SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 3, 2004
Big Dog Holdings, Inc.
----------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 0-22963 52-1868665
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
121 Gray Avenue
Santa Barbara, California 93101
(Address of Principal Executive Offices) (Zip Code)
Mr. Anthony J. Wall
Executive Vice President
and General Counsel
121 Gray Avenue
Santa Barbara, California 93101
(Name and Address of Agent For Service)
(805) 963-8727
(Telephone Number, Including Area Code, of Agent for Service)
INFORMATION TO BE INCLUDED IN THIS REPORT
This form 8-K/A is being filed to amend the Form 8-K filed on March 18, 2004 by
Big Dog Holdings, Inc. (the "Company") to include the financial statements and
pro forma financial information referred to in Item 7 below relating to the
acquisition of The Walking Company. At the time of the filing of the Form 8-K,
it was impractical for the Company to provide these financial statements and pro
forma financial information. Pursuant to the instructions to Item 7 of Form 8-K,
the Company hereby amends Item 7 to the Form 8-K to include the previously
omitted information.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of The Walking Company included herein as Exhibit 99.1
The Walking Company and subsidiaries consolidated statements of operations,
shareholders' equity and cash flows for the fiscal years ended February 1, 2004
and February 2, 2003
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The Walking Company and subsidiaries consolidated statements of operations,
shareholder's equity and cash flows for the fiscal year ended February 3, 2002
Independent Auditors' Report
Consolidated Statement of Operations
Consolidated Statement of Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Statements of Operations, Shareholders' Equity and Cash
Flows
(b) Pro Forma Condensed Financial Information included herein as Exhibit 99.2
Pro Forma Financial Information -Explanatory Note
Unaudited Pro Forma Condensed Consolidated Statement of Operations - December
31, 2003
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Three Months Ended March 31, 2004
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(c) Exhibits
Exhibit No.
99.1 Financial Statements of Business Acquired
99.2 Pro Forma Financial Information
TABLE OF CONTENTS
-----------------
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------
Consolidated Balance Sheets February 1, 2004 and February 2, 2003
- -----------------------------------------------------------------
Consolidated Statements of Operations Years ended February 1, 2004 and February 2, 2003
- ---------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (Deficit) Years ended February 1, 2004 and February 2, 2003
- -----------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows Years ended February 1, 2004 and February 2, 2003
- ---------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
Independent Auditors' Report
- ----------------------------
Consolidated Statement of Operations Year ended February 3,2002
- ---------------------------------------------------------------
Consolidated Statement of Shareholders' Equity Year ended February 3, 2002
- --------------------------------------------------------------------------
Consolidated Statement of Cash Flows Year ended February 3, 2002
- ----------------------------------------------------------------
Notes to Consolidated Statements of Operations, Shareholders' Equity and Cash
Flows
- -----------------------------------------------------------------------------
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION - EXPLANATORY NOTE
- -------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
- ------------------------------------------------------------------------------------------------------------
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------------------------------------
SIGNATURES
- ----------
Exhibit 99.1
THE WALKING COMPANY AND SUBSIDIARIES
(DEBTOR - IN - POSSESSION)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 1, 2004 AND FEBRUARY 2, 2003
PAGE
----
Report of Independent Registered Public Accounting Firm........................... 2
Consolidated Balance Sheets as of February 1, 2004 and February 2, 2003........... 3
Consolidated Statements of Operations for the years ended February 1, 2004 and
February 2, 2003.................................................................. 4
Consolidated Statement of Shareholders' Equity (Deficit) for the years ended
February 1, 2004 and February 2, 2003 ............................................ 5
Consolidated Statements of Cash Flows for the years ended February 1, 2004 and
February 2, 2003.................................................................. 6
Notes to the Consolidated Financial Statements.................................... 7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of The Walking Company
We have audited the accompanying consolidated balance sheets of The
Walking Company and subsidiaries (Debtor-in-Possession) as of February 1, 2004
and February 2, 2003, and the related statements of operations, and
shareholders' equity (deficit) and of cash flows for the fiscal years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with of the Public
Company Accounting Oversight Board (United States). Those 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 financial statements present fairly, in all
material respects, the financial position of The Walking Company and
subsidiaries as of February 1, 2004 and February 2, 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, on
March 2, 2004, the Bankruptcy Court entered an order confirming the second
amended plan of reorganization which became effective on March 3, 2004. Under
the second amended plan of reorganization, substantially all of the assets of
the Company were acquired as more fully described in Note 1.
DELOITTE & TOUCHE LLP
Los Angeles, California
May 21, 2004
THE WALKING COMPANY AND SUBSIDIARIES
(DEBTOR - IN - POSSESSION)
CONSOLIDATED BALANCE SHEETS
February 1, 2004 and February 2, 2003
2003 2002
---- ----
ASSETS (Note 4)
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 880,000 $ 1,131,000
Accounts receivable, net (Note 3)..................................... 8,000 423,000
Inventories........................................................... 11,680,000 23,467,000
Prepaid expenses and other current assets............................. 997,000 1,407,000
------------- --------------
Total currents assets................................................. 13,565,000 26,428,000
PROPERTY AND EQUIPMENT, Net (Note 2).................................. 8,147,000 12,004,000
INTANGIBLE ASSETS, Net (Note 1)....................................... 177,000 259,000
OTHER ASSETS (including deferred financing fees of $540,000 net of 99,000 659,000
accumulated amortization of $334,000 in 2002)(Notes 4 and 11)......... ------------- --------------
TOTAL................................................................. $ 21,988,000 $ 39,350,000
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable (including bank overdrafts of $114,000 and $2,081,000 $ 834,000 $ 8,617,000
in 2003 and 2002, respectively)(Note 5)................................
Accrued expenses and other current liabilities (Note 5)............... 2,967,000 3,339,000
Liabilities subject to compromise under reorganization proceedings
(Note 5).............................................................. 27,652,000 ---
Current borrowings under line of credit (Note 4)...................... 7,330,000 16,380,000
Current notes payable (Note 4)........................................ --- 10,086,000
Current portion of obligations under capital lease (Notes 5 and 7).... --- 126,000
------------- ---------------
Total current liablilities.............................................. 38,783,000 38,548,000
DEFERRED RENT (Note 7).................................................. 612,000 532,000
OBLIGATIONS UNDER CAPITAL LEASES (Notes 5 and 7)........................ --- 253,000
------------- ---------------
Total liabilities...................................................... 39,395,000 39,333,000
------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
SHAREHOLDERS' EQUITY (DEFICIT) (Notes 4 and 8):
Convertible preferred stock Series E, no par value-authorized
250,000 shares; issued and outstanding 85,714 shares.................. 5,939,000 5,939,000
Convertible preferred stock Series D, no par value-authorized
250,000 shares; issued and outstanding 199,473 shares................. 9,807,000 9,807,000
Convertible preferred stock Series C, no par value-authorized
500,000 shares; issued and outstanding 150,787 shares................. 3,085,000 3,085,000
Convertible preferred stock Series B, no par value-authorized
100,000 shares; issued and outstanding 62,046 shares.................. 1,109,000 1,109,000
Convertible preferred stock Series A, no par value-authorized
100,000 shares; issued and outstanding 80,925 shares.................. 921,000 921,000
Common stock, no par value-authorized 20,000 shares;
issued and outstanding 1,005,022 shares............................... 2,074,000 2,074,000
Accumulated deficit..................................................... (40,342,000) (22,918,000)
------------- --------------
Net shareholders' equity (deficit) (17,407,000) 17,000
------------- --------------
TOTAL................................................................... $ 21,988,000 $ 39,350,000
============= =============
See notes to consolidated financial statements.
