-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RDtmiRyLy7kgfwGTY1X1LffAuWASTa+W8n5RymHlGwxUpdOuFnUnaTf4cc2N7EHh 7VsfO7RgATWUtd44Jy0KvQ== 0000912057-97-030845.txt : 19970918 0000912057-97-030845.hdr.sgml : 19970918 ACCESSION NUMBER: 0000912057-97-030845 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19970916 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIG DOG HOLDINGS INC CENTRAL INDEX KEY: 0001019439 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33027 FILM NUMBER: 97680848 BUSINESS ADDRESS: STREET 1: 121 GRAY AVENUE STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93101 BUSINESS PHONE: 8059638727 MAIL ADDRESS: STREET 1: 121 GRAY AVENUE STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93101 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997 REGISTRATION NO. 333-33027 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- BIG DOG HOLDINGS, INC. (Exact name of registrant as specified in its charter) ------------------- DELAWARE 5651 52-1868665 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) No.)
------------------- 121 GRAY AVENUE SANTA BARBARA, CALIFORNIA 93101 (805) 963-8727 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------- ANTHONY J. WALL EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL BIG DOG HOLDINGS, INC. 121 GRAY AVENUE SANTA BARBARA, CALIFORNIA 93101 (805) 963-8727 FAX: (805) 962-9460 (Name and address, including zip code and telephone and fax number, of agent for service) ------------------- COPIES TO: JEFFREY M. WEINER, ESQ. THOMAS A. BEVILACQUA, ESQ. Kimball & Weiner LLP Brobeck, Phleger & Harrison LLP 555 S. Flower Street Two Embarcadero Place Suite 4540 2200 Geng Road Los Angeles, CA 90071 Palo Alto, CA 94303-0913 (213) 538-3800 (415) 424-0160
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997 BIG DOGS-REGISTERED TRADEMARK- [INSERT LOGO] 3,500,000 SHARES COMMON STOCK Of the 3,500,000 shares of Common Stock offered hereby, 2,800,000 shares are being sold by Big Dog Holdings, Inc. ("Big Dogs" or the "Company") and 700,000 shares are being sold by certain stockholders of the Company ("Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. ---------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS(2) Per Share...................... $ $ $ $ Total.......................... $ $ $ $
(1) Before deducting expenses, all of which are payable by the Company, estimated at $400,000. Approximately $6.4 million of the proceeds to the Company will be used to repay indebtedness to an affiliate of the Company. See "Use of Proceeds." (2) Certain of the Selling Stockholders have granted the Underwriters a 30-day option to purchase an aggregate of up to an additional 525,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. ---------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1997. ROBERTSON, STEPHENS & COMPANY HAMBRECHT & QUIST NEEDHAM & COMPANY, INC. The date of this Prospectus is , 1997. DESCRIPTION OF PICTURES AND CAPTIONS: FRONT COVER: "Ghost" image of Big Dog character. INSIDE FRONT COVER: Photos of store interiors and catalog covers. INSIDE FRONT GATE-FOLD: Product graphics and slogans. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE TRANSACTIONS, SEE "UNDERWRITING." 2 NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR ANY OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ----------------- TABLE OF CONTENTS
PAGE ----------- Summary........................................................................................ 4 Risk Factors................................................................................... 6 Use of Proceeds................................................................................ 13 Dividend Policy................................................................................ 13 Capitalization................................................................................. 14 Dilution....................................................................................... 15 Selected Consolidated Financial and Operating Data............................................. 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17 Business....................................................................................... 24 Management..................................................................................... 36 Certain Relationships and Related Transactions................................................. 43 Principal and Selling Stockholders............................................................. 45 Description of Capital Stock................................................................... 46 Shares Eligible for Future Sale................................................................ 51 Underwriting................................................................................... 53 Legal Matters.................................................................................. 55 Experts........................................................................................ 55 Additional Information......................................................................... 55 Index to Consolidated Financial Statements..................................................... F-1
