bylaws of the Corporation. Each Director
shall serve for a term ending on the date of the third annual meeting of
stockholders following the annual meeting at which the Director was
elected; provided, however, that each initial Director in Class I shall
hold office until the annual meeting of stockholders in 2000, each initial
Director in Class II shall hold office until the annual meeting of
stockholders in 1999, and each initial Director in Class III shall hold
office until the annual meeting of stockholders in 1998. Notwithstanding
the foregoing provisions of this Article, each Director shall serve until
his successor is duly elected and qualified or until his death, resignation
or removal.
<PAGE>
IN WITNESS WHEREOF, said Big Dog Holdings, Inc. has caused this Certificate
to be signed by Anthony J. Wall, its Executive Vice President and General
Counsel on this 15th day of September, 1997.
/s/ ANTHONY J. WALL
----------------------------------------
Anthony J. Wall
Executive Vice President and General
Counsel
<PAGE>
NUMBER [LOGO] SHARES
COMMON STOCK BIG DOGS COMMON STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 089128 10 2
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
- --------------------------BIG DOG HOLDINGS, INC.--------------------------------
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate property
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SEAL]
BIG DOG HOLDINGS, INC.
CORPORATE
1993
DELAWARE
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made
to the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ......Custodian.......
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act..........................
tenants in common (State)
UNIF TRF MIN ACT - ......Custodian (until age.......)
(Cust)
............under Uniform Transfers
(Minor)
to Minors Act......................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,___________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated____________________
X___________________________________________________
X___________________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
NOTICE: WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
[LETTERHEAD]
September 15, 1997
Big Dog Holdings, Inc.
121 Gray Avenue
Santa Barbara, California 93101
Ladies and Gentlemen:
We have acted as special counsel to Big Dog Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing of
the Registration Statement (File No. 333-33027) of the Company on Form S-1 (as
amended, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the public offering (the "Offering")
by the Company and the Selling Stockholders identified as such in the
Registration Statement of an aggregate of 4,025,000 shares (including 525,000
shares subject to an over-allotment option) of Common Stock, par value $.01 per
share of the Company ("Common Stock").
As such counsel, we have participated in the preparation of the
Registration Statement, including the Prospectus contained therein (the
"Prospectus"), and have reviewed certain corporate proceedings. In addition, we
have examined originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records and other documents, and such
certificates or comparable documents of public officials and of officers and
representatives, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, and the conformity to original documents of all documents
submitted to us as certified or photostatic copies. As to all questions of fact
material to this opinion that have not been independently established, we have
relied upon statements and certificates of officers and representatives of the
Company.
Based on the foregoing, and subject to the qualifications stated herein, we
are of the opinion that the shares of Common Stock to be registered for sale by
the Company and the Selling Stockholders under the Registration Statement have
been duly authorized, and the shares to be sold by the Selling Stockholders are,
and the shares to be sold by the Company, when issued and paid for as
contemplated by the Prospectus, will be, validly issued, fully paid and
nonassessable.
<PAGE>
Big Dog Holdings, Inc.
September 15, 1997
Page 2
The opinion expressed herein is limited to the corporate laws of the State
of Delaware, and we express no opinion as to the effect on the matters covered
by this letter of the laws of any other jurisdiction.
The opinion expressed herein is rendered solely for your benefit in
connection with the transactions described herein. This opinion may not be used
or relied upon by any other person, nor may this letter or any copies thereof be
furnished to a third party, filed with a governmental agency, quoted, cited or
otherwise referred to without our prior written consent.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and consent to the use of our name under the heading
"Legal Matters" in the Prospectus.
Very truly yours,
KIMBALL & WEINER LLP
<PAGE>
BIG DOG HOLDINGS, INC.
AMENDED AND RESTATED
1997 PERFORMANCE AWARD PLAN
<PAGE>
TABLE OF CONTENTS
Page
1. THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Administration and Authorization; Power and Procedure . . . . 1
1.2.1 Committee . . . . . . . . . . . . . . . . . . . . . 1
1.2.2 Plan Awards; Interpretation; Powers of
Committee . . . . . . . . . . . . . . . . . . . . . 1
1.2.3 Binding Determinations. . . . . . . . . . . . . . . 2
1.2.4 Reliance on Experts . . . . . . . . . . . . . . . . 2
1.2.5 Delegation. . . . . . . . . . . . . . . . . . . . . 2
1.3 Participation . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Shares Available for Awards; Share Limits . . . . . . . . . . 3
1.4.1 Shares Available. . . . . . . . . . . . . . . . . . 3
1.4.2 Share Limits. . . . . . . . . . . . . . . . . . . . 3
1.4.3 Share Reservation; Replenishment and
Reissue of Unvested Awards . . . . . . . . . . . . 3
1.5 Grant of Awards . . . . . . . . . . . . . . . . . . . . . . . 4
1.6 Award Period. . . . . . . . . . . . . . . . . . . . . . . . . 4
1.7 Limitations on Exercise and Vesting of Awards . . . . . . . . 4
1.7.1 Provisions for Exercise . . . . . . . . . . . . . . 4
1.7.2 Procedure . . . . . . . . . . . . . . . . . . . . . 4
1.7.3 Fractional Shares/Minimum Issue . . . . . . . . . . 4
1.8 Acceptance of Notes to Finance Exercise . . . . . . . . . . . 4
1.8.1 Principal . . . . . . . . . . . . . . . . . . . . . 5
1.8.2 Term. . . . . . . . . . . . . . . . . . . . . . . . 5
1.8.3 Recourse; Security. . . . . . . . . . . . . . . . . 5
1.8.4 Termination of Employment . . . . . . . . . . . . . 5
1.9 No Transferability; Limited Exception to Transfer
Restrictions. . . . . . . . . . . . . . . . . . . . 5
1.9.1 Limit On Exercise and Transfer. . . . . . . . . . . 5
1.9.2 Exceptions. . . . . . . . . . . . . . . . . . . . . 6
1.9.3 Further Exceptions to Limits On Transfer. . . . . . 6
2. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Option Price. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2.1 Pricing Limits. . . . . . . . . . . . . . . . . . . 7
2.2.2 Payment Provisions. . . . . . . . . . . . . . . . . 7
2.3 Limitations on Grant and Terms of Incentive Stock
Options . . . . . . . . . . . . . . . . . . . . . . 7
2.3.1 $100,000 Limit. . . . . . . . . . . . . . . . . . . 7
2.3.2 Option Period . . . . . . . . . . . . . . . . . . . 8
i
<PAGE>
2.3.3 Other Code Limits . . . . . . . . . . . . . . . . . 8
2.4 Limits on 10% Holders . . . . . . . . . . . . . . . . . . . . 8
2.5 Option Repricing/Cancellation and Regrant/Waiver of
Restrictions. . . . . . . . . . . . . . . . . . . . 8
2.6 Effects of Termination of Employment; Termination of
Subisidiary Status; Discretionary Provisions. . . . . . . . . 8
2.6.1 Options - Resignation or Dismissal. . . . . . . . . 9
2.6.2 Options - Death or Disability . . . . . . . . . . . 9
2.6.3 Options - Retirement. . . . . . . . . . . . . . . . 9
2.6.4 Certain SARs. . . . . . . . . . . . . . . . . . . . 10
2.6.5 Other Awards. . . . . . . . . . . . . . . . . . . . 10
2.6.6 Committee Discretion. . . . . . . . . . . . . . . . 10
2.7 Options and Rights in Substitution for Stock Options
Granted by Other Corporations . . . . . . . . . . . 10
3. STOCK APPRECIATION RIGHTS
(INCLUDING LIMITED STOCK APPRECIATION RIGHTS). . . . . . 10
3.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Exercise of Stock Appreciation Rights . . . . . . . . . . . . 11
3.2.1 Exercisability. . . . . . . . . . . . . . . . . . . 11
3.2.2 Effect on Available Shares. . . . . . . . . . . . . 11
3.2.3 Stand-Alone SARs. . . . . . . . . . . . . . . . . . 11
3.2.4 Proportionate Reduction . . . . . . . . . . . . . . 11
3.3 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3.1 Amount. . . . . . . . . . . . . . . . . . . . . . . 11
3.3.2 Form of Payment . . . . . . . . . . . . . . . . . . 12
3.4 Limited Stock Appreciation Rights . . . . . . . . . . . . . . 12
4. RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . . . 12
4.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2.1 Pre-Vesting Restraints. . . . . . . . . . . . . . . 13
4.2.2 Dividend and Voting Rights. . . . . . . . . . . . . 13
4.2.3 Cash Payments . . . . . . . . . . . . . . . . . . . 13
4.3 Return to the Corporation . . . . . . . . . . . . . . . . . . 13
5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES . . . . . . . . . . . . 13
5.1 Grants of Performance Share Awards. . . . . . . . . . . . . . 13
5.2.1 Eligible Class. . . . . . . . . . . . . . . . . . . 14
5.2.2 Maximum Award . . . . . . . . . . . . . . . . . . . 14
5.2.3 Committee Certification . . . . . . . . . . . . . . 15
5.2.4 Terms and Conditions of Awards. . . . . . . . . . . 15
5.2.5 Stock Payout Features . . . . . . . . . . . . . . . 15
5.3 Grants of Stock Bonuses . . . . . . . . . . . . . . . . . . . 15
5.4 Deferred Payments . . . . . . . . . . . . . . . . . . . . . . 15
5.5 Cash Bonus Awards . . . . . . . . . . . . . . . . . . . . . . 15
5.5.1 Performance Goals . . . . . . . . . . . . . . . . . 15
5.5.2 Maximum Annual Amount . . . . . . . . . . . . . . . 16
5.5.3 Payment in Restricted Stock . . . . . . . . . . . . 16
ii
<PAGE>
6. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1 Rights of Eligible Persons, Participants and
Beneficiaries . . . . . . . . . . . . . . . . . . . 16
6.1.1 Employment Status . . . . . . . . . . . . . . . . . 16
6.1.2 No Employment Contract. . . . . . . . . . . . . . . 16
6.1.3 Plan Not Funded . . . . . . . . . . . . . . . . . . 16
6.2 Adjustments; Acceleration . . . . . . . . . . . . . . . . . . 17
6.2.1 Adjustments . . . . . . . . . . . . . . . . . . . . 17
6.2.2 Acceleration of Awards Upon Change in
Control . . . . . . . . . . . . . . . . . . . . . . 18
6.2.3 Possible Early Termination of Accelerated
Awards . . . . . . . . . . . . . . . . . . . . . . 18
6.2.4 Golden Parachute Limitations. . . . . . . . . . . . 19
6.3 Effect of Termination of Employment . . . . . . . . . . . . . 19
6.4 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . 19
6.5 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . 19
6.5.1 Provision for Tax Withholding . . . . . . . . . . . 19
6.5.2 Tax Loans . . . . . . . . . . . . . . . . . . . . . 20
6.6 Plan Amendment, Termination and Suspension. . . . . . . . . . 20
6.6.1 Board Authorization . . . . . . . . . . . . . . . . 20
6.6.2 Stockholder Approval. . . . . . . . . . . . . . . . 20
6.6.3 Amendments to Awards. . . . . . . . . . . . . . . . 20
6.6.4 Limitations on Amendments to Plan and Awards . . . 20
6.7 Privileges of Stock Ownership . . . . . . . . . . . . . . . . 21
6.8 Effective Date of the Plan. . . . . . . . . . . . . . . . . . 21
6.9 Term of the Plan. . . . . . . . . . . . . . . . . . . . . . . 21
6.10 Governing Law/Construction/Severability . . . . . . . . . . . 21
6.10.1 Choice of Law . . . . . . . . . . . . . . . . . . . 21
6.10.2 Severability . . . . . . . . . . . . . . . . . . . 21
6.10.3 Plan Construction . . . . . . . . . . . . . . . . . 21
6.11 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.12 Effect of Change of Subsidiary Status . . . . . . . . . . . . 22
6.13 Plan Not Exclusive. . . . . . . . . . . . . . . . . . . . . . 22
7. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8. NON-EMPLOYEE DIRECTOR OPTIONS . . . . . . . . . . . . . . . . . . 28
8.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . 28
8.2 Annual Option Grants. . . . . . . . . . . . . . . . . . . . . 28
8.2.1 Time of Initial Award . . . . . . . . . . . . . . . 28
8.2.2 Subsequent Annual Awards. . . . . . . . . . . . . . 28
8.2.3 Maximum Number of Shares. . . . . . . . . . . . . . 28
8.3 Option Price. . . . . . . . . . . . . . . . . . . . . . . . . 28
8.4 Option Period and Exercisability. . . . . . . . . . . . . . . 29
8.5 Termination of Directorship . . . . . . . . . . . . . . . . . 29
8.6 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.7 Acceleration Upon a Change in Control Event . . . . . . . . . 29
iii
<PAGE>
BIG DOG HOLDINGS, INC.