THE WALKING COMPANY AND SUBSIDIARIES
(DEBTOR - IN - POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 1, 2004 and February 2, 2003
FISCAL YEARS
------------
2003 2002
---- ----
NET SALES.................................................... $ 74,323,000 $ 82,841,000
COST OF GOODS SOLD (Note 10) ................................ 36,689,000 44,150,000
----------- -----------
GROSS PROFIT................................................. 37,634,000 38,691,000
----------- -----------
OPERATING EXPENSES:
Selling, marketing and distribution (Notes 1 and 10)........ 34,964,000 44,025,000
General and administrative (Note 10)........................ 4,253,000 4,192,000
------------ ------------
Total operating expenses..................................... 39,217,000 48,217,000
----------- -----------
LOSS FROM OPERATIONS......................................... (1,583,000) (9,526,000)
------------- -------------
INTEREST EXPENSE (Notes 4, 5 and 7) ......................... (1,752,000) (2,044,000)
------------- -------------
LOSS BEFORE REORGANIZATION COSTS AND PROVISION FOR INCOME TAXES
(3,335,000) (11,570,000)
REORGANIZATION COSTS (Note 11) .............................. (14,061,000) --
-------------- --------------
LOSS BEFORE PROVISION FOR INCOME TAXES. (17,396,000) (11,570,000)
PROVISION FOR STATE INCOME TAXES (Note 6).................... (28,000) (30,000)
-------------- -------------
NET LOSS..................................................... $ (17,424,000) $ ( 11,600,000)
============== ==============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED FEBRUARY 1, 2004 AND FEBRUARY 2, 2003 (Notes 4 and 8)
Series E Preferred Stock Series D Preferred Stock Series C Preferred Stock Series B Preferred Stock
------------------------ ------------------------ ------------------------ ------------------------
Number of Number of Number of Number of
Shares Amount Shares Amount Shares Amount Shares Amount
BALANCE-February 4, 2002 85,714 $ 5,939,000 199,473 $ 9,807,000 150,787 $ 3,085,000 62,046 $ 1,109,000
Net Loss ------ ------------- ------- ------------ -------- ------------ ------ --------------
BALANCE-February 4, 2003 85,714 5,939,000 199,473 9,807,000 150,787 $ 3,085,000 62,046 $ 1,109,000
Net Loss ------ ------------- ------- ------------ -------- ------------ ------ --------------
BALANCE-February 4, 2004 85,714 $ 5,939,000 199,473 $ 9,807,000 150,787 $ 3,085,000 62,046 $ 1,109,000
====== ============== ======= ============ ========= ============ ====== =============
Series A Preferred Stock Common Stock
------------------------ ------------------- Net
Number of Number of Accumulated Shareholders
Shares Amount Shares Amount Deficit Equity (Deficit)
BALANCE-February 4, 2002 80,925 $ 921,000 1,005,022 $ 2,074,000 $(11,318,000) $ 11,617,000
Net Loss (11,600,000) (11,600,000)
------- ----------- --------- ----------- ------------ -------------
BALANCE-February 3, 2003 80,925 921,000 1,005,022 2,074,000 (22,918,000) 17,000
Net Loss (17,424,000) (17,424,000)
------- ----------- --------- ----------- ------------- ------------
BALANCE-February 1, 2004 80,925 $ 921,000 1,005,022 $ 2,074,000 $(40,342,000) (17,407,000)
======= =========== =========== =========== ============= ============
See notes to consolidated financial statements.
THE WALKING COMPANY AND SUBSIDIARIES
(DEBTOR - IN - POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 1, 2004 AND FEBRUARY 2, 2003
YEARS ENDED,
------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $(17,424,000) $(11,600,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:.....................................................
Depreciation and amortization............................................ 3,431,000 3,753,000
Amortization of deferred debt issue costs................................ 180,000 148,000
Loss on disposition of property and equipment............................ 2,558,000 207,000
Impairment of property and equipment..................................... ---- 2,562,000
Impairment of goodwill................................................... 92,000 ----
Net adjustments to liabilities subject to compromise under
reorganization proceedings............................................. 6,788,000 ----
Write off of deferred debt issue costs................................... 360,000 ----
Changes in operating assets and liabilities:
Accounts receivable..................................................... 415,000 156,000
Inventories............................................................. 11,787,000 (452,000)
Prepaid expenses and other current assets............................... 410,000 186,000
Intangibles and other assets............................................ 10,000 73,000
Accounts payable........................................................ 2,674,000 (703,000)
Income taxes payable.................................................... 39,000 14,000
Accrued expenses and other current liabilities.......................... 1,288,000 1,667,000
Deferred rent........................................................... 80,000 89,000
------------ ----------
Net cash provided by (used in) operating activities.................... 12,688,000 (3,900,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (2,190,000) (1,893,000)
Proceeds from sale of property and equipment.............................. 475,000 ----
------------ -----------
Net cash used in investing activities.................................. (1,715,000) (1,893,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in overdraft liabilities.............................. (1,967,000) 2,081,000
Net (repayments) borrowings under line of credit agreement................ (9,050,000) 2,572,000
Deferred debt issue costs................................................. ---- (431,000)
Issuance of notes payable, net............................................ ---- 2,500,000
Repayment of capital lease obligations.................................... (207,000) (291,000)
-------------- ------------
Net cash (used in) provided by financing activities.................... (11,224,000) 6,431,000
-------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....................... (251,000) 638,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................... 1,131,000 493,000
------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR..................................... $ 880,000 $ 1,131,000
============= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................................. $ 1,202,000 $ 1,569,000
Income taxes............................................................. 9,000 16,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FNFORMATION:
FINANCING ACTIVITIES:..................................................
Property and equipment acquired under capital leases..................... $ 417,000 $469,000
See notes to consolidated financial statements.
THE WALKING COMPANY AND SUBSIDIARIES
(DEBTOR - IN - POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 1, 2004 AND FEBRUARY 2, 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The consolidated financial statements include the accounts of The
Walking Company and its subsidiaries (the "Debtor-in-Possession" or "Company").
All significant inter-company accounts and transactions have been eliminated.
The Company is principally engaged in the retailing of footwear and accessories
in retail mall locations throughout the United States.
On July 14, 2003 (the "Petition Date"), the Company filed for
protection under Chapter 11 of the United States Bankruptcy Code. In a Chapter
11 filing, substantially all liabilities as of the Petition Date are subject to
compromise or other treatment under a plan of reorganization. In accordance with
Statement of Position 90-7, Financial Reporting by Entities under the Bankruptcy
Code, those liabilities and obligations whose disposition is dependent on the
outcome of the Chapter 11 filing have been segregated and classified as
liabilities subject to compromise under reorganization proceedings in the
accompanying consolidated financial statements (see Note 5). Liabilities not
subject to compromise are separately classified as current or non-current.
Expenses, realized losses, and provisions for losses resulting from the
reorganization are separately recorded as reorganization items (see Note 11).
Generally, actions to enforce or otherwise effect payment of all pre-Chapter 11
liabilities as well as all pending litigation against the company are stayed
while the Company continues its business operations as Debtor-in-Possession.
On March 1, 2004, an order confirming the Debtor's Second Amended Plan
of Reorganization (the "Plan") was entered and then confirmed by the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court") in an order (the "Order") entered on March 2, 2004 whereby all the
assets of the Company would be acquired by Big Dog Holdings, Inc. ("Big Dog"),
through Big Dog's majority-owned subsidiary, TWC Acquisition Corp, ("TWC"). The
total purchase price for the acquisition was approximately $22 million, which
included the payment and issuance of cash, notes and securities by TWC and Big
Dog pursuant to the Plan. The purchase price is subject to change and will be
finalized upon review and refinement of certain estimates and completion of
valuation and appraisals. The purchase included that TWC (i) paid the
approximately $7,330,000 outstanding balance under the Debtors' Loan and
Security Agreement with Wells Fargo Retail Finance II, LLC ("WFRF"), (ii) paid
$1,700,000 in cash to certain creditors of the Debtors, (iii) issued $3,300,000
in aggregate principal amount of secured promissory notes to certain creditors
of the Debtors, and issued to such creditors a right to put 50% of the
outstanding principal amount of such notes to Big Dog at a 20% discount, (iv)
issued $721,000 in aggregate principal amount of unsecured promissory notes to
certain creditors of the Debtors, and issued a right to put such unsecured notes
to TWC at a 20% discount, (v) assumed a long-term obligation to pay $584,000 in
accrued sales taxes, (vi) paid approximately $1,000,000 in certain
acquisition-related fees and expenses, (vii) assumed approximately $5,500,000 of
accrued expenses and other liabilities, (viii) settled a disputed administrative
claim with an online shoe retailer (see note 3) for $660,000 and (ix) issued to
certain creditors of the Debtors 10% of TWC's outstanding common stock), with a
right to convert the TWC shares into shares of common stock of Big Dog at a
price of $4.35 per share and a right to put such TWC shares to TWC for cash
totaling $645,000. In addition, Big Dog and certain executives of Big Dog
provided certain guarantees relating to the purchase.
In conjunction with the acquisition of the Company and in accordance
with the Plan, Big Dog rejected certain capital leases and terminated the
Company's existing employee benefit plan. In addition, all common stock,
preferred stock, stock options, and warrants were cancelled as of the effective
date of the Plan without consideration.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company reports its income on a 52- or 53-week fiscal year basis
with the last day of the year being the Sunday closest to the end of January.
The fiscal years ended February 1, 2004 (fiscal year 2003) and February 2, 2003
(fiscal year 2002) consisted of fifty-two weeks and fifty-three weeks,
respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
less than three months when purchased to be cash equivalents.
INVENTORIES
Inventories, consisting primarily of footwear held for resale, are
stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization of property and
equipment are provided using the straight-line method over the following useful
lives:
Store fixtures..................................... 7 years
Machinery and equipment............................ 7 years
Computer equipment................................. 5 years
Computer software.................................. 3 years
Leasehold improvements are depreciated over the lesser of the estimated useful
life of the asset or the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. This evaluation is
performed based on the estimated undiscounted future cash flows from operating
activities compared with the carrying value of the related asset. If the
undiscounted future cash flows are less than the carrying value, an impairment
loss is recognized, measured by the difference between the carrying value and
the estimated fair value of the assets, with such estimated fair values
determined using the best information available generally based on prices for
similar assets for stores recently opened. The Company's evaluation for the
fiscal year 2002, which included all retail locations, indicated
that operating losses existed for certain retail locations with a projection
that the operating losses for these retail locations would continue. The Company
recorded write-downs of store fixtures and leasehold improvements for these
retail stores which approximated $2,562,000 for fiscal 2002. Such costs are
included in selling, marketing and distribution expenses in fiscal 2002 in the
consolidated statements of operations. The Company's evaluation for fiscal 2003
indicated that no impairment existed at February 1, 2004.