----------------- BIG DOGS-Registered Trademark-, the dog logo and BIG DOG SPORTSWEAR-Registered Trademark- are registered trademarks of the Company and LITTLE BIG DOGS-TM- and BIG BIG DOGS-TM- are trademarks of the Company. Tradenames and trademarks of other companies appearing in this Prospectus are the property of their respective owners. The Company intends to mail to all of its stockholders annual reports containing financial statements audited by independent auditors for each fiscal year and quarterly reports containing unaudited financial data for each of the first three quarters of each fiscal year. The Company was incorporated in Delaware in December 1993. The Company's principal executive offices are located at 121 Gray Avenue, Santa Barbara, CA 93101, and its telephone number is (805) 963-8727. Unless otherwise indicated, all references to "Big Dogs," "Big Dog," "Big Dog Sportswear" or the "Company" refer to Big Dog Holdings, Inc., a Delaware corporation, and its subsidiaries (including subsidiaries of subsidiaries). 3 SUMMARY THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. NOTWITHSTANDING THE COMPANY'S DRAMATIC GROWTH IN SALES AND PROFITABILITY DURING RECENT PERIODS, THE COMPANY FACES SIGNIFICANT RISKS AND, AS A RESULT, THERE CAN BE NO ASSURANCE THAT THE COMPANY'S HISTORICAL GROWTH WILL BE INDICATIVE OF FUTURE PERFORMANCE. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY [LOGO] [LOGO] Big Dogs develops, markets and retails a branded, lifestyle collection of unique, high-quality, popular-priced consumer products, including activewear, casual sportswear, accessories and gifts. BIG DOGS-Registered Trademark- is an All-American, family-oriented brand that the Company believes has established a unique niche in its dedication to providing quality, value and fun. Big Dogs products were first sold in 1983, and operations remained limited through 1992 when the current controlling stockholders acquired the BIG DOGS-Registered Trademark- brand and related assets. Following the acquisition, Big Dogs initiated a strategy of leveraging the brand through dramatic expansion of its product line and rapid growth in its retail stores. The Company's net sales have grown from $11.4 million in 1993 (the Company's first full year of operation) to $68.7 million in 1996, a compound annual growth rate of 82%. The number of Company stores has grown from 5 in 1993 to 134 as of July 31, 1997, and over the last three years, the Company recruited a team of key executives and invested in management information systems and other infrastructure improvements that the Company believes have been critical in achieving this growth and positioning it to manage its anticipated future growth. The Company attained this dramatic growth in a highly competitive retail environment and, despite substantial infrastructure investments, the Company achieved increases in operating income in each full year of operation. The Company's collection is centered around its signature BIG DOGS-Registered Trademark- name, logo and "Big Dog" characters and is designed to appeal to a broad range of customers when they are in the "Big Dog state of mind." The BIG DOGS-Registered Trademark- brand conveys a sense of fun, humor and a "Big Dog attitude" whereby each customer can feel that he or she is a "Big Dog." The Big Dog attitude and sense of fun are brought to life through the Company's graphic capabilities that portray the Big Dog characters in a number of engaging, positive and inspiring situations and activities. The Big Dog attitude is further defined by a number of slogans such as "If You Can't Run with the Big Dogs Stay on the Porch"-Registered Trademark-, "Unless You're the Lead Dog, the Scenery Never Changes," and "Lead, Follow or Get Out of the Way." These graphics and slogans combine a bold, spirited attitude with wry, lighthearted humor. The appeal of the brand is further strengthened through the customer's personal identification with particular sports and other activities depicted in these graphics. In addition to its focus on fun, Big Dogs develops customer loyalty and enhances its brand image by providing a consistently high level of quality at moderate price points. Big Dogs accomplishes this primarily through (i) selling its own brand directly to the consumer, (ii) low product development costs, and (iii) sourcing high-volume/low-cost basic apparel with limited fashion risk. The BIG DOGS-Registered Trademark- brand is designed to appeal to men, women and children of all ages, particularly baby boomers and their kids, when they are engaged in leisure or recreational activities. Furthermore, the Company believes that the millions of dog and other pet owners in the United States, as well as children, have a strong natural affinity toward the dog-related images and themes in Big Dogs graphics. In addition, the Company believes that the positive image the brand brings to being a "Big Dog" has a special appeal to large-size customers. The Company's apparel products, which include a wide variety of basic apparel and related products, are developed with an emphasis on being functional rather than fashion-forward or trendy. These apparel products include graphic T-shirts, shorts, knit and woven shirts, fleece items, loungewear and boxer shorts. In addition to its BIG DOGS-Registered Trademark- line of activewear and casual sportswear for men and women, the Company has successfully introduced and expanded its LITTLE BIG DOGS-TM- line of infants' and children's apparel and its BIG BIG DOGS-TM- line of Big and Tall apparel. The Company has also successfully expanded its non-apparel products, including plush animals, stationery and pet products, which feature Big Dog graphics and are developed to complement its apparel. The Company reinforces its brand image by distributing BIG DOGS-Registered Trademark- products primarily through its own retail stores. This distribution strategy enables the Company to present a complete selection of its merchandise in a creative and fun environment. In addition, this strategy enables it to more effectively reach its targeted customers by locating stores in tourist-oriented and other casual environments where it believes consumers are more likely to be in the "Big Dog state of mind." The Company operates its retail stores in both outlet and full-price formats, depending on the location. Big Dogs' traditional emphasis has been on outlet malls because those malls are often located in tourist areas and therefore attract significant numbers of Big Dogs' targeted customers. More recently, the Company has increased its focus on opening full- price, stand-alone stores in locations frequented by tourist and leisure shoppers. The Company plans to open 30 net new stores during 1997, 13 of which were open as of July 31, 1997, and at least 30 stores in 1998. In addition to its retail stores, Big Dogs markets its products through other channels, including its catalog and better wholesale accounts. 4 THE OFFERING Common Stock Offered by the Company............. 2,800,000 shares Common Stock Offered by the Selling 700,000 shares Stockholders.................................... Common Stock Outstanding after the Offering..... 12,960,550 shares (1)