AMENDED AND RESTATED
1997 PERFORMANCE AWARD PLAN
1. THE PLAN
1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company
and the interests of its stockholders by attracting, motivating, retaining
and rewarding directors, officers, employees and others eligible persons
with awards and incentives for high levels of individual performance and
improved financial performance of the Company and to attract, motivate and
retain experienced and knowledgeable independent directors through the
benefits provided under Section 8. "CORPORATION" means Big Dog Holdings,
Inc. and "COMPANY" means the Corporation and its Subsidiaries, collectively.
These terms and other capitalized terms are defined in Section 7.
1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE.
1.2.1 COMMITTEE. This Plan will be administered by and all Awards to
Eligible Employees will be authorized by the Committee. Action of
the Committee with respect to the administration of this Plan will
be taken pursuant to a majority vote or by written consent of its
members.
1.2.2 PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the
express provisions of this Plan, the Committee will have the
authority to:
(a) determine eligible the particular Eligible Employees who will
receive Awards;
(b) grant Awards to Eligible Employees, determine the price at
which securities will be offered or awarded and the amount of
securities to be offered or awarded to any of such persons,
and determine the other specific terms and conditions of such
Awards consistent with the express limits of this Plan, and
establish the installments (if any) in which such Awards will
become exercisable or will vest, or determine that no delayed
exercisability or vesting is required, and establish the
events of termination or reversion of such Awards;
1
<PAGE>
(c) approve the forms of Award Agreements (which need not be
identical either as to type of Award or among Participants);
(d) construe and interpret this Plan and any agreements defining
the rights and obligations of the Company and Employee
Participants under this Plan, further define the terms used in
this Plan, and prescribe, amend and rescind rules and
regulations relating to the administration of this Plan;
(e) cancel, modify, or waive the Corporation's rights with respect
to, or modify, discontinue, suspend, or terminate any or all
outstanding Awards held by Eligible Employees, subject to any
required consent under Section 6.6;
(f) accelerate or extend the exercisability or extend the term of
any or all such outstanding Awards within the maximum ten-year
term of Awards under Section 1.6; and
(g) make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable
for the administration of this Plan and the effectuation of
its purposes.
but the provisions of Section 8 relating to Non-Employee Director Awards will
be automatic and, to the maximum extent possible, self-effectuating.
1.2.3 BINDING DETERMINATIONS. Any action taken by, or inaction of, the
Corporation, any Subsidiary, the Board or the Committee relating or
pursuant to this Plan will be within the absolute discretion of
that entity or body and will be conclusive and binding upon all
persons. No member of the Board or Committee, or officer of the
Corporation or any Subsidiary, will be liable for any such action
or inaction of the entity or body, of another person or, except in
circumstances involving bad faith, of himself or herself. Subject
only to compliance with the express provisions hereof, the Board
and Committee may act in their absolute discretion in matters
within their authority related to this Plan.
1.2.4 RELIANCE ON EXPERTS. In making any determination or in taking or
not taking any action under this Plan, the Committee or the Board,
as the case may be, may obtain and may rely upon the advice of
experts, including professional advisors to the Corporation. No
2
<PAGE>
director, officer or agent of the Company will be liable for any
such action or determination taken or made or omitted in good faith.
1.2.5 DELEGATION. The Committee may delegate ministerial,
non-discretionary functions to individuals who are officers or
employees of the Company.
1.3 PARTICIPATION. Awards may be granted by the Committee only to those
persons that the Committee determines to be Eligible Persons.
An Eligible Person who has been granted an Award may, if
otherwise eligible, be granted additional Awards if the
Committee so determines.
1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS.
1.4.1 SHARES AVAILABLE. Subject to the provisions of Section 6.2, the
capital stock that may be delivered under this Plan will be shares
of the Corporation's authorized but unissued Common Stock and any
shares of its Common Stock held as treasury shares. The shares may
be delivered for any lawful consideration.
1.4.2 SHARE LIMITS. The maximum number of shares of Common Stock that
may be delivered pursuant to Awards granted to Eligible Persons
under this Plan will not exceed one million (1,000,000) shares (the
"SHARE LIMIT"). The maximum number of shares subject to those
options and Stock Appreciation Rights that are granted during any
calendar year to any individual will be limited to two hundred
thousand (200,000) and the maximum individual limit on the number
of shares in the aggregate subject to all Awards that during any
calendar year are granted under this Plan will be two hundred fifty
thousand (250,000). Each of the foregoing numerical limits will be
subject to adjustment as contemplated by this Section 1.4 and
Section 6.2.
1.4.3 SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS.
No Award may be granted under this Plan unless, on the date of
grant, the sum of (a) the maximum number of shares issuable at any
time pursuant to such Award, plus (b) the number of shares that
have previously been issued pursuant to Awards granted under this
Plan, other than reacquired shares available for reissue consistent
with any applicable legal limitations, plus (c) the maximum number
of shares that may be issued at any time after such date of grant
pursuant to Awards that are outstanding on such date, does not
exceed the Share Limit. Shares that are subject to or underlie
Awards that expire or for any reason are canceled or terminated, are
3
<PAGE>
forfeited, fail to vest, or for any other reason are not paid or
delivered under this Plan, as well as reacquired shares, will
again, except to the extent prohibited by law, be available for
subsequent Awards under the Plan. Except as limited by law, if an
Award is or may be settled only in cash, such Award need not be
counted against any of the limits under this Section 1.4.
1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the
Committee will determine the number of shares of Common Stock subject to
each Award, the price (if any) to be paid for the shares or the Award
and, in the case of performance share awards, in addition to matters
addressed in Section 1.2.2, the specific objectives, goals and
performance criteria (such as an increase in sales, market value,
earnings or book value over a base period, the years of service before
vesting, the relevant job classification or level of responsibility or
other factors) that further define the terms of the performance share
award. Each Award will be evidenced by an Award Agreement signed by the
Corporation and, if required by the Committee, by the Participant.
1.6 AWARD PERIOD. Any Option, SAR, warrant or similar right shall expire and
any other Award shall either vest or be forfeited not more than 10 years
after the date of grant; provided, however, that any payment of cash or
delivery of stock pursuant to an Award may be delayed until a future date
if specifically authorized by the Committee in writing.
1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS.
1.7.1 PROVISIONS FOR EXERCISE. Unless the Committee otherwise expressly
provides, no Award will be exercisable or will vest until at least
six months after the initial Award Date, and once exercisable an
Award will remain exercisable until the expiration or earlier
termination of the Award.
1.7.2 PROCEDURE. Any exercisable Award will be deemed to be exercised
when the Corporation receives written notice of such exercise from
the Participant, together with any required payment made in
accordance with Section 2.2.2 or 8.4, as the case may be.
1.7.3 FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests will
be disregarded, but may be accumulated. The Committee, however, may
determine in the case of Eligible Persons that cash, other
securities, or other property will be paid or transferred in lieu
of any fractional share interests. No fewer than 100 shares may be
purchased on exercise of any Award at one time unless the number
4
<PAGE>
purchased is the total number at the time available for purchase
under the Award.
1.8 ACCEPTANCE OF NOTES TO FINANCE EXERCISE. The Corporation may, with the
Committee's express approval, accept one or more notes from any Eligible
Person in connection with the exercise or receipt of any outstanding
Award; but any such note will be subject to the following terms and
conditions:
1.8.1 PRINCIPAL. The principal of the note will not exceed the amount
required to be paid to the Corporation upon the exercise or receipt
of one or more Awards under the Plan and the note will be delivered
directly to the Corporation in consideration of such exercise or
receipt.
1.8.2 TERM. The initial term of the note will be determined by the
Committee; but the term of the note, including extensions, will not
exceed a period of five years.
1.8.3 RECOURSE; SECURITY. The note will provide for full recourse to the
Participant and will bear interest at a rate determined by the
Committee but not less than the interest rate necessary to avoid
the imputation of interest under the Code. If required by the
Committee or by applicable law, the note will be secured by a
pledge of any shares or rights financed thereby in compliance with
applicable law. The terms, repayment provisions, and collateral
release provisions of the note and the pledge securing the note
will conform with applicable rules and regulations of the Federal
Reserve Board as then in effect.
1.8.4 TERMINATION OF EMPLOYMENT. If the employment of the Participant
terminates, the unpaid principal balance of the note will become
due and payable on the 10th business day after such termination;
but if a sale of such shares would cause such Participant to incur
liability under Section 16(b) of the Exchange Act, the unpaid
balance will become due and payable on the 10th business day after
the first day on which a sale of such shares could have been made
without incurring such liability assuming for these purposes that
there are no other transactions (or deemed transactions in
securities of this Corporation) by the Participant after such
termination.
1.9 NO TRANSFERABILITY; LIMITED EXCEPTION TO TRANSFER RESTRICTIONS.
5
<PAGE>
1.9.1 LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly
provided in (or pursuant to) this Section 1.9, by applicable law
and by the Award Agreement, as the same may be amended, (a) all
Awards are non-transferable and will not be subject in any manner
to sale, transfer, anticipation, alienation, assignment, pledge,
encumbrance or charge; Awards will be exercised only by the
Participant; and (b) amounts payable or shares issuable pursuant to
an Award will be delivered only to (or for the account of) the
Participant.
1.9.2 EXCEPTIONS. The Committee may permit Awards to be exercised by and
paid only to certain persons or entities related to the Participant
pursuant to such conditions and procedures as the Committee may
establish. Any permitted transfer will be subject to the condition
that the Committee receive evidence satisfactory to it that the
transfer is being made for estate and/or tax planning purposes and
without consideration (other than nominal consideration). ISOs and
Restricted Stock Awards, however, will be subject to any and all
additional transfer restrictions under the Code.
1.9.3 FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. The exercise and
transfer restrictions in Section 1.9.1 will not apply to:
(a) transfers to the Corporation,
(b) the designation of a beneficiary to receive benefits if the
Participant dies or, if the Participant has died, transfers to
or exercise by the Participant's beneficiary, or, in the
absence of a validly designated beneficiary, transfers by will
or the laws of descent and distribution,
(c) transfers pursuant to a QDRO if approved or ratified by the
Committee,
(d) if the Participant has suffered a disability, permitted
transfers or exercises on behalf of the Participant by the
Participant's legal representative, or
(e) the authorization by the Committee of "cashless exercise"
procedures with third parties who provide financing for the
purpose of (or who otherwise facilitate) the exercise of
Awards consistent with applicable laws and the express
authorization of the Committee.