INTANGIBLE ASSETS
Effective February 3, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
which changed the accounting for goodwill and "indefinite lived" intangibles
from an amortization method to an impairment-only approach. Accordingly,
amortization of goodwill and intangible assets acquired in a previous
acquisition ceased on February 3, 2002. Beginning in fiscal 2002, impairment
tests are performed at least annually and more often as circumstances require.
The Company's evaluation of goodwill for fiscal years 2003 and 2002 indicated
impairment in fiscal 2003, and accordingly, $92,000 was recorded as a write-down
of goodwill and was included in reorganization expenses in the accompanying
consolidated statements of operations. Management does not believe that any
impairment of its trademarks existed for fiscal years 2003 and 2002. Intangible
assets at fiscal 2003 and 2002 include goodwill of $68,000 and $160,000 and
trademarks of $109,000 and $99,000, respectively, which are stated at cost less
accumulated amortization.
REVENUE RECOGNITION
The Company's revenues are generated by its retail operations, which
are recognized at the time of sale. The Company records an allowance for
estimated returns in the period of sale based on prior experience. For fiscal
years 2003 and 2002, the Company recorded a reserve for returns of $157,000 and
$196,000, respectively.
SHIPPING AND HANDLING
Revenue received from shipping and handling is reflected in net sales
in the accompanying statements of operations. Costs for shipping and handling
are included in selling, marketing and distribution expense and totaled
$1,457,000 and $1,575,000 for the fiscal years ended February 1, 2004 and
February 2, 2003, respectively.
PRE-OPENING COSTS
Store pre-opening costs are expensed as incurred.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising expense
was $166,000 and $319,000 for fiscal 2003 and 2002, respectively.
INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach for measuring deferred income taxes based on temporary differences
between the financial statement and income tax bases of assets and liabilities
existing at each balance sheet date. A valuation allowance is established, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized (see Note 6).
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation, requires companies to
estimate employee stock compensation expense based on the fair value method of
accounting. However, the statement allows the alternative of continued use of
the intrinsic value method described in Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, if pro forma
disclosure of fair value amounts is provided. The Company has elected the
alternative of continued use of APB Opinion No. 25. However, the impact on pro
forma net loss is immaterial; therefore, no pro forma information is presented.
There were no stock options issued during the fiscal years ended 2003 and 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of cash and cash equivalents, receivables,
trade accounts payable and accrued liabilities approximate their carrying values
because of the short-term maturity of these instruments. As a result of the
Company's Chapter 11 filing, a limited market has developed for the trading of
financial instruments included as liabilities subject to compromise under
reorganization proceedings. Since the market for claims against the Company
under Chapter 11 is not well developed, no reliable market price is available.
REORGANIZATION COSTS
Expenditures directly related to the Chapter 11 filing are classified
as reorganization costs and are expensed as incurred (see Note 11).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 eliminates the
amortization of goodwill and intangible assets with indefinite useful lives and
requires goodwill and intangible assets to be reviewed for impairment at least
annually and expensed to earnings only in the periods in which the recorded
value of the intangible asset is more than the fair value. SFAS No. 142 was
effective for fiscal years beginning after December 15, 2001. This Statement was
adopted in fiscal 2002. Accordingly, amortization of goodwill and intangible
assets ceased on February 3, 2002.
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which provides standards on the accounting for obligations
associated with the retirement of long-lived assets. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. The adoption of this statement
did not have an impact on the Company's consolidated financial
statements.
In July 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supersedes SFAS No. 121 on the same topic and the accounting and
certain reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as defined in that Opinion). This
Statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal periods beginning after December 15, 2001. The Company
implemented the pronouncement at the beginning of fiscal year 2002. The adoption
of this statement did not have an impact on the Company's consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses exit or disposal
activities including one-time involuntary employee termination benefits,
contract termination costs and costs to consolidate facilities or relocate
employees. Existing accounting guidelines (principally Emerging Issue Task Force
Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity) require companies to recognize a liability when
management commits itself or announces plans to exit or dispose of an activity.
SFAS No. 146 prohibits companies from recognizing an exit or disposal liability
until the liability has been incurred, generally the "communication date" for
one-time termination benefits and the contract termination or "cease use date"
for contract costs, and will require these liabilities to be measured at fair
value. This statement is effective for exit or disposal activities initiated
after December 31, 2002. The adoption of the provisions of this statement did
not have an impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148. SFAS No. 123, as
amended by SFAS No. 148, requires companies to estimate employee stock
compensation expense based on the fair value method of accounting. However, the
statement allows the alternative of continued use of the intrinsic value method
described in APB Opinion No. 25, if pro forma disclosure of fair value amounts
is provided. The Company has elected the alternative of continued use of APB
Opinion No. 25.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have an impact on the Company's
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement did not
have an impact on the consolidated financial statements since the Company
currently has no instruments that meet this definition.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on required
disclosures by a guarantor in its financial statements about obligations under
certain guarantees that it has issued and clarifies the need for a guarantor to
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Company adopted
the provisions of this Interpretation relating to initial recognition and
measurement of guarantor liabilities, which was effective for qualifying
guarantees entered into or modified after January 1, 2003. The adoption of this
interpretation did not have an impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51, Consolidated Financial
Statements. This interpretation addresses consolidation by business enterprises
of entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Variable interest entities are required to be
consolidated by their primary beneficiaries if they do not effectively disperse
risks among the parties involved. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the entity's expected losses or
receives a majority of its expected residual returns. In December 2003, the FASB
amended FIN 46, now known as FIN 46 Revised ("FIN 46R"). The requirements of FIN
46R are effective no later than the end of the first reporting period that ends
after December 15, 2004. A company that has applied FIN 46 to an entity prior to
the effective date of FIN 46R shall either continue to apply FIN 46 until the
effective date of FIN 46R or apply FIN 46R at an earlier date. The Company does
not believe the adoption of this interpretation will have an impact on the
Company's consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of February 1, 2004
and February 2, 2003:
2003 2002
---- ----
Leasehold improvements............................. $ 11,541,000 $ 14,347,000
Store fixtures..................................... 7,274,000 9,589,000
Furniture, fixtures and equipment.................. 635,000 616,000
Computer equipment and software.................... 4,017,000 3,112,000
Construction in progress........................... 194,000 168,000
------------ ------------
23,661,000 27,832,000
Less accumulated depreciation and amortization..... (15,514,000) (15,828,000)
------------ ------------
Property and equipment, net........................ $ 8,147,000 $12,004,000
=========== ===========
Depreciation and amortization of property and equipment totaled
$3,431,000 and $3,753,000 in fiscal years 2003 and 2002, respectively. In fiscal
2003 and 2002, the Company closed 32 and 1 store respectively while opening five
stores in each year.
3. INVESTMENT
The Company has a 34% ownership interest in Shoes.com, Inc.
("Shoes.com"), an online shoe retailer. Due to losses incurred by Shoes.com, the
Company's investment was reduced to zero in fiscal year 2000. The Company does
not have any guarantees of the indebtedness of Shoes.com, Inc. or any obligation
to fund operating deficits of Shoes.com, Inc.; thus, no related accrual for
losses in excess of its basis were recorded by the Company.
In November 2002, the Company entered into certain E-commerce and
Supply agreements with Shoes.com for the purpose of operating a new Walking
Company website and supplying inventory to Shoes.com. Such agreements were for a
period of ten years. The E-commerce agreement allowed Shoes.com to operate a
Walking Company website selling footwear and other products to the public
consumer through online sales. The Company reported all revenues in the
accompanying financial statements, which amounts for fiscal years 2003 and 2002,
respectively, were not significant. At February 1, 2004 and February 2, 2003,
the Company recorded amounts due from Shoes.com of $0 and $131,000 in accounts
receivable in the accompanying balance sheets, respectively.
4. BORROWINGS UNDER CREDIT LINE AND NOTES PAYABLE
On June 23, 2000, the Company entered into a line of credit agreement
(the "Agreement") with a bank to replace its former credit facility. The
Agreement was amended on December 20, 2001. The Agreement permited maximum
borrowings of the lesser of $35,000,000 or, based on an independent appraisal,
up to 65% of the Company's eligible inventory balances. Under the amendment to
the Agreement, the Company could borrow $1,500,000 in excess of the borrowing
base through September 30, 2003. Borrowings under this Agreement bore interest
at the bank's prime interest rate plus 0.50% (5.25% at February 2, 2003) or an
adjusted Eurodollar rate ("LIBOR") plus 2.75% (4.09% at February 2, 2003) and
expire on July 31, 2004. As of February 2, 2003, outstanding borrowings under
this agreement were $16,380,000. Borrowings under the Agreement were also
secured by substantially all of the Company's assets. The Agreement required the
Company to be in compliance with certain financial covenants (including a fixed
charge coverage ratio) and operational covenants, as defined in the Agreement.