Use of Proceeds................................. To reduce indebtedness and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.......... BDOG
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (in thousands, except per share data)
SEVEN MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30, --------------- ------------------------------------------ -------------------- 1992 1993 1994 1995 1996 1996 1997 --------------- --------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales.......................... $ 3,000 $ 11,413 $ 28,404 $ 51,541 $ 68,683 $ 24,351 $ 31,143 Gross profit....................... 1,211 5,467 15,547 29,970 38,963 13,734 17,935 Operating income (loss)............ (517) 253 808 1,989 2,717 (1,927) (1,940) Net income (loss).................. (544) (54) 392 638 635 (1,540) (1,803) Net income (loss) per common share............................. $ (0.06) $ (0.01) $ 0.04 $ 0.07 $ 0.06 $ (0.15) $ (0.17) Weighted average common and common share equivalents outstanding..... 9,225 9,225 9,225 9,728 10,230 10,038 10,491 OPERATING DATA: Number of stores: Open at beginning of period...... 4 5 16 51 91 91 121 Stores added (net of closures)... 1 11 35 40 30 14 11 Open at end of period............ 5 16 51 91 121 105 132 Comparable store sales increase (decrease)........................ N/A 31.8% (1.5)% 9.0% 3.2% (4.6)% 9.6%
JUNE 30, 1997 -------------------------- ACTUAL AS ADJUSTED (2) --------- --------------- CONSOLIDATED BALANCE SHEET DATA: Cash........................................................................ $ 1,650 $ 12,779 Working capital............................................................. 10,730 29,268 Total assets................................................................ 32,976 44,105 Total indebtedness.......................................................... 22,323 -- Stockholders' equity........................................................ 4,339 37,791
- --------- (1) Based on the number of shares of Common Stock outstanding at June 30, 1997. Excludes (i) 147,500 shares of Common Stock issuable upon the exercise of options outstanding at June 30, 1997 at a weighted average exercise price of $4.93 per share; (ii) 282,500 shares of Common Stock issuable upon the exercise of options granted after June 30, 1997 at an exercise price of $12.00 per share; (iii) 240,000 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 1997 at a weighted average exercise price of $3.50 per share; and (iv) 717,500 shares of Common Stock available for future grant under the Company's 1997 Performance Award Plan, of which the Company intends to grant options for up to 50,000 shares to certain employees and 30,000 shares to the initial three non-employee directors at the initial public offering price on the effective date of this offering. See "Management--Stock and Incentive Plans" and "Description of Capital Stock." (2) Adjusted to reflect the sale of the 2,800,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the application of the estimated net proceeds therefrom. 5 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. The statements contained in this Prospectus that are not purely historical are forward-looking statements, including without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements in this document are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this Prospectus. CHANGES IN CONSUMER PREFERENCES The Company believes its merchandise appeals to men, women and children of all ages, particularly baby boomers and their kids, when they are in the "Big Dog state of mind." In addition, the Company believes that its merchandise has a special appeal to children because of its dog-related themes and to customers who wear large sizes because of the positive image the brand brings to being a "Big Dog." However, the consumer products industry in general, and the apparel industry in particular, are subject to changing consumer demands and preferences. While the Company believes that its products historically have not been significantly affected by fashion trends, the Company's products are subject to changing consumer preferences. The Company's long-term success will depend significantly on its ability to continue to produce appealing and popular graphics and products that anticipate, gauge and respond in a timely manner to changing consumer demands and preferences. Failure to anticipate and respond to changes in consumer preferences could lead to, among other things, lower sales, excess inventories, diminished customer loyalty and lower margins, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, consumer preferences could shift away from the Company's traditional graphic and logo-oriented merchandise, and any such shift could have a material adverse effect on the Company's business, financial condition and results of operations. Failure of the Company's new products or graphics to gain sufficient market acceptance may not only have the short-term effect of low sales levels for such products, but in the long-term may also adversely affect the image and value of the BIG DOGS-Registered Trademark- brand name and trademarks. See "Business--Merchandising" and "Business--Competition." ABILITY TO ACHIEVE FUTURE GROWTH The Company's growth strategies include opening new stores, increasing sales in existing stores, expanding other channels of distribution, pursuit of international sales, and selective brand leveraging through, among other things, licensing and media activities. The Company believes that its growth has been attributable in part to the Company's ability to open and operate new stores successfully. The Company's continued growth