6
<PAGE>
2. OPTIONS
2.1 GRANTS. One or more Options may be granted under this Section to any
Eligible Person. Each Option granted will be designated in the
applicable Award Agreement, by the Committee as either an Incentive Stock
Option, subject to Section 2.3, or a Non-Qualified Stock Option.
2.2 OPTION PRICE.
2.2.1 PRICING LIMITS. The purchase price per share of the Common Stock
covered by each Option will be determined by the Committee at the
time of the Award, but in the case of Incentive Stock Options will
not be less than 100% (110% in the case of a Participant described
in Section 2.4) of the Fair Market Value of the Common Stock on the
date of grant and in all cases will not be less than the par value
thereof.
2.2.2 PAYMENT PROVISIONS. The purchase price of any shares purchased on
exercise of an Option granted under this Section will be paid in
full at the time of each purchase in one or a combination of the
following methods: (a) in cash or by electronic funds transfer;
(b) by certified or cashier's check payable to the order of the
Corporation; (c) if authorized by the Committee or specified in the
applicable Award Agreement, by a promissory note of the Participant
consistent with the requirements of Section 1.8; (d) by notice and
third party payment in such manner as may be authorized by the
Committee; or (e) by the delivery of shares of Common Stock of the
Corporation already owned by the Participant, but the Committee may
in its absolute discretion limit the Participant's ability to
exercise an Award by delivering such shares, and any shares
delivered that were initially acquired upon exercise of a stock
option must have been owned by the Participant at least six months
as of the date of delivery. Shares of Common Stock used to satisfy
the exercise price of an Option will be valued at their Fair Market
Value on the date of exercise. Without limiting the generality of
the foregoing, the Committee may provide that the Option can be
exercised and payment made by delivering a properly executed
exercise notice together with irrevocable instructions to a broker
to promptly deliver to the Corporation the amount of sale proceeds
necessary to pay the exercise price and, unless otherwise
prohibited by the Committee or applicable law, any applicable tax
withholding under Section 6.5. The Corporation will not be
obligated to deliver certificates for the
7
<PAGE>
shares unless and until it receives full payment of the exercise price
therefor and any related withholding obligations have been satisfied.
2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS.
2.3.1 $100,000 LIMIT. To the extent that the aggregate "FAIR MARKET
VALUE" of stock with respect to which incentive stock options first
become exercisable by a Participant in any calendar year exceeds
$100,000, taking into account both Common Stock subject to
Incentive Stock Options under this Plan and stock subject to
incentive stock options under all other plans of the Company or any
parent corporation, such options will be treated as Nonqualified
Stock Options. For this purpose, the "FAIR MARKET VALUE" of the
stock subject to options will be determined as of the date the
options were awarded. In reducing the number of options treated as
incentive stock options to meet the $100,000 limit, the most
recently granted options will be reduced first. To the extent a
reduction of simultaneously granted options is necessary to meet
the $100,000 limit, the Committee may, in the manner and to the
extent permitted by law, designate which shares of Common Stock are
to be treated as shares acquired pursuant to the exercise of an
Incentive Stock Option.
2.3.2 OPTION PERIOD. Subject to Section 1.6, each Option and all rights
thereunder will expire no later than 10 years after the Award Date.
2.3.3 OTHER CODE LIMITS. Incentive Stock Options may only be granted to
Eligible Employees of the Corporation or a Subsidiary that
satisfies the other eligibility requirements of the Code. There
will be imposed in any Award Agreement relating to Incentive Stock
Options such other terms and conditions as from time to time are
required in order that the Option be an "incentive stock option" as
that term is defined in Section 422 of the Code.
2.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to any
person who, at the time the Option is granted, owns (or is deemed to own
under Section 424(d) of the Code) shares of outstanding Common Stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation, unless the exercise price of such
Option is at least 110% of the Fair Market Value of the stock subject to
the Option and such Option by its terms is not exercisable after the
expiration of five years from the date such Option is granted.
8
<PAGE>
2.5 OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. Subject
to Section 1.4 and Section 6.6 and the specific limitations on Awards
contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible
Person any adjustment in the exercise or purchase price, the vesting
schedule, the number of shares subject to, the restrictions upon or the
term of, an Award granted under this Section by cancellation of an
outstanding Award and a subsequent regranting of an Award, by amendment,
by substitution of an outstanding Award, by waiver or by other legally
valid means. Such amendment or other action may result among other
changes in an exercise or purchase price that is higher or lower than the
exercise or purchase price of the original or prior Award, provide for a
greater or lesser number of shares subject to the Award, or provide for a
longer or shorter vesting or exercise period.
2.6 EFFECTS OF TERMINATION OF EMPLOYMENT; TERMINATION OF SUBSIDIARY STATUS;
DISCRETIONARY PROVISIONS.
2.6.1 OPTIONS - RESIGNATION OR DISMISSAL. If the Participant's
employment by (or other service specified in the Award Agreement
to) the Company terminates for any reason (the date of such
termination being referred to as the "SEVERANCE DATE") other than
Retirement, Total Disability or death, or "FOR CAUSE" (as
determined in the discretion of the Committee), the Participant
will have, unless otherwise provided in the Award Agreement and
subject to earlier termination pursuant to or as contemplated by
Section 1.6 or 6.2, three months after the Severance Date to
exercise any Option to the extent it has become exercisable on the
Severance Date. In the case of a termination "for cause", the
Option will terminate on the Severance Date. In other cases, the
Option, to the extent not exercisable on the Severance Date, will
terminate.
2.6.2 OPTIONS - DEATH OR DISABILITY. If the Participant's employment by
(or specified service to) the Company terminates as a result of
Total Disability or death, the Participant, Participant's Personal
Representative or the Participant's Beneficiary, as the case may
be, will have, unless otherwise provided in the Award Agreement and
subject to earlier termination pursuant to or as contemplated by
Section 1.6 or 6.2, until 12 months after the Severance Date to
exercise any Option to the extent it will have become exercisable
by the Severance Date. Any Option to the extent not exercisable on
the Severance Date will terminate.
9
<PAGE>
2.6.3 OPTIONS - RETIREMENT. If the Participant's employment by (or
specified service to) the Company terminates as a result of
Retirement, the Participant, Participant's Personal Representative
or the Participant's Beneficiary, as the case may be, will have,
unless otherwise provided in the Award Agreement and subject to
earlier termination pursuant to or as contemplated by Section 1.6
or 6.2, until 12 months after the Severance Date to exercise any
Nonqualified Stock Option (three months after the Severance Date in
the case of an Incentive Stock Option) to the extent it will have
become exercisable by the Severance Date. The Option, to the
extent not exercisable on the Severance Date, will terminate.
2.6.4 CERTAIN SARS. Any SAR granted concurrently or in tandem with an
Option will have the same post-termination provisions and
exercisability periods as the Option to which it relates, unless
the Committee otherwise provides.
2.6.5 OTHER AWARDS. The Committee will establish in respect of each
other Award granted hereunder the Participant's rights and benefits
(if any) if the Participant's employment is terminated and in so
doing may make distinctions based upon the cause of termination and
the nature of the Award.
2.6.6 COMMITTEE DISCRETION. Notwithstanding the foregoing provisions of
this Section 2.6, in the event of, or in anticipation of, a
termination of employment with the Company for any reason, other
than discharge for cause, the Committee may increase the portion of
the Participant's Award available to the Participant, or
Participant's Beneficiary or Personal Representative, as the case
may be, or, subject to the provisions of Section 1.6, extend the
exercisability period upon such terms as the Committee determines
and expressly sets forth in or by amendment to the Award Agreement.
2.7 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options and Stock Appreciation Rights may be granted to
Eligible Persons under this Plan in substitution for employee stock
options granted by other entities to persons who are or who will become
Eligible Persons in respect of the Company, in connection with a
distribution, merger or reorganization by or with the granting entity or
an affiliated entity, or the acquisition by the Company, directly or
indirectly, of all or a substantial part of the stock or assets of the
employing entity.
10
<PAGE>
3. STOCK APPRECIATION RIGHTS
(INCLUDING LIMITED STOCK APPRECIATION RIGHTS)
3.1 GRANTS. The Committee may grant to any Eligible Person Stock
Appreciation Rights either concurrently with the grant of another Award
or in respect of an outstanding Award, in whole or in part, or
independently of any other Award. Any Stock Appreciation Right granted
in connection with an Incentive Stock Option will contain such terms as
may be required to comply with the provisions of Section 422 of the Code
and the regulations promulgated thereunder, unless the holder otherwise
agrees.
3.2 EXERCISE OF STOCK APPRECIATION RIGHTS.
3.2.1 EXERCISABILITY. Unless the Award Agreement or the Committee
otherwise provides, a Stock Appreciation Right related to another
Award will be exercisable at such time or times, and to the extent,
that the related Award will be exercisable.
3.2.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock
Appreciation Right is exercised, only the actual number of
delivered shares of Common Stock will be charged against the
maximum amount of Common Stock that may be delivered pursuant to
Awards under this Plan. The number of shares subject to the Stock
Appreciation Right and the related Option of the Participant will,
however, be reduced by the number of underlying shares as to which
the exercise related, unless the Award Agreement otherwise
provides.
3.2.3 STAND-ALONE SARS. A Stock Appreciation Right granted independently
of any other Award will be exercisable pursuant to the terms of the
Award Agreement but in no event earlier than six months after the
Award Date, except in the case of death or Total Disability.
3.2.4 PROPORTIONATE REDUCTION If an SAR extends to less than all the
shares covered by the related Award and if a portion of the related
Award is thereafter exercised, the number of shares subject to the
unexercised SAR shall be reduced only if and to the extent that the
remaining number of shares covered by such related Award is less
than the remaining number of shares subject to such SAR.
3.3 PAYMENT.
11
<PAGE>
3.3.1 AMOUNT. Unless the Committee otherwise provides, upon exercise of
a Stock Appreciation Right and the attendant surrender of an
exercisable portion of any related Award, the Participant will be
entitled to receive subject to Section 6.5 payment of an amount
determined by multiplying
(a) the difference obtained by subtracting the exercise price per
share of Common Stock under the related Award (if applicable)
or the initial share value specified in the Award from the
Fair Market Value of a share of Common Stock on the date of
exercise of the Stock Appreciation Right, by
(b) the number of shares with respect to which the Stock
Appreciation Right has been exercised.
3.3.2 FORM OF PAYMENT. The Committee, in its sole discretion, will
determine the form in which payment will be made of the amount
determined under Section 3.3.1 above, either solely in cash, solely
in shares of Common Stock (valued at Fair Market Value on the date
of exercise of the Stock Appreciation Right), or partly in such
shares and partly in cash, but the Committee will have determined
that such exercise and payment are consistent with applicable law.
If the Committee permits the Participant to elect to receive cash
or shares (or a combination thereof) on such exercise, any such
election will be subject to such conditions as the Committee may
impose.
3.4 LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant to any
Eligible Person Stock Appreciation Rights exercisable only upon or in
respect of a change in control or any other specified event ("LIMITED
SARS") and such Limited SARs may relate to or operate in tandem or
combination with or substitution for Options, other SARs or other Awards
(or any combination thereof), and may be payable in cash or shares based
on the spread between the base price of the SAR and a price based upon or
equal to the Fair Market Value of the Shares during a specified period or
at a specified time within a specified period before, after or including
the date of such event.