As of February 2, 2003, the Company was not in compliance with certain of its
financial covenants. On April 2, 2003, the Company received a notice of default
and a reservation of rights from their lender.
On August 1, 2003, the Company entered into a one year, $20,000,000
debtor-in-possession financing ("DIP Financing") with a bank to replace the
existing facility as described above. The DIP Financing was subject to various
financial performance covenants, such as earnings before interest, taxes,
depreciation, amortization and rent, minimum sales, maximum disbursements,
minimum/maximum inventory as well as actual gross margin variances from plan.
The maximum borrowing under the DIP Financing was based on a percentage of
eligible inventory varying from 65% to 75%, net of established reserves. The
agreement was collateralized by substantially all assets of the Company.
Borrowings under this agreement bear interest at the bank's prime rate plus 1.5%
(5.5 % at February 1, 2004). On November 21, 2003, the agreement was amended,
among other things, to change the maturity date to the earliest of July 31, 2004
or the date of entry of an order by the Bankruptcy court confirming a
reorganization plan of the borrower satisfactory to the bank. This loan was used
to pay amounts as outlined in the financial performance covenants. The
outstanding balance was $7,330,000 as of February 1, 2004.
The Company also has a $6,000,000 senior subordinated note payable
("Senior Subordinated Note Payable") bearing interest at 12.5% from a
third-party investor ("Investor"). Payment required under the note is as
follows: interest-only payments from date of note (July 1999) through July 2003,
principal and interest on a monthly basis from July 2003 through June 2004, and
any unpaid principal and interest due in full in July 2004. The amount of
principal due in fiscal years 2003 and 2004 is approximately $840,000 and
$5,160,000, respectively. Upon the closing of the financing, warrants were
issued that entitle the Investor to purchase 332,824 shares of the Company's
common stock for $0.01 per share. The warrants expire on the earlier of October
2008 or six years from the date the note and related interest are paid in full.
Upon issuance of the 2002 Notes (see below), the $6,000,000 senior subordinated
note holders agreed to defer payment of 5.5% out of the 12.5% interest payable
monthly on the $6,000,000 subdebt. For its deferral of 5.5% current interest,
the Subdebt holders received warrants for common stock at the next
equity-offering price (supplemental warrants). Under reorganization proceedings,
at February 1, 2004, $6,000,000 of this note was deemed compromised and
therefore classified as a liability subject to compromise on the accompanying
balance sheet (Note 5). At the time of their issuance, there was no value
ascribed to the 332,824 or the supplemental warrants.
On December 20, 2001, the Company entered into a $1,500,000 note and
warrant purchase agreement ("Junior Subordinated Note Payable" or "2001 Notes
and 2001 Warrants") with certain shareholders of the Company. This agreement was
junior to the $6,000,000 senior subordinated note. It bore interest at the rate
of 15% per annum. The original agreement stated that if the principal and
accrued interest is not paid by April 20, 2003, the note holders individually
have the option to exercise their warrants which, if exercised, would
collectively equal 10% of the Company's then outstanding common shares. However,
in September 2002, the Company reissued the 2001 Notes to have identical terms
as the unsecured 2002 Notes (see below). The amended maturity date for interest
and principal payments became October 29, 2006. The holders of the 2001 Notes
and 2001 Warrants were required to submit to the Company their original 2001
Notes and 2001 Warrants to the Company for cancellation. At February 1, 2004,
this note was deemed compromised and therefore classified as a liability subject
to compromise in the accompanying balance sheet (Note 5). At the time of
issuance, there was no value ascribed to the 2001 Warrants.
In September and October, 2002, the Company commenced the issuance of
$2,500,000 in secured convertible promissory notes ("Secured Convertible
Promissory Notes" or "2002 Notes") and $1,000,000 in unsecured convertible
promissory notes ("Unsecured Convertible Promissory Notes" or "2002 Notes")
pursuant to the Note Purchase Agreement dated September 18, 2002 with
third-party investors and certain shareholders. Purchasers of the 2002 Notes
received two types of Notes, one secured and the other unsecured. For each $1 of
secured 2002 Notes purchased, the purchaser received $0.40 in unsecured 2002
Notes. The September 18, 2002 and the October 15, 2002 closing resulted in the
issuance of $2,450,000 ($1,750,000 secured and $700,000 unsecured) and
$1,050,000 ($750,000 secured and $300,000 unsecured). The notes pay interest at
15% per annum. Interest and principal payments are not required until maturity,
October 29, 2006. Under reorganization proceedings, at February 1, 2004, these
notes were deemed compromised and therefore classified as a liability subject to
compromise on the accompanying balance sheet (Note 5). At the time of issuance,
no value was ascribed to the conversion feature.
Deferred financing costs included in other assets in the accompanying
balance sheets as of February 1, 2004 and February 2, 2003, are $0 and $540,000,
respectively. These costs were amortized using the straight-line method over the
term of the of the related debt. When the Company filed for protection under
Chapter 11 of the Bankruptcy Code, amortization of these deferred financing
costs ceased. Of the amount recorded as of February 2, 2003, $360,000 was
expensed as reorganization costs in fiscal year 2003 (see Note 11) and $180,000
was amortized to interest expense.
5. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings
refers to liabilities incurred prior to the Petition Date. Under bankruptcy law,
actions by creditors to collect indebtedness owed prior to the Petition Date
were stayed and certain other pre-petition contractual obligations became
unenforceable against the Company. These liabilities consist primarily of
amounts that were outstanding under long-term debt agreements, accrued interest,
trade accounts payable, other accrued expenses and capital leases. These amounts
represent the Company's estimates of known or potential claims to be resolved in
connection with the Chapter 11 filing. The Company received approval from the
Court to pay certain pre-petition liabilities including salaries and wages,
benefits and other employee obligations. The Court also approved payments
related to amounts outstanding under the line of credit agreement through the
use of the DIP Financing agreement. Except for the line of credit agreement,
employee payroll and benefits, and sales and use taxes, all pre-petition
liabilities have been classified as liabilities subject to compromise under
reorganization proceedings in the Company's consolidated balance sheet as of
February 1, 2004. Adjustments to the claims resulting from negotiations,
payments authorized by Court order, rejection of executory contracts including
leases and other events, have been adjusted to the court allowed amount in the
accompanying consolidated balance sheet and recognized as a component of
reorganization costs in the statements of operations for the year ended February
1, 2004. (See Note 11)
The following table summarizes the components of the liabilities
subject to compromise in our consolidated balance sheet as of February 1, 2004:
2003
----
Secured liabilities:
Senior subordinated note payable (includes interest payable of
$385,000 accrued through petition date) (See Note 4)....... $ 6,385,000
Secured convertible promissory notes (includes interest
payable of $303,000 accrued through petition date) (See
Note 4).................................................... 2,803,000
Capitalized lease obligations (See Note 7).................. 589,000
------------
9,777,000
-----------
Unsecured liabilities:
Junior subordinated note payable (includes interest payable of
$366,000 accrued through petition date (See Note 4)........ 1,866,000
Unsecured convertible promissory notes (See Note 4)......... 1,000,000
Trade accounts payable including merchandise vendors........ 14,364,000
Priority tax claim.......................................... 584,000
Other note payable.......................................... 61,000
-----------
17,875,000
-----------
Total liabilities subject to compromise under reorganization
proceedings.........................................................$ 27,652,000
============
6. INCOME TAXES
At February 1, 2004 and February 2, 2003 the Company had Federal and
state net operating loss carryforwards of approximately $24,524,000 and
$12,031,000, and deferred tax assets aggregating $12,291,000 and $7,798,000,
respectively. Due to the uncertainty of the Company's ability to generate future
earnings, the Company has established a related valuation allowance of
$12,291,000 and $7,798,000 at February 1, 2004 and February 2, 2003,
respectively, as management believes it is more likely than not that the
deferred income tax assets will not be realized. During fiscal 2003 and 2002,
the Company recognized a net increase in the valuation allowance of $4,493,000
and $3,882,000, respectively.