will depend to a significant degree on its ability to open and operate new stores, to increase net sales and profitability from the Company's existing stores, and to expand its other sources of revenue. The Company plans to open 30 net new stores during 1997, 13 of which were open as of July 31, 1997, bringing the total number of stores to 134 as of that date. The Company plans to open at least 30 stores in 1998. The Company's recent and planned expansion includes the opening of stores in new geographic markets. In addition, the Company's traditional emphasis has been on opening stores in outlet malls, though the Company plans to expand the number of its stores in other venues. These new markets and venues have in the past presented, and will continue to present, competitive and merchandising challenges that are different from those faced by the Company in its existing markets and venues. There can be no assurance that new stores will achieve sales and profitability levels consistent with existing stores. The Company's retail expansion is dependent on a number of factors, including the Company's ability to locate and obtain favorable store sites, and to negotiate acceptable lease terms. In addition, the Company's comparable store sales results are affected by a variety of factors, including, among others, prevailing retail market conditions, merchandising strategies, timing of promotions, weather conditions, 6 shifts in the timing of certain holidays, and the Company's ability to efficiently source and distribute merchandise. The Company's comparable store sales have fluctuated in the past and the Company believes fluctuations may continue in the future. For example, in the last ten quarters, the Company's comparable store sales results were (2.0)%, 14.6%, 16.5%, 3.3%, (6.2)%, (3.8)%, (2.8)%, 16.1%, 16.4% and 5.5%, respectively. Past comparable store sales results may not be indicative of future results, and there can be no assurance that the Company's comparable store sales results will increase or not decrease in the future. In addition, there can be no assurance that the Company's strategies to increase other sources of revenue, which may include expansion of its catalog business, wholesale business, corporate sales, international sales, licensing, co-branding and media and entertainment activities, will be successful or that the Company's overall sales or profitability will increase or not be adversely affected as a result of any such expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ABILITY TO MANAGE FUTURE GROWTH The Company's growth has resulted in an increased demand on the Company's managerial, operational and administrative resources. The Company has recently invested significant resources in, among other things, its management information systems and distribution center and has hired additional key executives. However, in order to manage currently anticipated levels of future demand, the Company may be required to, among other things, expand its distribution facilities, establish relationships with new manufacturers to produce its products, and continue to expand and improve its financial, management and operating systems. There can be no assurance that the Company will be able to manage future growth effectively and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The success of the Company is significantly dependent on the personal efforts, performance and abilities of its key management, particularly Andrew Feshbach, the Company's President and Chief Executive Officer, and Douglas Nilsen, Executive Vice President--Merchandising. The loss of the services of Mr. Feshbach, Mr. Nilsen or the other key members of the management team, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not have an employment contract with Mr. Feshbach, Mr. Nilsen or any other members of the management team. The Company currently maintains $5 million of keyman insurance on the life of Mr. Feshbach payable to the Company, which may be significantly reduced following this offering. The inability to attract and retain qualified personnel in the future could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management." CONFLICTS OF INTEREST; CERTAIN RELATED TRANSACTIONS Fred Kayne, the Chairman and majority stockholder of the Company, is the Chairman, President and beneficial owner of 60% of the capital stock of Fortune Fashions Inc. ("Fortune Fashions"). In addition, Mr. Feshbach, the President, Chief Executive Officer and a director of the Company, is a director and beneficial owner of approximately 10% of the capital stock of Fortune Fashions. See "Management" and "Principal and Selling Stockholders." Fortune Fashions manufactured approximately 23% of the Company's products (by dollar value of purchases) in 1996, including over 80% of the Company's graphic T-shirts. Fortune Fashions also produces products for other customers who compete with the Company. While the Company believes its transactions with Fortune Fashions have generally been on terms no less favorable to the Company than could have been obtained with unrelated third parties, such transactions could pose conflicts of interest, especially if any disputes were to arise between the parties. See "Certain Relationships and Related Transactions." The Audit Committee of the Board of Directors of the Company will monitor transactions with Fortune Fashions and any other related parties to ensure that the Company's overall transactions with each such party are on terms no less favorable to the Company than could be obtained with unrelated third parties. 