4. RESTRICTED STOCK AWARDS
4.1 GRANTS. The Committee may grant one or more Restricted Stock Awards to
any Eligible Person. Each Restricted Stock Award Agreement will specify
the number of shares of Common Stock to be issued to the Participant, the
12
<PAGE>
date of such issuance, the consideration for such shares (but not less
than the minimum lawful consideration under applicable state law) by the
Participant, the extent (if any) to which and the time (if ever) at which
the Participant will be entitled to dividends, voting and other rights in
respect of the shares prior to vesting, and the restrictions (which may
be based on performance criteria, passage of time or other factors or any
combination thereof) imposed on such shares and the conditions of release
or lapse of such restrictions. Such restrictions will not lapse earlier
than six months after the Award Date, except to the extent the Committee
may otherwise provide. Stock certificates evidencing shares of Restricted
Stock pending the lapse of the restrictions ("RESTRICTED SHARES") will
bear a legend making appropriate reference to the restrictions imposed
hereunder and will be held by the Corporation or by a third party
designated by the Committee until the restrictions on such shares have
lapsed and the shares have vested in accordance with the provisions of
the Award and Section 1.7. Upon issuance of the Restricted Stock Award,
the Participant may be required to provide such further assurance and
documents as the Committee may require to enforce the restrictions.
4.2 RESTRICTIONS.
4.2.1 PRE-VESTING RESTRAINTS. Except as provided in Sections 4.1 and
1.9, restricted shares comprising any Restricted Stock Award may
not be sold, assigned, transferred, pledged or otherwise disposed
of or encumbered, either voluntarily or involuntarily, until the
restrictions on such shares have lapsed and the shares have become
vested.
4.2.2 DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the
applicable Award Agreement, a Participant receiving a Restricted
Stock Award will be entitled to cash dividend and voting rights for
all shares issued even though they are not vested, but such rights
will terminate immediately as to any Restricted Shares which cease
to be eligible for vesting.
4.2.3 CASH PAYMENTS. If the Participant has been paid or received cash
(including any dividends) in connection with the Restricted Stock
Award, the Award Agreement will specify whether and to what extent
such cash will be returned (with or without an earnings factor) as
to any restricted shares that cease to be eligible for vesting.
4.3 RETURN TO THE CORPORATION. Unless the Committee otherwise expressly
provides, Restricted Shares that remain subject to restrictions at the
time of termination of employment or are subject to other conditions to
vesting that
13
<PAGE>
have not been satisfied by the time specified in the applicable Award
Agreement will not vest and will be returned to the Corporation in such
manner and on such terms as the Committee provides.
5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES
5.1 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may grant Performance
Share Awards to Eligible Employees based upon such factors as the
Committee deems relevant in light of the specific type and terms of the
award. An Award Agreement will specify the maximum number of shares of
Common Stock (if any) subject to the Performance Share Award, the
consideration (but not less than the minimum lawful consideration) to be
paid for any such shares as may be issuable to the Participant, the
duration of the Award and the conditions upon which delivery of any
shares or cash to the Participant will be based. The amount of cash or
shares or other property that may be deliverable pursuant to such Award
will be based upon the degree of attainment over a specified period of
not more than 10 years (a "PERFORMANCE CYCLE") as may be established by
the Committee of such measure(s) of the performance of the Company (or
any part thereof) or the Participant as may be established by the
Committee. The Committee may provide for full or partial credit, prior
to completion of such performance cycle or the attainment of the
performance achievement specified in the Award, in the event of the
Participant's death, Retirement, or Total Disability, a Change in Control
Event or in such other circumstances as the Committee (consistent with
Section 6.10.3(b), if applicable) may determine.
5.2 SPECIAL PERFORMANCE-BASED SHARE AWARDS. Options or SAR's granted with an
exercise price not less than Fair Market Value at the applicable date of
grant for Section 162(m) purposes to Eligible Employees which otherwise
satisfy the conditions to deductibility under Section 162(m)of the Code
are deemed "Qualifying Awards". Without limiting the generality of the
foregoing, and in addition to Qualifying Awards granted under other
provisions of this Plan, other performance-based awards within the
meaning of Section 162(m) of the Code ("PERFORMANCE-BASED AWARDS"),
whether in the form of restricted stock, performance stock, phantom stock
or other rights, the vesting of which depends on the performance of the
Company on a consolidated, segment, subsidiary, or division basis, with
reference to revenue growths, net earnings (before or after taxes or
before or after taxes, interest, depreciation, and/or amortization), cash
flow, return on equity or on assets or on net investment, or cost
containment or reduction, or any combination thereof (the "BUSINESS
CRITERIA") relative to preestablished performance goals, may be granted
under this Plan. To the extent so defined, these terms are used as
applied under generally accepted accounting principles and in the
Company's financial reporting. The applicable business criterion or
criteria and the specific performance goals must be approved by the
Committee in advance of applicable deadlines under the Code and while the
performance relating to such goals remains substantially uncertain. The
applicable performance measurement period may be not less than one
(except as provided in Section 1.6) nor more than 10 years.
14
<PAGE>
Other types of performance and non-performance awards may also be granted
under the other provisions of this Plan. The following provisions relate
to all Performance-Based Awards (other than Qualifying Awards) granted
under this Plan;
5.2.1 ELIGIBLE CLASS. The eligible class of persons for Awards under
this Section is executive officers of the Corporation.
5.2.2 MAXIMUM AWARD. Subject to Section 1.4.2, in no event will grants in
any calendar year to any one individual under this Section 5.2 relate
to more than two hundred fifty thousand (250,000) shares or, (if
payable solely in cash) a cash amount of more than one million dollars
($1,000,000).
5.2.3 COMMITTEE CERTIFICATION. To the extent required by Section 162(m)
before any Performance-Based Award under this Section 5.2 is paid, the
Committee must certify that the material terms of the Performance-
Based Award were satisfied.
5.2.4 TERMS AND CONDITIONS OF AWARDS. The Committee will have discretion
to determine the restrictions or other limitations of the
individual Awards under this Section 5.2 (including the authority
to reduce Awards, payouts or vesting or to pay no Awards, in its
sole discretion, if the Committee preserves such authority at the
time of grant by language to this effect in its authorizing
resolutions or otherwise).
5.2.5 STOCK PAYOUT FEATURES. In lieu of cash payment of an Award, the
Committee may require or allow all or a portion of the Award to be
paid in the form of stock, Restricted Shares, an Option, or another
Award.
5.2.6 ADJUSTMENTS FOR MATERIAL CHANGES. Performance goals or other
features of an Award under this Section 5.2 may provide that they
(a) shall be adjusted to reflect a change in corporate
capitalization, a corporate transaction (such as a reorganization,
combination, separation, or merger) or a complete or partial
corporate liquidation, or (b) shall be calculated either without
regard for or to reflect any change in accounting policies or
practices affecting the Company and/or the business criteria or
performance goals or targets, or (c) shall be adjusted for any
other circumstance or event, or (d) any combination of (a) through
(c), but only to the extent in each case that such adjustment or
determination in respect of Performance-Based Awards would be
consistent with the requirements of Section 162(m) to qualify as
performance-based compensation.
5.3 GRANTS OF STOCK BONUSES. The Committee may grant a Stock Bonus to any
Eligible Person to reward exceptional or special services, contributions
or achievements in the manner and on such terms and conditions (including
any restrictions on such shares) as determined from time to time by the
Committee. The number of shares so awarded will be determined by the
Committee. The Award may be granted independently or in lieu of a cash
bonus.
5.4 DEFERRED PAYMENTS. The Committee may authorize for the benefit of any
Eligible Person the deferral of any payment of cash or shares that may
become due or of cash otherwise payable under this Plan, and provide for
accredited benefits thereon based upon such deferment, at the election or
at the request of such Participant, subject to the other terms of this
Plan.
15
<PAGE>
Such deferral will be subject to such further conditions, restrictions or
requirements as the Committee may impose, subject to any then vested
rights of Participants.
5.5 CASH BONUS AWARDS.
5.5.1 PERFORMANCE GOALS. The Committee may establish a program of annual
incentive awards that are payable in cash to Eligible Persons based
upon the extent to which performance goals are met during the
performance period. The performance goals may depend upon the
performance of the Company on a consolidated, subsidiary division
basis with reference to revenues, net earnings (before or after
interest, taxes, depreciation, or amortization), cash flow, return
on equity or on assets or net investment, cost containment or
reduction, or achievement of strategic goals (or any combination of
such factors). In addition, the award may depend upon the Eligible
Employee's individual performance.
5.5.2 PAYMENT IN RESTRICTED STOCK. In lieu of cash payment of an Award,
the Committee may require or allow all or a portion of the Award
to be paid in the form of stock, Restricted Stock, an Option or
other Award.
6. OTHER PROVISIONS
6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.
6.1.1 EMPLOYMENT STATUS. Status as an Eligible Person will not be
construed as a commitment that any Award will be made under this
Plan to an Eligible Person or to Eligible Persons generally.
6.1.2 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in any
other documents related to this Plan or to any Award) will confer
upon any Eligible Person or other Participant any right to continue
in the employ or other service of the Company or constitute any
contract or agreement of employment or other service, nor will
interfere in any way with the right of the Company to otherwise
change such person's compensation or other benefits or to terminate
the employment of such person, with or without cause, but nothing
contained in this Plan or any related document will adversely affect
16
<PAGE>
any independent contractual right of such person without the
Participant's consent.
6.1.3 PLAN NOT FUNDED. Awards payable under this Plan will be payable in
shares or from the general assets of the Corporation, and (except
as provided in Section 1.4.3) no special or separate reserve, fund
or deposit will be made to assure payment of such Awards. No
Participant, Beneficiary or other person will have any right, title
or interest in any fund or in any specific asset (including shares
of Common Stock, except as expressly otherwise provided) of the
Company by reason of any Award hereunder. Neither the provisions of
this Plan (or of any related documents), nor the creation or
adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan will create, or be construed to create, a
trust of any kind or a fiduciary relationship between the Company
and any Participant, Beneficiary or other person. To the extent
that a Participant, Beneficiary or other person acquires a right to
receive payment pursuant to any Award hereunder, such right will be
no greater than the right of any unsecured general creditor of the
Company.
6.2 ADJUSTMENTS; ACCELERATION.
6.2.1 ADJUSTMENTS. The following provisions will apply if any
extraordinary dividend or other extraordinary distribution occurs
in respect of the Common Stock (whether in the form of cash, Common
Stock, other securities, or other property), or any
reclassification, recapitalization, stock split (including a stock
split in the form of a stock dividend), reverse stock split,
reorganization, merger, combination, consolidation, split-up,
spin-off, combination, repurchase, or exchange of Common Stock or
other securities of the Corporation, or any similar, unusual or
extraordinary corporate transaction (or event in respect of the
Common Stock) or a sale of substantially all the assets of the
Corporation as an entirety occurs. The Committee will, in such
manner and to such extent (if any) as it deems appropriate and
equitable
(a) proportionately adjust any or all of (i) the number and type
of shares of Common Stock (or other securities) that
thereafter may be made the subject of Awards (including the
specific maxima and numbers of shares set forth elsewhere in
this Plan), (ii) the number, amount and type of shares of
Common Stock (or other securities or property) subject to any
or all outstanding Awards,(iii) the grant, purchase, or
exercise price
17
<PAGE>
of any or all outstanding Awards, (iv) the securities, cash or
other property deliverable upon exercise of any outstanding
Awards, or (v) the performance standards appropriate to any
outstanding Awards, or
(b) in the case of an extraordinary dividend or other
distribution, recapitalization, reclassification, merger,
reorganization, consolidation, combination, sale of assets,
split up, exchange, or spin off, make provision for a cash
payment or for the substitution or exchange of any or all
outstanding Awards or the cash, securities or property
deliverable to the holder of any or all outstanding Awards
based upon the distribution or consideration payable to
holders of the Common Stock of the Corporation upon or in
respect of such event. In each case, with respect to Awards
of Incentive Stock Options, no such adjustment will be made
that would cause the Plan to violate Section 424(a) of the
Code or any successor provisions without the written consent
of holders materially adversely affected thereby. In any of
such events, the Committee may take such action sufficiently
prior to such event if necessary to permit the Participant to
realize the benefits intended to be conveyed with respect to
the underlying shares in the same manner as is available to
stockholders generally.