The Company filed for Chapter 11 protection under the United States
Bankruptcy Code in July, 2003. Subsequent to year end, substantially all of the
Company's assets were sold as part of the reorganization (see Note 1);
therefore, the losses and deferred tax assets will not be fully recognized or
utilized in future periods.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases retail stores, office buildings and warehouse space
under lease agreements that expire through 2014. Future minimum lease payments
are as follows:
Operating Capital
Leases Leases
--------- --------
FISCAL YEARS ENDING
2004............................................................ $ 10,069,000 $ 324,000
2005............................................................ 9,556,000 238,000
2006............................................................ 9,098,000 112,000
2007............................................................ 7,729,000 2,000
2008............................................................ 5,761,000 ---
Thereafter...................................................... 8,188,000 ---
------------ --------
Total minimum obligations....................................... $ 50,401,000 676,000
Less amount representing interest...................... ============ 87,000
---------
Present value of minimum lease payments (Note 5)................ 589,000
Less current portion................................... 191,000
---------
Long-term portion............................................... $398,000
========
The above amounts do not include contingent rentals based on sales in
excess of the stipulated minimum that may be paid under certain leases on retail
stores. Additionally, certain leases contain future adjustments in rental
payments based on changes in a specified inflation index. The effective annual
rent expense for the Company is the total rent paid over the term of the lease,
amortized on a straight-line basis. The difference between the actual rent paid
and the effective rent recognized for financial statement purposes is reported
as deferred rent.
Rent expense for the fiscal years ended 2003 and 2002 was $11,682,000
and $13,467,000, respectively, and includes contingent rentals of $45,000 and
$52,000, respectively, which are included in operating expenses in the
consolidated statements of operations.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company's credit agreement prohibits the payment of dividends. The
Company did not pay dividends in 2003 and 2002, and does not expect to pay
dividends in the future.
PREFERRED STOCK
Holders of all outstanding series of preferred stock are entitled to
receive dividends if and when declared upon the common stock. None of the
outstanding series of preferred stock has any rights to cumulative dividends.
The holders of the outstanding series of preferred stock have liquidation
preferences over each junior issuance of preferred stock and over the common
stock. Shares of all outstanding series of preferred stock are convertible into
common stock at any time (ten shares of common stock for each share of preferred
stock). All outstanding series of preferred stock automatically convert to
common stock upon the closing of a public offering.
STOCK OPTIONS AND WARRANTS
Options to purchase common shares have been granted under the 1993
Stock Option Plan to officers, directors, key employees, and other parties
providing services to the Company. The Company has reserved a total of 1,500,000
shares under the stock option plan and has 627,440 of options outstanding as of
February 1, 2004 to purchase common stock at an exercise price ranging from
$1.93 to $9.50 per share. The options vest over a range of time from grant date
to five years commencing one year from grant date. As of February 1, 2004, a
total of 551,140 options were vested under the stock option plan, with a
weighted-average exercise price of $5.04.
The following summarizes stock option activity for the periods
presented:
WEIGHTED-
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- ---------------
Balance at February 3, 2002............................. 782,340 $ 5.45
Options cancelled.................................... (73,600) $(2.88)
-------
Balance at February 2, 2003............................. 708,740 $ 5.72
Options cancelled.................................... (81,300) $(7.96)
-------
Balance at February 1, 2004............................. 627,440 $ 5.43
=======
The following table summarizes information about stock options outstanding at
February 1, 2004:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- ------
$1.93 70,740 0.2 years $ 1.93 70,740 $ 1.93
2.50 128,000 2.0 years 2.50 128,000 2.50
4.5-6.00 133,000 3.1 years 5.12 133,000 5.12
7.00 123,000 4.0 years 7.00 123,000 7.00
8.00-9.50 172,700 7.4 years 8.06 96,400 8.10
---------- ---------
1.934-9.50 627,440 3.9 years 5.43 551,140 5.04
========== =========
At February 1, 2004 and February 2, 2003, the number of options
exercisable for each year was 551,140 and 522,307, respectively. No options
were issued or exercised during the fiscal years 2003 and 2002.
The Company accounts for its stock-based awards using the intrinsic
value method in accordance with APB Opinion No. 25 and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. SFAS No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation, requires companies to estimate and disclose employee
stock compensation expense based on the fair value method of accounting. Under
the fair value method, no compensation expense would be recorded.
As of February 3, 2004, the Company had outstanding warrants to
purchase 1,639,244 shares of the Company's common stock for $.01 to $5.39 per
share and 3,240 shares of the Company's Series C preferred stock for $2.50 per
share that were granted outside of the 1993 Stock Option Plan. No warrants were
exercised during fiscal years 2003 and 2002.
9. EMPLOYEE BENEFIT PLAN
The Company has a Retirement Savings Plan (the "Plan"), a defined
contribution plan adopted pursuant to Section 401(k) of the Internal Revenue
Code. The Plan is available to substantially all of the Company's employees. The
Company matches 25% of each dollar deferred up to 4% of compensation.
Participants vest in the Company's contribution at varying rates of 0% to 25%
per year over six years. The Company contributed approximately $25,000 and
$41,000 in 2003 and 2002, respectively.
10. RELATED PARTY TRANSACTIONS
For the fiscal year ended 2003, the Company paid rent totaling $349,000
for a retail store for which a shareholder owns. In fiscal year 2002, the
Company paid rent totaling $604,000 for a retail store and an office building
for which a shareholder owns. Additionally, in the normal course of business,
the Company purchased inventory from a family member of a shareholder which
totaled $78,000 and $150,000 in fiscal years 2003 and 2002, respectively. See
discussion of related party transactions with Shoes.com in Note 5.
11. REORGANIZATION COSTS
Expenses and income directly incurred or realized as a result of the
Chapter 11 filing have been segregated from the normal operations and are
disclosed separately in the accompanying consolidated statements of operations.
The major components are as follows for the fiscal years ended February 1, 2004:
Professional fees and administrative items.................... $2,079,000
Write off of deferred debt issue costs........................ 360,000
Allowed claims adjustments.................................... 6,788,000
Store closing costs........................................... 814,000
Employee retention bonus...................................... 805,000
Loss on sale of inventory at closed stores.................... 645,000
Loss on abandonment of assets................................. 2,570,000
-----------
Total reorganization costs $14,061,000
============
Professional fees and other administrative items relate to legal,
accounting and other professional costs directly attributable to the Chapter 11
filing. Write off of deferred debt issuance costs represent the adjustment of
the pre-petition debt to the allowed claim amount under Chapter 11. Allowed
claim adjustments represent adjustments to certain pre-petition liabilities
included within liabilities subject to compromise to reflect the allowed amount
under Chapter 11 based on the Company's claim reconciliation process. Store
closing costs include accrued rent and expenses paid to close stores. Employee
retention bonuses represent bonuses paid to employees to retain their employment
during the bankruptcy process. Loss on sale of inventory consists of the sale of
inventory from certain closed stores to inventory liquidators at amounts below
cost. Loss on abandonment of assets consists of the net book value of leasehold
improvement and store fixtures abandoned with the closure of certain stores as a
result of the Chapter 11 filing during fiscal 2003.
THE WALKING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY
AND CASH FLOWS
YEAR ENDED FEBRUARY 3, 2002
PAGE
----
Independent Auditors' Report...................................................... 2
Consolidated Statement of Operations for the year ended February 3, 2002 ......... 3
Consolidated Statement of Shareholders' Equity for the year ended
February 3, 2002 ................................................................. 4
Consolidated Statement of Cash Flows for the year ended February 3, 2002 ......... 5
Notes to the Consolidated Statements of Operations, Shareholder's
Equity and Cash Flows............................................................. 6
Independent Auditors' Report
The Board of Directors
The Walking Company:
We have audited the accompanying consolidated statement of operations,
shareholder's equity and cash flows of The Walking Company and subsidiaries as
of February 3, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of The Walking Company and subsidiaries for the year ended February 3, 2002
in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Los Angeles, California
May 3, 2002
THE WALKING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Operations
Year ended February 3, 2002
Net Sales $ 87,894,417
Cost of goods sold 45,485,483
---------------
Gross profit 42,408,934
---------------
General and administrative expenses 6,840,333
Store expenses 31,628,603
Warehouse expenses 1,186,004
Store closure costs (note 10) 599,809
Depreciation and amortization 3,851,828
---------------
44,106,577
---------------
Loss from operations (1,697,643)
Interest expense (1,852,216)
---------------
Loss before income taxes (3,549,859)
State income taxes-all current (note 9) 28,500
---------------
Net loss $ (3,578,359)
===============
See accompanying notes to consolidated financial statements.
THE WALKING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity (Notes 7 and 8)
Year ended February 3, 2002
Series E Preferred Stock Series D Preferred Stock Series C Preferred Stock Series B Preferred Stock
----------------------------------------------------------------------------- -----------------------
Number of Number of Number of Number of
Shares Amount Shares Amount Shares Amount Shares Amount
--------- --------- ------- ----------- --------- ---------- ------- -----------
Balance at January 28, 2001 85,714 $ 5,939,644 199,473 $ 9,807,062 150,787 $ 3,085,171 62,046 $ 1,109,147
Net Loss --- --- --- --- --- --- --- ---
--------- --------- ------- ----------- --------- ---------- ------- -----------
Balance at February 3, 2002 85,714 $ 5,939,644 199,473 $ 9,807,062 150,787 $ 3,085,171 62,046 $ 1,109,147
========= =========== ======= ============ ========== ========== ======= ===========
Series A Preferred Stock Common Stock
-------------------------------------------------- Net
Number of Number of Accumulated shareholders'
Shares Amount Shares Amount Deficit equity
------ ------- --------- --------- ----------- ------------
Balance at January 28, 2001 80,925 $ 920,500 1,005,022 $ 2,073,832 $ (7,739,440) $ 15,195,916
Net Loss ......... --- --- --- --- (3,578,359) (3,578,359)
------ ------- --------- --------- ------------ ------------
Balance at February 3, 2002 80,925 $ 920,500 1,005,022 $ 2,073,832 $(11,317,799) $ (11,617,557)
------ --------- --------- ----------- ------------ ------------
See accompanying notes to consolidated financial statements.