6.2.2 ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Unless prior to a
Change in Control Event the Committee determines that, upon its
occurrence, benefits under any or all Awards will not accelerate or
determines that only certain or limited benefits under any or all
Awards will be accelerated and the extent to which they will be
accelerated, and/or establishes a different time in respect of such
Event for such acceleration, then upon the occurrence of a Change
in Control Event
(a) each Option and Stock Appreciation Right will become
immediately exercisable,
(b) Restricted Stock will immediately vest free of restrictions,
and
(c) each Performance Share Award will become payable to the
Participant.
However, in the case of a transaction intended to
be accounted for as a pooling of interests transaction, the
Committee shall have no discretion with respect to the
foregoing acceleration of Awards.
18
<PAGE>
The Committee may override the limitations on acceleration in this
Section 6.2.2 by express provision in the Award Agreement and may
accord any Eligible Person a right to refuse any acceleration,
whether pursuant to the Award Agreement or otherwise, in such
circumstances as the Committee may approve. Any acceleration of
Awards will comply with applicable legal requirements.
6.2.3 POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option or
other right to acquire Common Stock under this Plan (other than
under Section 8) has been fully accelerated as required or
permitted by Section 6.2.2 but is not exercised prior to (a) a
dissolution of the Corporation, or (b) an event described in
Section 6.2.1 that the Corporation does not survive, or (c) the
consummation of an event described in Section 6.1 involving a
Change of Control approved by the Board, such Option or right will
terminate, subject to any provision that has been expressly made by
the Committee through a plan of reorganization approved by the
Board or otherwise for the survival, substitution, assumption,
exchange or other settlement of such Option or right.
6.2.4 GOLDEN PARACHUTE LIMITATIONS. Unless otherwise specified in an
Award Agreement, no Award be accelerated under this Plan to an
extent or in a manner that would not be fully deductible by the
Company for federal income tax purposes because of Section 280G of
the Code, nor will any payment hereunder be accelerated if any
portion of such accelerated payment would not be deductible by the
Company because of Section 280G of the Code. If a holder would be
entitled to benefits or payments hereunder and under any other plan
or program that would constitute "parachute payments" as defined in
Section 280G of the Code, then the holder may by written notice to
the Company designate the order in which such parachute payments
will be reduced or modified so that the Company is not denied
federal income tax deductions for any "parachute payments" because
of Section 280G of the Code.
6.3 EFFECT OF TERMINATION OF EMPLOYMENT. The Committee will establish in
respect of each Award granted to an Eligible Person the effect of a
termination of employment on the rights and benefits thereunder and in so
doing may make distinctions based upon the cause of termination.
6.4 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Awards
under this Plan and the offer, issuance and delivery of shares of Common
Stock and/or the payment of money under this Plan or under Awards granted
hereunder are subject to compliance with all applicable federal and
19
<PAGE>
state laws, rules and regulations (including but not limited to state and
federal securities law, federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in
the opinion of counsel for the Corporation, be necessary or advisable in
connection therewith. Any securities delivered under this Plan will be
subject to such restrictions, and to any restrictions the Committee may
require to preserve a pooling of interests under generally accepted
accounting principles, and the person acquiring such securities will, if
requested by the Corporation, provide such assurances and representations
to the Corporation as the Corporation may deem necessary or desirable to
assure compliance with all applicable legal requirements.
6.5 TAX WITHHOLDING.
6.5.1 PROVISION FOR TAX WITHHOLDING OFFSET. Upon any exercise, vesting,
or payment of any Award or upon the disposition of shares of Common
Stock acquired pursuant to the exercise of an Incentive Stock
Option prior to satisfaction of the holding period requirements of
Section 422 of the Code, the Company shall have the right at its
option to (i) require the Participant (or Personal Representative or
Beneficiary, as the case may be) to pay or provide for payment of the
amount of any taxes which the Company may be required to withhold with
respect to such Award event or payment or (ii) deduct from any amount
payable in cash the amount of any taxes which the Company may be
required to withhold with respect to such cash payment. In any case
where a tax is required to be withheld in connection with the delivery
of shares of Common Stock under this Plan, the Committee may in its
sole discretion (subject to Section 6.4) grant (either at the time of
the Award or thereafter) to the Participant the right to elect,
pursuant to such rules and subject to such conditions as the Committee
may establish, to have the Corporation reduce the number of shares to
be delivered by (or otherwise reacquire) the appropriate number of
shares valued at their then Fair Market Value, to satisfy such
withholding obligation.
6.5.2 TAX LOANS. If so provided in the Award Agreement, the Company may,
to the extent permitted by law, authorize a loan to an Eligible
Person in the amount of any taxes that the Company may be required
to withhold with respect to shares of Common Stock received (or
disposed of, as the case may be) pursuant to a transaction
described in Section 6.5.1. Such a loan will be for a term, at a
rate of interest and pursuant to such other terms and conditions as
the Company, under applicable law may establish and such loan need
not comply with the provisions of Section 1.8.
6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION.
6.6.1 BOARD AUTHORIZATION. The Board may, at any time, terminate or,
from time to time, amend, modify or suspend this Plan, in whole or
in part. No Awards may be granted during any suspension of this
Plan or after termination of this Plan, but the Committee will
retain jurisdiction as to Awards then outstanding in accordance
with the terms of this Plan.
20
<PAGE>
6.6.2 STOCKHOLDER APPROVAL. To the extent then required under Sections
422 and 424 of the Code or any other applicable law, or deemed
necessary or advisable by the Board, any amendment to this Plan
shall be subject to shareholder approval.
6.6.3 AMENDMENTS TO AWARDS. Without limiting any other express authority
of the Committee under but subject to the express limits of this
Plan, the Committee by agreement or resolution may waive conditions
of or limitations on Awards to Eligible Persons that the Committee
in the prior exercise of its discretion has imposed, without the
consent of a Participant, and may make other changes to the terms
and conditions of Awards that do not affect in any manner
materially adverse to the Participant, the Participant's rights and
benefits under an Award.
6.6.4 LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment,
suspension or termination of this Plan or change of or affecting
any outstanding Award will, without written consent of the
Participant, affect in any manner materially adverse to the
Participant any rights or benefits of the Participant or
obligations of the Corporation under any Award granted under this
Plan prior to the effective date of such change. Changes
contemplated by Section 6.2 will not be deemed to constitute
changes or amendments for purposes of this Section 6.6.
6.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized
by the Committee or this Plan, a Participant will not be entitled to any
privilege of stock ownership as to any shares of Common Stock not
actually delivered to and held of record by the Participant. No
adjustment will be made for dividends or other rights as a stockholder
for which a record date is prior to such date of delivery.
6.8 EFFECTIVE DATE OF THE PLAN. This Plan is effective as of August 1, 1997,
and was restated in its entirety as of September 12, 1997. The Plan was
approved by the Company's stockholders on August 1, 1997 and the
restatement was approved by the Company's stockholders on September 12,
1997.
6.9 TERM OF THE PLAN. No Award will be granted under this Plan
more than ten years after July 31, 2007 (the "TERMINATION DATE").
Unless otherwise expressly provided in this Plan or in an applicable Award
Agreement, any Award granted prior to the termination date may extend
beyond such date, and all authority of the Committee with respect to Awards
hereunder, including the authority to amend an Award, will continue
21
<PAGE>
during any suspension of this Plan and in respect of Awards
outstanding on the termination date.
22
<PAGE>
6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY.
6.10.1 CHOICE OF LAW. This Plan, the Awards, all documents
evidencing wards and all other related documents will be overned
by, and construed in accordance with the aws of the state of
California.
6.10.2 SEVERABILITY. If a court of competent jurisdiction holds any
provision invalid and unenforceable, the remaining provisions of
this Plan will continue in effect.
6.10.3 PLAN CONSTRUCTION.
(a) RULE 16b-3. It is the intent of the Corporation that the
Awards hereunder satisfy and be interpreted in a manner that,
in the case of Participants who are or may be subject to
Section 16 of the Exchange Act, satisfies the applicable
requirements of Rule 16b-3 so that such persons (unless they
otherwise agree) will be entitled to the benefits of Rule
16b-3 or other exemptive rules under Section 16 of the
Exchange Act in respect of those transactions and will not be
subjected to avoidable liability thereunder. If any provision
of this Plan or of any Award would otherwise frustrate or
conflict with the intent expressed above, that provision to
the extent possible will be interpreted as to avoid such
conflict. If the conflict remains irreconcilable, the
Committee may disregard the provision if it concludes that to
do so furthers the interest of the Corporation, is fair to the
affected Participant, and is consistent with the purposes of
this Plan as to such persons in the circumstances.
(b) SECTION 162(m). It is the further intent of the Company that
Options or SARs with an exercise or base price not less than
Fair Market Value on the date of grant and performance awards
under Section 5.2 of this Plan that are granted to or held by
a person subject to Section 162(m) of the Code will qualify as
performance-based compensation under Section 162(m) of the
Code, and this Plan will be interpreted consistent with such
intent.
6.11 CAPTIONS. Captions and headings are given to the sections and
subsections of this Plan solely as a convenience to facilitate reference.
23
<PAGE>
Such headings will not be deemed in any way material or relevant to the
construction or interpretation of this Plan or any provision thereof.
6.12 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan and
any Award hereunder, if an entity ceases to be a Subsidiary a termination
of employment and service will be deemed to have occurred with respect to
each Eligible Person in respect of such Subsidiary who does not continue
as an Eligible Person in respect of another entity within the Company.
6.13 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan will limit or be deemed
to limit the authority of the Board or the Committee to grant awards or
authorize any other compensation, with or without reference to the Common
Stock, under any other plan or authority.
7. DEFINITIONS
"AWARD" means an award of any Option, Stock Appreciation Right, Restricted
Stock, Stock Bonus, performance share award, dividend equivalent or deferred
payment right or other right or security that would constitute a "derivative
security" under Rule 16a-1(c) of the Exchange Act, or any combination
thereof, whether alternative or cumulative, authorized by and granted under
this Plan.
"AWARD AGREEMENT" means any writing setting forth the terms of an Award that
has been authorized by the Committee.
"AWARD DATE" means the date upon which the Committee took the action granting
an Award or such later date as the Committee designates as the Award Date at
the time of the Award or, in the case of Awards under Section 8, the
applicable dates set forth therein.
"AWARD PERIOD" means the period beginning on an Award Date and ending on the
expiration date of such Award.
"BENEFICIARY" means the person, persons, trust or trusts designated by a
Participant or, in the absence of a designation, entitled by will or the laws
of descent and distribution, to receive the benefits specified in the Award
Agreement and under this Plan if the Participant dies, and means the
Participant's executor or administrator if no other Beneficiary is designated
and able to act under the circumstances.
"BOARD" means the Board of Directors of the Corporation.
24
<PAGE>
"CHANGE IN CONTROL EVENT" means any of the following:
(a) Approval by the stockholders of the Corporation of the dissolution
or liquidation of the Corporation;
(b) Approval by the stockholders of the Corporation of an agreement to
merge or consolidate, or otherwise reorganize, with or into one or
more entities that are not Subsidiaries or other affiliates, as a
result of which less than 50% of the outstanding voting securities
of the surviving or resulting entity immediately after the
reorganization are, or will be, owned, directly or indirectly, by
stockholders of the Corporation immediately before such
reorganization (assuming for purposes of such determination that
there is no change in the record ownership of the Corporation's
securities from the record date for such approval until such
reorganization and that such record owners hold no securities of
the other parties to such reorganization), but including in such
determination any securities of the other parties to such
reorganization held by affiliates of the Corporation);
(c) Approval by the stockholders of the Corporation of the sale of
substantially all of the Corporation's business and/or assets to a
person or entity that is not a Subsidiary or other affiliate; or;
(d) Any "PERSON" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act but excluding any person described in and
satisfying the conditions of Rule 13d-1(b)(1) thereunder), other
than a Current Affiliate, becomes the beneficial owner (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing more than 50% of the
combined voting power of the Corporation's then outstanding
securities entitled to then vote generally in the election of
directors of the Corporation; provided, however, that a Change of
Control will not be deemed to have occurred if a Current Affiliate
transfers to an organization described under Section 501 of the
Code beneficial ownership of more than 50% of the combined voting
power of the Corporation's then outstanding securities entitled to
then vote generally in the election of directors of the
Corporation; or
(e) During any period not longer than two consecutive years, individuals
who at the beginning of such period constituted the Board cease to
constitute at least a majority thereof, unless the election, or the
nomination for election by the Corporation's stockholders, of each
new Board member was approved by a vote of at least three-fourths
25
<PAGE>
of the Board members then still in office who were Board members at
the beginning of such period (including for these purposes, new
members whose election or nomination was so approved).
"CURRENT AFFILIATE" means Fred Kayne or any of his affiliates (within the
meaning of the Exchange Act), successors, heirs, descendants or members of
his immediate family.
"CODE" means the Internal Revenue Code of 1986, as amended from time to time.
"COMMISSION" means the Securities and Exchange Commission.
"COMMITTEE" means the Board or a committee appointed by the Board to
administer this Plan, which committee will be comprised only of two or more
directors or such greater number of directors as may be required under
applicable law, each of whom, in respect of any decision involving a
Participant affected by the decision who may be subject to Section 162(m) of
the Code, will be Disinterested. In acting on any transaction with or for the
benefit of a Section 16 Person, all acting members of the Committee shall be
Non-Employee Directors within the meaning of Rule 16b-3 under the Exchange
Act.
"COMMON STOCK" means the Common Stock of the Corporation and such other
securities or property as may become the subject of Awards, or become subject
to Awards, pursuant to an adjustment made under Section 6.2 of this Plan.
"COMPANY" means, collectively, the Corporation and its Subsidiaries.
"CORPORATION" means Big Dog Sportswear, a Delaware corporation, and its
successors.
"DISINTERESTED" means a disinterested director or an "outside director"
within the meaning of any mandatory legal or regulatory requirements,
including Section 162(m) of the Code.
"ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or key
employee of the Company.
"ELIGIBLE PERSON" means an Eligible Employee, or any Other Eligible Person,
as determined by the Committee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time.
26
<PAGE>
"FAIR MARKET VALUE" on any date means (a) if the stock is listed or admitted
to trade on a national securities exchange, the closing price of the stock on
the Composite Tape, as published in the Western Edition of The Wall Street
Journal, of the principal national securities exchange on which the stock is
so listed or admitted to trade, on such date, or, if there is no trading of
the stock on such date, then the closing price of the stock as quoted on such
Composite Tape on the next preceding date on which there was trading in such
shares; (b) if the stock is not listed or admitted to trade on a national
securities exchange, the last price for the stock on such date, as furnished
by the National Association of Securities Dealers, Inc. ("NASD") through the
NASDAQ National Market Reporting System or a similar organization if the NASD
is no longer reporting such information; (c) if the stock is not listed or
admitted to trade on a national securities exchange and is not reported on
the National Market Reporting System, the mean between the bid and asked
price for the stock on such date, as furnished by the NASD or a similar
organization; or (d) if the stock is not listed or admitted to trade on a
national securities exchange, is not reported on the National Market
Reporting System and if bid and asked prices for the stock are not furnished
by the NASD or a similar organization, the value as established by the
Committee at such time for purposes of this Plan.
"INCENTIVE STOCK OPTION" means an Option that is designated and intended as
an incentive stock option within the meaning of Section 422 of the Code, the
award of that contains such provisions (including but not limited to the
receipt of stockholder approval of this Plan, if the award is made prior to
such approval) and is made under such circumstances and to such persons as
may be necessary to comply with that section.
"NONQUALIFIED STOCK OPTION" means an Option that is designated as a
Nonqualified Stock Option and will include any Option intended as an
Incentive Stock Option that fails to meet the applicable legal requirements
thereof. Any Option granted hereunder that is not designated as an incentive
stock option will be deemed to be designated a nonqualified stock option
under this Plan and not an incentive stock option under the Code.
"NON-EMPLOYEE DIRECTOR" means a member of the Board of Directors of the
Corporation who is not an officer or employee of the Company. For purposes
of this Plan, the Chairman of the Board will be deemed an officer of the
Company.
"NON-EMPLOYEE DIRECTOR PARTICIPANT" means a Non-Employee Director who holds
an outstanding Award under the provisions of Section 8.
27
<PAGE>
"OPTION" means an option to purchase Common Stock granted under this Plan.
The Committee will designate any Option granted to an Eligible Person as a
Nonqualified Stock Option or an Incentive Stock Option.
"OTHER ELIGIBLE PERSON" means any Non-Employee Director or any individual
consultant or advisor who or (to the extent provided in the next sentence)
agent who renders or has rendered BONA FIDE services (other than services in
connection with the offering or sale of securities of the Company in a
capital raising transaction) to the Company, and who is selected to
participate in this Plan by the Committee. If the Corporation's officers and
directors are or become subject to Section 16 of the Exchange Act, a
Non-Employee Director will not thereafter be selected as an Other Eligible
Person. A non-employee providing BONA FIDE services to the Company (other
than as an eligible advisor or consultant) may also be selected as an Other
Eligible Person if such agent's participation in this Plan would not
adversely affect (a) the Corporation's eligibility to use Form S-8 to
register under the Securities Act of 1933, as amended, the offering of shares
issuable under this Plan by the Company or (b) the Corporation's compliance
with any other applicable laws.
"PARTICIPANT" means an Eligible Person who has been granted an Award under
this Plan and a Non-Employee Director who has been received an Award under
Section 8 of this Plan.
"PERFORMANCE SHARE AWARD" means an Award of a right to receive shares of
Common Stock under Section 5.1, or to receive shares of Common Stock or other
compensation (including cash) under Section 5.2, the issuance or payment of
that is contingent upon, among other conditions, the attainment of
performance objectives specified by the Committee.
"PERSONAL REPRESENTATIVE" means the person or persons who, upon the
disability or incompetence of a Participant, has acquired on behalf of the
Participant, by legal proceeding or otherwise, the power to exercise the
rights or receive benefits under this Plan by virtue of having become the
legal representative of the Participant.
"PLAN" means this 1997 Performance Award Plan, as amended from time to time.
"QDRO" means a qualified domestic relations order.
"RESTRICTED SHARES" or "RESTRICTED STOCK" means shares of Common Stock
awarded to a Participant under this Plan, subject to payment of such
consideration, if any, and such conditions on vesting (which may include,
among others, the passage of time, specified performance objectives or other
factors) and
28
<PAGE>
such transfer and other restrictions as are established in or pursuant to
this Plan and the related Award Agreement, for so long as such shares remain
unvested under the terms of the applicable Award Agreement.
"RETIREMENT" means retirement with the consent of the Company or, from active
service as an employee or officer of the Company on or after attaining age 55
with ten or more years of service or age 65.
"RULE 16b-3" means Rule 16b-3 as promulgated by the Commission pursuant to
the Exchange Act, as amended from time to time, but subject to any applicable
transition rules.
"SECTION 16 PERSON" means a person subject to Section 16(a) of the Exchange
Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to
time.
"STOCK APPRECIATION RIGHT" OR "SAR" means a right authorized under this Plan
to receive a number of shares of Common Stock or an amount of cash, or a
combination of shares and cash, the aggregate amount or value of which is
determined by reference to a change in the Fair Market Value of the Common
Stock.
"STOCK BONUS" means an Award of shares of Common Stock granted under this
Plan for no consideration other than past services and without restriction
other than such transfer or other restrictions as the Committee may deem
advisable to assure compliance with law.
"SUBSIDIARY" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Corporation.
"TOTAL DISABILITY" means a disability where Participant is unable to
effectively engage in the material activities required for Participant's
position with the Company by reason of any medically determinable physical or
mental impairment that can be expected to result in death or that has lasted
or can be expected to last for a period of 90 consecutive days or for shorter
periods aggregating 180 days in any consecutive 12 month period.
29
<PAGE>
8. NON-EMPLOYEE DIRECTOR OPTIONS
8.1 PARTICIPATION. Awards under this Section 8 will be made only to
Non-Employee Directors and will be evidenced by Award Agreements
substantially in the form of EXHIBIT A.
8.2 ANNUAL OPTION GRANTS.
8.2.1 TIME OF INITIAL AWARD. After approval of this Plan by the
stockholders of the Corporation, if any person who is not then an
officer or employee of the Company will become a director of the
Corporation, such person will automatically be granted (without any
action by the Board or Committee) a Non-qualified Stock Option (the
Award Date of which will be the date such person takes office) to
purchase 10,000 shares of Common Stock.
8.2.2 SUBSEQUENT ANNUAL AWARDS. Subject to Section 8.2.3, at the close of
trading on the day of the annual stockholders meeting in each year
during the term of the Plan commencing 1998, there will be granted
automatically (without any action by the Committee or the Board) a
Nonqualified Stock Option (the Award Date of which will be such
date) to each Non-Employee Director then continuing in office to
purchase 5,000 shares of Common Stock.
8.2.3 MAXIMUM NUMBER OF OPTIONS/SHARES. Annual grants that would
otherwise exceed the maximum number of shares under Section 1.4.1
will be prorated within such limitation. A Non-Employee Director
will not receive more than one Nonqualified Stock Option under this
Section 8.2 in any calendar year.
8.3 OPTION PRICE. The purchase price per share of the Common Stock covered
by each Option granted pursuant to Section 8.2 will be 100% of the Fair
Market Value of the Common Stock on the Award Date. The exercise price
of any Option granted under this Section will be paid in full at the time
of each purchase in cash or by check or in shares of Common Stock valued
at their Fair Market Value on the date of exercise of the Option, or
partly in such shares and partly in cash, but any such shares used in
payment must be owned by the Participant at least six months prior to the
date of exercise.
8.4 OPTION PERIOD AND EXERCISABILITY. Each Option granted under this Section
8 and all rights or obligations thereunder will expire on the day before
the tenth anniversary of the Award Date and will be subject to earlier
termination as provided below. Each Option granted under Section 8.2
will become exercisable at the rate
30
<PAGE>
of 20% per annum commencing on the first anniversary of the Award Date and
each of the next four anniversaries thereof.
8.5 TERMINATION OF DIRECTORSHIP. If a Non-Employee Director's services as a
member of the Board of Directors terminate by reason of death, Disability
or Retirement, an Option granted pursuant to this Section 8 held by such
Participant will immediately become and will remain exercisable for two
years after the date of such termination or until the expiration of the
stated term of such Option, whichever first occurs. If a Non-Employee
Director's services as a member of the Board of Directors terminate for
any other reason, any portion of an Option granted pursuant to this
Section that is not then exercisable will terminate and any portion of
such Option that is then exercisable may be exercised for six months
after the date of such termination or until the expiration of the stated
term whichever first occurs.