THE WALKING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended February 3, 2002
Cash flows from operating activities:
Net loss $ (3,578,359)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,851,828
Loss on disposal of property and equipment 259,140
Changes in operating assets and liabilities:
Inventories 3,183,164
Accounts receivable 747,637
Prepaid expenses and other current assets 9,270
Other assets 83,411
Accounts payable and accrued expenses (366,913)
Customer deposits (1,160)
Deferred rent (28,557)
---------------
Net cash provided by operating activities 4,159,461
---------------
Cash flows used in investing activities:
Purchases of property and equipment (1,759,774)
---------------
Net cash used in investing activities (1,759,774)
---------------
Cash flows from financing activities:
Bank overdraft (753,630)
Net repayment of borrowings under line of credit (2,427,758)
Proceeds from issuance of notes payable 1,500,000
Deferred loan costs (79,764)
Principal payments under capital lease obligations (145,880)
----------------
Net cash used in financing activities (1,907,032)
----------------
Net increase in cash 492,655
Cash at beginning of year ---
----------------
Cash at end of year $ 492,655
================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,894,249
Income taxes 22,533
See accompanying notes to consolidated financial statements.
THE WALKING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
February 3, 2002
(1) Organization
The Walking Company and subsidiaries (the Company) is principally engaged
in the retailing of footwear, apparel, and accessories in retail mall
locations throughout the United States of America. The Company had 95
retail stores open as of February 3, 2002.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned and majority-owned subsidiaries,
Alan's Shoes, Inc. and Oasis Comfort Corporation (Oasis). All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Inventories
Inventories, consisting primarily of footwear held for resale, are
stated at the lower of cost (determined by the first-in, first-out
method) or market.
(c) Depreciation and Amortization
Depreciation and amortization of property and equipment are
provided using the straight-line method over five to seven years,
which approximates the estimated useful lives of the related
assets. Leasehold improvements are amortized on the straight-line
basis over their estimated economic useful lives or the lease
term, whichever is shorter. Goodwill that resulted from the
acquisition of Alan's Shoes, Inc. is being amortized over a
ten-year period on a straight-line basis.
(d) Revenue Recognition
Revenue from products sold is recognized at the point of sale.
Allowances for estimated returns and discounts are provided when
the related revenue is recorded.
(e) Business and Credit Concentrations
The Company sells footwear products throughout the United States
of America. The footwear industry is impacted by the general
economy. Changes in the marketplace may significantly affect
management's estimates and the Company's performance. Management
performs regular evaluations concerning the ability of its
wholesale customers to satisfy their obligations and records a
provision for doubtful accounts based upon these evaluations. The
Company's credit losses for the fiscal years presented are
insignificant and have not exceeded management's estimates.
(f) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of revenues and expenses,
and the disclosure of contingent assets and liabilities as of
February 3, 2002 and the reported amounts of revenues and
expenses during the reporting period in conformity with
accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
(g) Income Taxes
The Company accounts for income taxes under the asset and
liability method whereby deferred income taxes are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the fiscal years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) Fiscal Year
The Company reports its income on a 52- or 53-week fiscal year
basis with the last day of the year being the Sunday closest to
the end of January. The Company has defined its fiscal year as the
period in which the majority of the months occur (e.g., the year
ending February 3, 2002 is referred to as fiscal 2001). Fiscal
2001 was a 53-week year.
(i) Long-Lived Assets
The Company reports long-lived assets, including intangibles, at
cost. Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If such assets are considered impaired, 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.
(j) Investment
The Company accounts for its investment using the equity method in
accordance with Accounting Principles Board Opinion No. 18. The
equity method is used when the Company's ownership does not permit
it to control or make major decisions of the operations of the
underlying investment. Under the equity method, the investment is
recorded at cost and adjusted for its proportionate share of the
earnings or loss, any distributions received from the entity, or
any permanent impairment of value below cost.
(k) Goodwill
Amortization of goodwill is provided on a straight-line basis over
the estimated useful life of ten years. The carrying amount of
goodwill is assessed for impairment when income from operations
from the applicable related business indicates that the carrying
amount of the asset may not be recoverable. Effective in fiscal
2002, goodwill will no longer be amortized and will be subject to
a transitional impairment analysis as a result of the issuance of
Statement of Financial Accounting Standards Board No. 142
(SFAS No. 142), Goodwill and Other Intangible Assets.
Amortization of goodwill in fiscal 2001 was $22,700.
(l) Stock Compensation
The Company accounts for stock compensation under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (Statement No. 123), and has elected to continue to
measure compensation cost under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APBO No.
25), with pro forma disclosures of net loss as if the
fair-value-based method of accounting had been applied. The impact
on pro forma net loss is immaterial; therefore, no pro forma
information is presented.
(m) Advertising
Advertising costs are expensed as incurred. Total advertising
expense was $346,161 during fiscal 2001.
(n) Comprehensive Income
The Company reports comprehensive income under Statement of
Financial Accounting Standards No. 130 (SFAS No. 130),
Reporting Comprehensive Income. Except for net loss, the Company
does not have any transactions and other economic events that
qualify as comprehensive income as defined under SFAS No. 130.
(o) Liquidity
The accompanying consolidated statements of operations,
shareholders's equity and cash flows have been prepared assuming
that the Company will continue as a going concern. While the
Company incurred a $3,578,359 loss for the year ended February 3,
2002, the Company's current assets exceed its current liabilities
by $16,538,542, and cash flows from operations were $4,159,461.
In order to improve cash flows and profitability, the Company
discontinued its wholesale operations in fiscal 2000 and has
focused on its core retail operations. Additionally, the
Company has significantly curtailed its internet business
activity through the contribution of the domain name shoes.com to
Shoes.com, Inc. in fiscal 2000 (note 3). Management of the
Company intends to selectively add new stores in fiscal 2002,
focus on growing existing stores profitability, close those
stores that are not operating at an acceptable level of
profitability, and continue to utilize cost containment/reduction
strategies. The Company believes these measures will improve the
Company's liquidity and combined with existing credit facilities
will be sufficient to continue its operations.
(3) Investment
The Company has a 34% investment in Shoes.com, Inc. The investment
is recorded on the equity method of accounting. The Company has recorded
losses whereby its investment has been written off.
(4) Acquisition
In September 1999, the Company acquired all of the outstanding stock of
Alan's Shoes, Inc. in exchange for 30,242 shares of the Company's common
stock, with an aggregate appraised value of $241,936 plus $1,500,000 in
cash. This acquisition was accounted for as a purchase. The net assets
acquired consisted primarily of inventory, accounts receivable, an
Internet domain name (notes 3 and 10), property and equipment, various
other assets, and the assumption of certain notes payable and accounts
payable. The notes payable assumed were repaid on September 18, 1999. The
excess purchase price over the net assets acquired, aggregating
$1,327,000, was recorded as goodwill.
(5) Borrowings under Line of Credit and Notes Payable
On June 23, 2000, the Company entered into a line of credit agreement
(the Agreement) with a bank to replace its former credit facility. The
Agreement was amended on December 20, 2001. The Agreement permits maximum
borrowings of the lesser of $35,000,000 or, based on an independent
appraisal, up to 65% of the Company's eligible inventory balances. Under
the amendment to the Agreement, the Company can borrow $1,500,000 in
excess of the borrowing base through September 30, 2002. Borrowings under
this Agreement bear interest at the bank's prime interest rate plus 0.50%
(5.25% at February 3, 2002) or an adjusted Eurodollar rate (Libor) plus
2.50% (4.2613% at February 3, 2002) and expires on July 31, 2004.
Borrowings under the Agreement are also secured by substantially all of
the Company's assets. As of February 3, 2002, outstanding borrowings
under this agreement were $13,808,411. Available borrowings under the
line of credit at February 3, 2002 were $1,687,704. The Agreement has a
subfeature that provides for the Company to issue letters of credit for a
maximum of $6,000,000. Outstanding commitments under related letters of
credit were $887,281 as of February 3, 2002. The Agreement requires the
Company to be in compliance with certain financial (including a fixed
charge coverage ratio) and operational covenants, as defined in the
Agreement. The Agreement also includes certain prepayment
penalties including a 5.00% premium on any outstanding letters of credit,
as well as a penalty based on a percentage of borrowings outstanding
under the Agreement as follows: 2.00% from date of note through July 30,
2002, 1.00% from July 31, 2002 through July 31, 2003, and 0.75% from
August 1, 2003 through July 30, 2004.