8.6 ADJUSTMENTS; ACCELERATIONS; TERMINATIONS. Options granted under this
Section 8 will be subject to adjustments, accelerations and terminations
as provided in Section 6.2, but only to the extent that in the case of a
Change in Control Event such effect and any Board or Committee action in
respect thereof is effected pursuant to the terms of a reorganization
agreement approved by stockholders of the Corporation, or is otherwise
consistent with the effect on Options held by persons other than
executive officers or directors of the Corporation (or, if there are
none, consistent in respect of the underlying shares with the effect on
stockholders generally).
31
<PAGE>
8.7 ACCELERATION UPON A CHANGE IN CONTROL EVENT. Upon the occurrence of a
Change in Control Event and acceleration under Section 6.2.2, each Option
granted under Section 8.2 hereof will become immediately exercisable in
full. To the extent that any Option granted under this Section 8 is not
exercised prior to (a) a dissolution of the Corporation or (b) a merger
or other corporate event that the Corporation does not survive, and no
provision is (or consistent with the provisions of this Plan can be) made
for the assumption, conversion, substitution or exchange of the Option,
the Option will terminate upon the occurrence of such event.
32
<PAGE>
EXHIBIT A
BIG DOG HOLDINGS, INC.
ELIGIBLE DIRECTOR
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of _____________, ____, is between BIG DOG
HOLDINGS, INC. , a Delaware corporation (the "CORPORATION"), and
________________ (the "DIRECTOR"). The Corporation and the Director agree to
the terms and conditions set forth herein as required by the terms of the
Plan.
BACKGROUND
A. The Corporation has adopted and the stockholders of the
Corporation have approved the 1997 Performance Award Plan (the "PLAN").
B. Pursuant to the Plan, the Corporation has granted an option (the
"OPTION") to the Director upon the terms and conditions evidenced hereby, as
required by the Plan, which Option is not intended as and will not be deemed
to be an incentive stock option within the meaning of Section 422 of the Code.
1. OPTION GRANT. This Agreement evidences the grant to the Director, as of
___________, ____ (the "OPTION DATE"), of an Option to purchase an aggregate
of _____ shares of Common Stock, par value $____ per share, under Section 8
of the Plan, subject to the terms and conditions and to adjustment as set
forth herein or in pursuant to the Plan.
2. EXERCISE PRICE. The Option entitles the Director to purchase (subject
to the terms of Sections 3 through 5 below) all or any part of the Option
shares at a price per share of $_______, which represents the Fair Market
Value of the shares on the Option Date.
Exhibit A-1
<PAGE>
3. OPTION EXERCISABILITY AND TERM. Subject to adjustment pursuant to the
Plan, the Option will first become and remain exercisable as to ___________
(20%) of the shares on the first anniversary of the date of grant and as to an
additional _________ shares (20%) on each of the next four anniversaries of
that date, in each case subject to adjustments and acceleration under
Section 8.6 of the Plan. The Option will terminate on ____________, ____,*
unless earlier terminated in accordance with the terms of the Plan.
4. SERVICE AND EFFECT OF TERMINATION OF SERVICE. The Director
agrees to serve as a director in accordance with the provisions of the
Corporation's Certificate of Incorporation, bylaws and applicable law. If
the Director's services as a member of the Board terminate, this Option will
terminate at the times and to the extent set forth in the Plan.
5. GENERAL TERMS. The Option and this Agreement are subject to,
and the Corporation and the Director agree to be bound by, the provisions of
the Plan that apply to the Option. Such provisions are incorporated herein
by this reference. The Director has received a copy of the Plan and has read
its applicable provisions. Capitalized terms not otherwise defined herein
have the meaning set forth in the Plan.
_______________
* Insert day before tenth anniversary of date of grant
Exhibit A-2
<PAGE>
The parties have signed this Agreement as of the date on page 1.
BIG DOG HOLDINGS, INC.
(a Delaware corporation)
By __________________________
Title ______________________
Optionee Director
_____________________________
(Signature)
_____________________________
(Print Name)
_____________________________
(Address)
_____________________________
(City, State, Zip Code)
_____________________________
[social security number]
In consideration of the execution of the foregoing Stock Option
Agreement by Big Dog Holdings, Inc., I, ____________________________, the
spouse of the Director named therein, agree to be bound by all of the terms
and provisions thereof and of the Plan.
DATED: ______________, ____.
___________________________
Signature of Spouse
Exhibit A-3
<PAGE>
ADDENDUM TO
BIG DOG HOLDINGS, INC.
1997 PERFORMANCE AWARD PLAN
The following Addendum amends the Big Dog Holdings, Inc. 1997 Performance Award
Plan (the "Plan"). All terms used herein shall have the meaning provided in the
Plan. Until the date (the "Sunset Date") on which the offer and grant of
Options and the issuance of Common Stock subject to Options under the plan is
exempt from California qualification requirements under Federal law or Section
25100(o) of the California Corporate Securities Law and the Rules of the
California Commissioner of Corporations thereunder, the following amendments
shall continue to apply, to the extent required under California law, in respect
of all Options granted under the plan prior to the Sunset Date (the "Initial
Options").
1. EFFECTIVE TIME OF AMENDMENT. This addendum amendment shall be effective
from August 1, 1997 until the Sunset Date.
2. TERM. Section 1.6 is deleted and Section 2.3.2 is amended to provide:
OPTION PERIOD. Each Option and all rights thereunder will expire no
later than 120 months after the Award Date.
3. TRANSFERABILITY. Section 1.9.2 and clauses (a), (c) and (d) of Section
1.9.3 are deleted.
4. PRICING LIMITS. Section 2.2.1 is amended by changing the phrase "not less
than the par value thereof" to "not less than 85% of the fair value (as
determined consistent with the requirements of Section 25102(o) of the
California Corporate Securities Law of 1968, as amended (the "California
Exemption")) as of the Award Date, except that the purchase price shall be 110%
of the fair value in the case of any person who owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company.
5. EFFECT OF TERMINATION OF EMPLOYMENT. Section 2.6 is amended to eliminate
the discretion of the Committee (other than under 2.6.6) and the Board in
respect of Options granted to persons other than persons ("Associated
Persons") who are officers, directors or consultants of the Corporation or
any of its affiliates.
6. EXERCISE. Section 2.8 is added to provide:
RIGHT TO EXERCISE. Subject to Section 2.6, Options shall become
exercisable at the rate of at least 20% per year over five years from
the Award Date, subject to reasonable conditions such as continued
employment. However, in the case of an Option granted to an
Associated Person, the Option may become fully exercisable, subject to
reasonable
<PAGE>
conditions such as continued employment, at any time or during any
period established by the Committee.
7. INFORMATION. Section 2.9 is added to provide:
INFORMATION TO PARTICIPANTS. To the extent required by the California
Exemption, Participants will receive financial statements of the
Company at least annually.
8. ELIGIBLE PERSONS. Eligible Persons shall be limited to persons eligible
under the California Exemption and SEC Rule 701.
9. REPURCHASE RIGHTS. Any provision in the Option Agreement for the repurchase
of the option or the underlying Common Stock from a person who is not an
Associated Person shall comply with the provisions of Section 260.140.41 of the
Rules of the California Commissioner of Corporations.
<PAGE>
EXHIBIT 10.10A
BIG DOG HOLDINGS, INC.
ELIGIBLE EMPLOYEE
NON-QUALIFIED STOCK OPTION AGREEMENT
This AGREEMENT dated as of __________, 1997, is between BIG DOG HOLDINGS,
INC., a Delaware corporation (the "CORPORATION"), and the individual named on
the signature page hereof (the "PARTICIPANT"). The Corporation and the
Participant agree to the terms and conditions set forth herein as required by
the terms of the Plan (as defined below).
A. The Corporation has adopted and the stockholders of the Corporation
have approved the 1997 Performance Award Plan, as supplemented by an Addendum (
the "ADDENDUM") each dated as of August 1, 1997 (together with the Addendum, the
"PLAN"). All capitalized terms not defined herein shall have the meaning
provided in the Plan.
B. Pursuant to the Plan, the Corporation has granted an option (the
"OPTION") to the Participant on the terms and conditions evidenced by this
Agreement, contemplated by the Plan, which Option is not intended as and shall
not be deemed to be an incentive stock option within the meaning of Section 422
of the Code.
In consideration of the mutual promises and covenants made herein and the
mutual benefits to be derived herefrom, the parties agree as follows:
1. OPTION GRANT. This Agreement evidences the grant to the
Participant, as of August 1, 1997 (the "AWARD DATE"), of an Option to purchase
an aggregate of ____________________________ shares of Common Stock under
Section 2 of the Plan (the "OPTION SHARES"), subject to the terms and conditions
of, and to adjustments as set forth in or pursuant to, the Plan and to the terms
and conditions hereof.
2. EXERCISE PRICE. The Option entitles the Participant to purchase
(subject to the vesting requirements and other terms of Sections 3 through 13
below) all or any part of the Option Shares at a price per share of Twelve
Dollars ($12.00), which represents the Fair Market Value of the shares on the
Award Date as determined by the Board in accordance with the Plan.
3. OPTION EXERCISABILITY AND TERM.
3.1. Subject to adjustment pursuant to the Plan, the Option will first
become and, subject to Section 5, remain exercisable as to 20% of the shares on
August 1,
1
<PAGE>
1998 and as to an additional 20% of the shares on each of the next four
anniversaries of that date, in each case subject to adjustments, acceleration
and termination under the Plan.
3.2. The Option expires on July 31, 2004 (the "EXPIRATION DATE"),
unless earlier terminated in accordance with the terms of the Plan or this
Agreement.
3.3 To the extent the Participant does not in any year purchase all
or any part of the shares to which the Participant is entitled, the Participant
has the right cumulatively thereafter to purchase any shares not so purchased
and such right shall continue until the Option terminates or expires.
3.4 Fractional share interests shall be disregarded, but may be
cumulated.
3.5 No fewer than 100 shares may be purchased at any one time, unless
the number purchased is the total number at the time available for purchase
under the Option.
3.6 Participant acknowledges that the vesting schedule requires
continued service through each applicable vesting date as a condition to the
vesting of the applicable rights and benefits under this Agreement. Partial
service, even if substantial, during any vesting period will not entitle the
Participant to any proportionate vesting or avoid or mitigate a termination of
rights and benefits upon or following a termination of employment or service as
provided in Section 5 below or under the Plan.
4. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable by
the delivery to the Corporation of a written notice stating the number of shares
to be purchased pursuant to the Option and accompanied by payment as provided in
or pursuant to Section 2.2.2(a), (b), or (e) of the Plan, or in any combination
thereof; subject to such further limitations as the Committee may from time to
time establish as to any non-cash payment and as to the tax withholding
requirements of the Plan. In addition, the Participant or his or her successor
in interest shall furnish any written statements required pursuant to Section
6.4 of the Plan.
5. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH; CHANGE IN
SUBSIDIARY STATUS. The Option and all other rights hereunder, to the extent not
previously exercised, shall terminate and become null and void at such time as
the Participant ceases to be employed by the Company except that:
(a) if the Participant's employment terminates by reason of
disability (as determined by the Committee), the Participant may at any
time within a period of six (6) months after the termination of employment
exercise the Option, but only to the extent the Option was exercisable at
the date of such termination;
2
<PAGE>
(b) if the Participant's employment terminates by reason of
Retirement, the Participant may at any time within a period of six (6)
months after such termination exercise the Option, but only to the extent
the Option was exercisable at the date of such termination;
(c) if the Participant's employment terminates by reason of
resignation, other than pursuant to a dismissal for Cause (as defined
below), or by reason of a dismissal without Cause, the Participant may at
any time within a period of three (3) months after such termination
exercise the Option, but only to the extent the Option was exercisable at
the date of such termination;
(d) if the Participant dies while in the employ of the Company,
or within three (3) months after a termination described in subsection (a)
of this Section 5, then the Option may be exercised within a period of six
(6) months after the Participant's date of death, but only to the extent
the Option was exercisable on the date of Participant's termination of
service;
PROVIDED, HOWEVER, THAT IN EACH CASE IN NO EVENT MAY THE OPTION BE EXERCISED BY
ANYONE UNDER THIS SECTION 5 OR OTHERWISE AFTER THE EXPIRATION DATE.
For purposes of clause (c) of this Section 5, the Participant will be considered
to have been dismissed for "Cause" if the Company has terminated Participant's
employment because of any act which has resulted in the Participant's personal
gain at the expense of the Company or because of incompetence, insubordination
or refusal to perform assigned duties; negligence, willful misconduct or breach
of fiduciary duty; being convicted of (or pleading guilty or no contest to) a
crime (other than minor traffic violations or similar offenses); being under the
influence of, or using, distributing or possessing, unauthorized or illegal
drugs or intoxicating beverages while on duty or on the Company's premises;
suspicion of theft, embezzlement, fraud, or dishonesty; willful destruction or
defacement of the Company's, a visitor's, or an employee's property;
unauthorized disclosure of confidential information; falsifying or altering the
Company's records; inappropriate absences from work; or other conduct that the
Committee believes may result in a detriment to the business or reputation of
the Company. In each case, the existence or non-existence of "Cause" shall be
determined in the sole discretion of the Committee. Nothing contained in this
Agreement or the Plan constitutes an employment commitment by the Company,
affects the Participant's status as an employee-at-will who is subject to
termination without cause, confers upon the Participant any right to remain
employed by the Company or any subsidiary, interferes in any way with the right
of the Company or of any subsidiary at any time to terminate such employment, or
affects the Company's right to increase or decrease the Participant's other
compensation.
6. TERMINATION OF OPTION UPON CERTAIN EVENTS. The Option to the
extent not previously exercised may be terminated in accordance with the
provisions of Section 6.2 of the Plan.
3
<PAGE>
7. NON-TRANSFERABILITY OF OPTION; CALL RIGHTS; OTHER RESTRICTIONS;
INVESTMENT REPRESENTATIONS.
7.1. During the Participant's lifetime, this Option and any other
rights hereunder may be exercised only by the Participant or the Participant's
duly appointed guardian or legal representative. The Option and such rights
shall not be sold, transferred, assigned, pledged, hypothecated or otherwise
disposed of in any way (whether by operation of law or otherwise). Nothing in
this Section 7 shall prevent a transfer by will or by the applicable laws of
descent and distribution.
7.2. Unless and until the issuance of the Option Shares is registered
under the Securities Act of 1933, the Option Shares are subject to substantial
restrictions on transfer as provided in Appendix A hereto, incorporated herein
by this reference.
7.3. The Participant acknowledges that by executing this Agreement he
or she makes the investment and other representations set forth in Appendix A
hereto, incorporated herein by this reference.
8. NOTICES. Any notice to be given under the terms of this
Agreement shall be in writing and addressed to the Corporation at its principal
office, to the attention of the General Counsel and to the Participant at the
address given beneath the Participant's signature hereto, or at such other
address as either party may hereafter designate in writing to the other.
9. PARTICIPANT NOT A STOCKHOLDER.
9.1. Neither the Participant nor any other person entitled to exercise
the Option shall have any of the rights or privileges of a stockholder of the
Corporation as to any shares of Common Stock not actually issued and delivered
to him or her prior to delivery of the exercise price and satisfaction of all
other conditions precedent to the due exercise of the Option and delivery of
Option Shares.
9.2 The Participant acknowledges and agrees that neither the Option
nor anything contained in this Agreement or the Plan (a) confers upon the
Participant any right to vote or to give or withhold consent to any corporate
action, to receive any notices of meetings or other action of the board or
stockholders, to receive dividends or other distributions, or otherwise to
receive rights or benefits in respect of shares issuable on the exercise of the
Option or any other rights of a stockholder, (b) creates any equity interest in
the Corporation, or (c) imposes on the Corporation, the Board, any committee of
the Board or any officer, director or agent of the Corporation any fiduciary
duty to the Participant. Participant's rights are solely in contract and
limited to claims for contract damages if the Corporation materially breaches
this Agreement.
9.3 Neither the Option nor anything contained in this Agreement or
the Plan shall be deemed to restrict in any way any rights of the stockholders
of the
4
<PAGE>
Corporation or the Board during the term of this Agreement to issue
additional securities of the Corporation and to determine the consideration
therefor, to make distributions to stockholders, to sell or dispose of
assets, to reorganize, merge, or dissolve and liquidate the Corporation or to
take any other action or make any other change (fundamental or otherwise)
affecting the structure, existence, organization, operations, business assets
or equity of the Corporation and/or any of its subsidiaries. No adjustments
to the Option exercise price or number of shares will be required in
connection with any of such actions or events, except as, the Committee shall
expressly provide under Section 6.2 of the Plan.
10. EFFECT OF AWARD AGREEMENT. This Agreement shall be binding upon
and inure to the benefit of any successor or successors of the Corporation,
except to the extent the Committee determines otherwise.
11. LAWS APPLICABLE TO CONSTRUCTION. The Option has been granted,
executed and delivered as of the day and year first above written, and the
interpretation, performance and enforcement of the Option and this Agreement
shall be governed by the laws of the State of California.
12. GENERAL TERMS. The Option, this Agreement and all rights of
Participant thereunder are subject to, and the Participant agrees to be bound
by, all of the terms and conditions of the provisions of the Plan, incorporated
herein by this reference. The Participant acknowledges receipt of a copy of the
Plan, which is made a part hereof by this reference, and reading and
understanding its applicable provisions. Provisions of the Plan that confer
discretionary authority on the Committee do not (and shall not be deemed to)
create any rights of the Participant, unless such rights are expressly set forth
herein or in the sole discretion of the Committee are conferred by appropriate
action of the Committee under the Plan after the date hereof.
13. INFORMATION. The Participant acknowledges that he has received
and reviewed a Private Placement Memorandum dated as of August 1, 1997 providing
information as to the plan and the Corporation, which include financial
statements of the Corporation as of and for periods ended December 31, 1996 and
June 30, 1997.
5
<PAGE>
The parties have signed this Agreement as of the date in Section 1.
BIG DOG HOLDINGS, INC.
(a Delaware corporation)
By:_____________________________
Title:__________________________
PARTICIPANT
______________________________
(Signature)
______________________________
(Print Name)
______________________________
(Address)
______________________________
(City, State, Zip Code)
______________________________
(Social Security Number)
6
<PAGE>
SPOUSAL CONSENT
---------------
In consideration of the execution of the foregoing Non-Qualified Stock
Option Agreement by Big Dog Holdings, Inc., I, _________________________, the
spouse of the Participant named therein, agree to be bound by all of the terms
and provisions thereof and of the Plan.
DATED: _______________, 1997
______________________________
Signature of Spouse
7
<PAGE>
APPENDIX A
BIG DOG HOLDINGS, INC.
1997 PERFORMANCE AWARD PLAN
SECURITIES LAW INVESTMENT REPRESENTATIONS
1. RESTRICTIONS ON SHARES. The Participant represents that he/she understand
that (i) the offer and grant of an Option to the Participant and the offer and
sale of any Option Shares is being made to the Participant without registration
of such offer, grant or sale under federal securities laws and without
qualification under any state securities laws. Accordingly, the Option Shares
will be "restricted securities" under Rule 144 Under the Securities Act since
they are being acquired from the Corporation in an offering under Rule 701 and
(ii) under such laws and applicable regulations, any Option Shares may be resold
without registration under the Securities Act and qualification under state laws
only in certain limited circumstances. The Participant represents that he/she
is familiar with such Rules 144 and 701, and understands the resale limitations
imposed thereby and by the Securities Act and the state securities law.
2. ADDITIONAL RESTRICTIONS. The Participant represents that he/she has read
and understands the restrictions and limitations imposed on the Option and the
Option Shares under the Plan, including, but not limited to the termination
provisions of Section 2.6 and the non-transferability provisions of Section 1.9.
3. SHARE CERTIFICATE LEGEND. The Participant represents that he/she
understands and acknowledges that any certificate evidencing the Option Shares
if and when issued may, if determined to be appropriate by the General Counsel
of the Corporation, bear, in addition to any other legends which may be required
at the time by applicable state or federal securities laws, the following
legends:
"THE SALE, ASSIGNMENT, PLEDGE OR OTHER TRANSFER AND VOTING OF THE
SHARES PRESENTED BY THIS CERTIFICATE OR ANY INTEREST THEREIN ARE
SUBJECT TO A NON-QUALIFIED STOCK OPTION AGREEMENT DATED AUGUST 1, 1997
(A COPY OF WHICH IS ON FILE AT THE OFFICE OF BIG DOG HOLDINGS, INC.).
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT") NOR HAVE THEY BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. NO
TRANSFER OF SUCH SECURITIES WILL BE PERMITTED UNLESS A REGISTRATION
STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER, THE TRANSFER
IS MADE IN ACCORDANCE WITH RULES 144 OR 701 UNDER THE ACT, OR IN
8
<PAGE>
THE OPINION OF COUNSEL TO THE CORPORATION, REGISTRATION UNDER THE ACT IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT AND WITH
APPLICABLE STATE SECURITIES LAWS."
9
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-33027 of Big Dog Holdings, Inc. of our report dated January 31, 1997 (August
1, 1997 as to Note 10), appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
September 15, 1997
<PAGE>
EXHIBIT 99.1
CONSENT
The undersigned hereby consents to being named as a future director of Big
Dog Holdings, Inc. (the "Company") in the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on August 7, 1997 and
in any amendment or prospectus related thereto.
<TABLE>
<S> <C> <C>
Date: September 5, 1997 /s/ ROBERT SCHNELL
-----------------------------------------
Robert Schnell
</TABLE>
<PAGE>
EXHIBIT 99.2
CONSENT
The undersigned hereby consents to being named as a future director of Big
Dog Holdings, Inc. (the "Company") in the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on August 7, 1997 and
in any amendment or prospectus related thereto.
<TABLE>
<S> <C> <C>
Date: September 2, 1997 /s/ STEVEN C. GOOD
-----------------------------------------
Steven C. Good
</TABLE>
<PAGE>
EXHIBIT 99.3
CONSENT
The undersigned hereby consents to being named as a future director of Big
Dog Holdings, Inc. (the "Company") in the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on August 7, 1997 and
in any amendment or prospectus related thereto.
<TABLE>
<S> <C> <C>
Date: September 4, 1997 /s/ DAVID J. WALSH
-----------------------------------------
David J. Walsh
</TABLE>
<PAGE>
EXHIBIT 99.4
CONSENT
The undersigned hereby consents to the use of its name and the quotation and
summarization of information provided by it in the Big Dog Holdings, Inc.
Registration Statement (File Number 333-33027) on form S-1.
IN WITNESS WHEREOF, the undersigned has executed this Consent as of the 15th
day of September, 1997.
NPD Group, Inc.
By: /s/_LESLIE E. SINGER__
Name: Leslie E. Singer
Title: Director, Corporate
Communication