The Company also has a $6,000,000 senior subordinated note payable
bearing interest at 12.75% from a third-party investor (Investor).
Payment required under the note is as follows: interest-only payments
from date of note (July 1999) through July 2003, principal and interest
on a monthly basis from July 2003 through June 2004, and any unpaid
principal and interest due in full in July 2004. The amount of principal
due during the fiscal years ended January 2003 and 2004 is approximately
$840,000 and $5,160,000, respectively. Upon the closing of the financing,
warrants were issued that entitle the Investors to purchase 332,824 of
the Company's common stock for $0.01 per share. The warrants expire on
the earlier of October 2008 or six years from the date the note and
related interest are paid in full. No value was ascribed to the warrants
upon issuance.
On December 20, 2001, the Company entered into a $1,500,000 note and
warrant purchase agreement with certain shareholders of the Company. This
agreement is junior to the $6,000,000 senior subordinated note. It bears
interest at the rate of 15% per annum. Interest and principal payments
are not required until maturity, October 29, 2004. However, if the
principal and accrued interest is not paid by April 20, 2003, the note
holders individually have the option to exercise their warrants which, if
exercised, would collectively equal 10% of the Company's then outstanding
common shares. The exercise price of the warrants is $0.01 per share. No
value was ascribed to the warrants upon issuance. Additionally, if the
principal and accrued interest continues to be unpaid as of December 20,
2003, the note holders have the option to individually convert their
notes to common shares which would collectively equal 10% of the
Company's then outstanding common shares. This option may be exercised
at any time up to December 20, 2008. The note requires that the Company
be in compliance with certain financial covenants (including tangible
net worth and fixed charge ratio) and operational covenants, as
defined in the note. The Company was in compliance with all such
covenants as of February 3, 2002. The Company has recorded related party
interest expense related to this note of approximately $28,000 during
fiscal 2001.
Deferred financing costs related to these financing agreements were
$451,795, and accumulated amortization was $204,399, as of February 3,
2002. These costs are being amortized over the term of the loans.
(6) Factoring Agreement
On April 20, 1998, the Company entered into a factoring agreement (the
Agreement) with a commercial bank that permits Oasis to borrow up to 80%
of factored accounts receivable less charges and reserves at the prime
interest rate plus 1.00% (5.75% at February 3, 2002). As of February 3,
2002, there were no borrowings outstanding under this Agreement. The
Agreement expired in April 2002 and was not renewed by the Company.
(7) Shareholders' Equity
Holders of all outstanding series of preferred stock are entitled to
receive dividends if and when declared upon the common stock. None of the
outstanding series of preferred stock has any rights to cumulative
dividends. The holders of the outstanding series of preferred stock have
liquidation preferences over each junior issuance of preferred stock and
over the common stock. Shares of all outstanding series of preferred
stock are convertible into common stock at any time (ten shares of common
stock for each share of preferred stock). All outstanding series of
preferred stock automatically convert to common stock upon the closing of
a public offering.
(8) Stock Options and Warrants
Options to purchase common shares have been granted under the 1993 Stock
Option Plan to officers, directors, key employees, and other parties
providing services to the Company. The Company has reserved a total of
1,500,000 shares under the stock option plan and has 782,340 of options
outstanding as of February 3, 2002 to purchase common stock at an
exercise price ranging from $.40 to $9.50 per share. The options vest
over a range of time from grant date to five years commencing one year
from grant date. The remaining contractual life ranges from one month to
ten years. As of February 3, 2002, a total of 481,067 options were
exercisable under the stock option plan, with a weighted average
exercise price of $4.05.
The following table summarizes the transactions of the Company's stock
option plan for fiscal 2001:
Weighted
Number of average
shares exercise price
-------------------- --------------------
Options outstanding, January 28, 2001 976,022 5.41
Granted 221,000 8.01
Exercised --- ---
Canceled 414,682 6.71
--------------------
Options outstanding, February 3, 2002 782,340 5.45
====================
As of February 3, 2002, the Company had outstanding warrants to purchase
1,639,244 shares of the Company's common stock at prices ranging from
$0.01 to $5.39 per share and 3,240 shares of the Company's Series C
preferred stock for $2.50 per share that were not granted under the 1993
Stock Option Plan. No warrants were exercised duing fiscal 2001.
(9) Income Taxes
State income tax expense (all current) consists of the following:
Year ended February 3, 2002:
State $ 28,500
====================
Income tax expense differs from the amount computed by applying the
federal statutory corporate tax rate of 34% to loss before income taxes
as shown below:
February 3,
2002
--------------------
Computed expected income tax benefit $ (1,207,000)
State income taxes, net of federal benefit (70,000)
Change in deferred tax asset valuation allowance 1,299,000
Nondeductible expenses 6,500
--------------------
$ 28,500
====================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
February 3,
2002
--------------------
Deferred tax assets:
Inventories $ 339,000
Property and equipment 1,091,000
Accrued expenses 258,000
Net operating losses 2,228,000
--------------------
3,916,000
Less valuation allowance 3,916,000
--------------------
$ --
====================
As of February 3, 2002, the Company has federal and state net operating
loss carryforwards of $6,194,000. The future tax benefit of the net
operating loss carryforward has not been recognized since the realization
is dependent upon the Company's ability to generate future earnings.
As of February 3, 2002, deferred tax assets aggregating $3,916,000, have
been recorded. Due to the uncertainty of the Company's ability to
generate future earnings, the Company has established a related valuation
allowance of $3,916,000 at February 3, 2002, an increase of $1,299,000
from January 20, 2001.
(10) Store Closure Costs
During fiscal 2001, the Company closed five stores that were not
operating at acceptable levels of profitability. As a result, the Company
has recorded $599,809 of store closure costs during fiscal 2001 related
to lease termination fees, abandoned leasehold improvements, severance
costs, and other costs.
(11) Commitments and Contingencies
(a) Leases
The Company leases its facilities under various operating and
capital lease agreements that expire through June 2011. Some of
these leases require the Company to make periodic payments for
property taxes and common area operating expenses. Certain leases
include rent abatements and scheduled rent escalations, for which
the effects are being amortized and recorded over the lease term.
At February 3, 2002, the approximate minimum rental commitments
under noncancelable operating and capital lease agreements are
summarized as follows:
Operating
Year ending January: Capital leases Leases
-------------- -------
2003 $ 157,896 9,938,339
2004 50,040 9,467,050
2005 4,696 8,305,150
2006 -- 8,013,311
2007 -- 7,843,475
Thereafter -- 18,527,488
-------------------- -------------------
Total minimum obligations 212,632 $ 62,094,813
===================
Less amount representing interest 12,788
--------------------
Present value of minimum obligations $ 199,844
====================
In addition to the above minimum rental commitments, the Company
has certain operating leases that require the Company to pay a
percentage of gross or net revenues, as defined. As the future
rental expense for these leases is not estimable, no future
commitment has been included in the above schedule. Rental expense
related to percentage rent during the fiscal years ended February
3, 2002 was approximately $117,000.
Total rental expense, including amounts related to percentage
rent, for the fiscal year ended February 3, 2002 was approximately
$9,900,000.
(b) Other Matters
The Company is a party to various legal proceedings incidental to
the conduct of its business. Although the ultimate disposition of
these proceedings is not presently determinable, management
believes that any adverse outcome which may result from such
proceedings would not have a material adverse effect upon the
financial position or results of operations of the Company.
Exhibit 99.2
PRO FORMA FINANCIAL INFORMATION - EXPLANATORY NOTES
On March 3, 2004, Big Dog Holdings, Inc. ("Big Dog" or the "Company")
completed its acquisition of substantially all the assets of the The Walking
Company ("TWC") through an asset purchase pursuant to the second amended
Debtor's Plan of Reorganization dated March 2, 2004 (the "Plan"). Big Dog
acquired TWC for approximately $22 million which included the payment and
issuance of cash, notes and stock rights by the Company and a subsidiary of the
Company pursuant to the Plan. The following unaudited Pro Forma Condensed
Combined Financial Statements are presented to illustrate the effects of the
acquisition of The Walking Company on the historical financial position and
operating results of Big Dog.
Pro Forma Results for the Year Ended December 31, 2003
The unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 2003 give effect to the acquisition of The
Walking Company as if it occurred on January 1, 2003. The Pro Forma Condensed
Combined Statement of Operations are based on the historical results of
operations of Big Dog and TWC for the year ended December 31, 2003 and February
1, 2004, respectively.
Pro Forma Results for the Three Months Ended March 31, 2004
The unaudited Pro Forma Condensed Combined Statement of Operations for
the three months ended March 31, 2004 gives effect to the acquisition of The
Walking Company as if it occurred on January 1, 2003. The Pro Forma Condensed
Combined Statement of Operations is based on the historical results of
operations of Big Dog and TWC for the three months ended March 31, 2004.
The Pro Forma Condensed Financial Statements and the accompanying notes
(together, the "Pro Forma Financial Information") should be read in conjunction
with the historical financial statements and notes thereto of Big Dogs and TWC.
For Big Dog, those financial statements are included in the Big Dog's Annual
Report on Form 10-K for the year ended December 31, 2003 and Big Dog's Quarterly
Report on Form 10-Q for the period ended March 31, 2004 as previously filed with
the Securities and Exchange Commission. For TWC, those financial statements are
included herewith.
The Pro Forma Financial Information is presented for illustrative
purposes only and is not necessarily indicative of the results of operations
that would have actually been reported had the business combination occurred
on January 1, 2003 and is not necessarily indicative of
future results of operations.
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEARS ENEDED DECEMBER 31, 2003
Big Dog The Walking
------- -----------
Holdings, Inc. Company
-------------- -------
December 31, February 1, Pro Forma
------------ ---------- ---------
2003 2004 Adjustments Notes Combined
---- ---- ----------- ------ ---------
NET SALES....................................... $103,757,000 $74,323,000 $(9,894,000) (1) $168,186,000
COST OF GOODS SOLD ............................. 45,025,000 36,689,000 (5,253,000) (1) 76,461,000
---------------- ---------------- ------------ ------------
GROSS PROFIT.................................... 58,732,000 37,634,000 (4,641,000) 91,725,000
---------------- ---------------- ------------ ------------
OPERATING EXPENSES:
Selling, marketing and distribution............ 49,089,000 34,964,000 (6,291,000) (1)(2) 77,762,000
General and administrative..................... 5,199,000 4,253,000 (522,000) (6) 8,930,000
---------------- ---------------- ------------ ------------
Total operating expenses...................... 54,288,000 39,217,000 (6,813,000) 86,692,000
--------------- ---------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS .................. 4,444,000 (1,583,000) 2,172,000 5,033,000
INTEREST EXPENSE, NET .......................... 318,000 1,752,000 (820,000) (1)(3) 1,250,000
---------------- ---------------- ------------ ------------
INCOME (LOSS) BEFORE REORGANIZATION COSTS AND
PROVISION FOR INCOME TAXES ..................... 4,126,000 (3,335,000) 2,992,000 3,783,000
REORGANIZATION COSTS ........................... - 14,061,000 (14,061,000) (1) -
---------------- ----------------- ----------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
4,126,000 (17,396,000) 17,053,000 3,783,000
---------------- ---------------- ------------ -------------
PROVISION FOR INCOME TAXES ..................... 1,489,000 28,000 (79,000) (4) 1,438,000
---------------- ---------------- ------------ --------------
NET INCOME (LOSS) .............................. $2,637,000 $(17,424,000) $17,132,000 $ 2,345,000
================ ================ ============ =============
NET INCOME PER SHARE -
BASIC AND DILUTED .............................. $ .32 (5) $ .28
================= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ..... 8,307,000 8,307,000
================== ==============
See accompanying notes
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
Big Dog The Walking
------- -----------
Holdings, Inc. Company Pro Forma
-------------- ------- ------------
Historical Historical Adjustments Notes Combined
------------ ---------- --------- ------ -----------
NET SALES....................................... $16,626,000 $13,573,000 $ - $ 30,199,000
COST OF GOODS SOLD ............................. 7,890,000 7,559,000 - 15,449,000
---------------- ---------------- --------------------- ----------------
GROSS PROFIT.................................... 8,736,000 6,014,000 - 14,750,000
---------------- ---------------- --------------------- ----------------
OPERATING EXPENSES:
Selling, marketing and distribution............ 11,461,000 6,069,000 (134,000) (2) 17,396,000
General and administrative..................... 1,327,000 1,528,000 (106,000) (6) 2,749,000
---------------- ---------------- --------------------- --------------
Total operating expenses...................... 12,788,000 7,597,000 (240,000) 20,145,000
--------------- --------------- --------------------- --------------
LOSS FROM OPERATIONS ........................... (4,052,000) (1,583,000) 240,000 (5,395,000)
INTEREST EXPENSE, NET .......................... 71,000 460,000 (205,000) (3) 326,000
---------------- ---------------- ------------ --------------
LOSS BEFORE REORGANIZATION COSTS AND BENEFIT
FOR INCOME TAXES ............................... (4,123,000) (2,043,000) 445,000 (5,721,000)
REORGANIZATION COSTS ........................... - (954,000) 954,000 (1) -
------------------ --------------- ------------ -------------
LOSS BEFORE BENEFIT FOR INCOME TAXES ........... (4,123,000) (2,997,000) 1,399,000 (5,721,000)
------------------ -------------- ------------- -------------
BENEFIT FOR INCOME TAXES ....................... (1,567,000) (265,000) (342,000) (4) (2,174,000)
------------------- --------------- ------------- -------------
NET LOSS ....................................... $ (2,556,000) $(2,732,000) $1,741,000 $(3,547,000)
=================== =============== ============== =============
NET LOSS PER SHARE - BASIC AND DILUTED........... $ (.31) (5) $ (.43)
=================== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING...... 8,244,000 8,244,000
=================== ==============
See accompanying notes
BIG DOG HOLDINGS, INC. AND SUBSIDIARIES
NOTES AND ASSUMPTIONS TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
Basis of Presentation
Big Dog Holdings, Inc. and subsidiaries ("Big Dog") operate on a calendar basis
ending December 31. Prior to acquisition, The Walking Company ("TWC") operated
on a 52-53 week fiscal year ending on the Sunday closest to the month end in
January. The Pro Forma condensed consolidated financial statements for the year
ended December 31, 2003 include Big Dog financial information for the year ended
December 31, 2003 and TWC financial information for the 53 weeks ended February
1, 2004. The Pro Forma condensed consolidated financial statements for the three
months ended March 31, 2004 include Big Dog financial information for the three
months ended March 31, 2004 and TWC financial information for the three months
ended March 31, 2004. As a result of the different fiscal year ends, revenues of
$3.8 million and net loss of $3.4 million for TWC for the period of January 1,
2004 through February 1, 2004 is included in both the Pro Forma results of
operations for the year ended December 31, 2004 and the three months ended March
31, 2004.
Purchase Price Allocation
The following table sets forth the components of the purchase price. The
consideration will be allocated to the assets and liabilities acquired based
upon their relative fair values. Such allocations are subject to final
determination based on valuations and other studies to be performed.
Cash consideration paid at closing $1,700,000
Redeemable convertible notes, notes payable and rights
issued 5,582,000
Net current and other liabilities assumed 12,840,000
Estimated acquisition costs 1,661,000
-----------
Total purchase consideration $21,783,000
===========
Allocation of purchase price:
Cash and cash equivalents $ 123,000
Inventories 12,754,000
Other current assets 1,944,000
Property and equipment 6,962,000
-----------
Total purchase allocation $21,783,000
===========
Explanation of Pro Forma Adjustments
The pro forma statement of operations for the three months ended March 31, 2004
and year ended December 31, 2003 give effect to the acquisition of TWC by Big
Dog as if it had occurred on January 1, 2003.
(1) During the fiscal year ended February 1, 2004, TWC incurred reorganization
costs and expenses in conjunction with its Chapter 11 bankruptcy proceedings.
Accordingly, all bankruptcy related items and events (e.g., reorganization
expenses, rejected leases, liabilities subject to compromise) have been removed
from the combined condensed pro forma financial statements. In addition, 32
underperforming stores were closed both before and during the bankruptcy
proceedings. Accordingly, sales of $9,894,000, cost of goods sold of $5,253,000
and selling expenses of $5,486,000 were excluded from the Pro Forma results for
these closed stores for the year ended December 31, 2003. Selling expenses
include salaries, rent, depreciation and other direct costs associated with the
closed stores.
(2) Represents a reduction in depreciation expense of $805,000 and $134,000 for
the year ended December 31, 2003 and for the three months ended March 31, 2004,
respectively. The depreciation reduction is a result of adjusting TWC's property
and equipment down by $1,185,000 to its fair value of $6,962,000 as of the
acquisition date. This amount excludes depreciation expense associated with the
closed stores (see note 1) and was calculated by comparing the monthly
depreciation post acquisition to monthly depreciation pre acquisition.
(3) Represents the net change in interest expense from reduced debt service. As
a result of the reorganization, $11,000,000 in debt (recorded as liabilities
subject to compromise) was eliminated. However as a component of purchase price,
the Company issued $5,582,000 in redeemable convertible notes, notes payable and
rights. In addition, the Company will continue to use its lines of credit
facilities to manage its short-term liquidity needs. The Company has estimated a
reduction of interest expense of $820,000 and $205,000 for the year ended
December 31, 2003 and the three months ended March 31, 2004, respectively. This
estimate was calculated based on the debt service requirements for the new and
existing debt, as well as projected use of the lines of credit facilities.
(4) Adjustment to the income tax provision to reflect Big Dog effective tax rate
of 38.0%.
(5) Assumes no change in the weighted average number of shares outstanding.
(6) Represents the reduction in personnel expense as a result of the
elimination of certain redundant management positions.