7 DEPENDENCE ON THIRD-PARTY AND FOREIGN MANUFACTURERS The Company does not own or operate any manufacturing facilities and is therefore dependent on third parties for the manufacture of its products. The Company currently relies on over 100 vendors to produce its products, with one affiliated vendor, Fortune Fashions, producing approximately 23% of the Company's products (by dollar value of purchases) in 1996, including over 80% of the Company's graphic T-shirts. See "--Conflicts of Interest; Certain Related Transactions" and "Certain Relationships and Related Transactions." The Company has no supply contracts with its manufacturing sources and it competes with other companies for production facilities. In the event Fortune Fashions or any of the Company's other manufacturers are unable or unwilling to ship the Company's products in a timely manner or continue to manufacture the Company's products, the Company would have to rely on other current manufacturing sources or identify and qualify new manufacturers. In such event, there can be no assurance that the Company would be able to qualify such manufacturers for existing or new products in a timely manner or that such manufacturers would allocate sufficient capacity to the Company in order to meet its requirements. Although the loss of major suppliers could have a significant effect on the Company's immediate operating results, the Company believes alternate sources of merchandise for most product categories are available at comparable prices and that it could replace these suppliers without any long-term adverse effect on the Company. Although the Company believes it maintains good controls with respect to product specifications and quality, there can be no assurance that its manufacturers will continue to produce products that are consistent with the Company's standards. The Company has occasionally received, and may from time-to-time in the future receive, shipments of product from manufacturers that fail to conform to the Company's quality control standards. In such event, unless the Company is able to obtain replacement products in a timely manner, the Company risks the loss of revenue resulting from the sale of such products and related increased administrative and shipping costs. The failure of any key manufacturer to supply products that conform to the Company's standards could materially and adversely affect the Company's results of operations and its reputation in the marketplace. Although the Company believes that it has good relationships with its principal manufacturing sources, the Company's future success is substantially dependent upon its ability to maintain such relationships. Should the Company experience significant unanticipated demand, the Company will be required to significantly expand its access to manufacturing, both from current and new manufacturing sources. There can be no assurance that such additional manufacturing capacity will be available on terms as favorable as those obtained from current sources. See "Business--Sourcing." In 1996, approximately 61% of the Company's products (by dollar value of purchases) was manufactured outside of the United States, primarily in Asia. The Company's operations could be adversely affected by events that result in disruption of trade from foreign countries in which the Company's suppliers are located. A significant portion of the Company's foreign-supplied products is produced by contractors with manufacturing facilities in China. There have been a number of recent trade disputes between China and the United States during which the United States has threatened to impose punitive tariffs and duties on products imported from China and to withdraw China's "most favored nation" trade status. The loss of most favored nation status for China, changes in current tariff or duty structures or the adoption by the United States of other trade policies or sanctions adverse to China could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's internal and vendor operating guidelines promote ethical and legal business practices. The Company's staff or agents periodically visit and observe the operations of its foreign and domestic manufacturers, but the Company does not control such manufacturers or their labor practices. The violation of labor or other laws by any manufacturer used by the Company or the divergence of an independent manufacturer's labor practices from those generally accepted as ethical in the United States, could have a material adverse effect on the Company's business, financial condition and results of operations. VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY Because a significant portion of the Company's products are designed for warm weather use and a significant number of the Company's retail stores are located in tourist areas and outdoor malls, the Company's 8 business is seasonal by nature. In addition, the Company believes that because it locates its stores largely in tourist areas and outdoor malls, which have different visitation patterns than urban and suburban retail centers, the Company's seasonality is somewhat different than that of many apparel retailers. The third and fourth quarters (consisting of the summer vacation, back-to-school, and Christmas seasons) have historically accounted for the largest percentage of the Company's annual net sales and profits. In 1996, excluding sales generated by stores not open for all of 1996, substantially all the Company's operating income and approximately 28% and 33% of the Company's net sales were generated during the third and fourth quarters, respectively. In addition, the Company has historically incurred operating losses in its first quarter and anticipates that it will continue to do so during the first quarter of each year for the foreseeable future. The Company has experienced, and may continue to experience, year-over-year fluctuations in its net sales and net income (loss) on a quarterly basis, which is typical of many apparel and retail businesses. The Company's quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of store openings, the amount of revenue contributed by new stores, changes in comparable store sales, changes in the mix of products sold, customer acceptance of new products, the timing and level of markdowns, competitive factors and general economic conditions, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Because of these quarterly and seasonal fluctuations, the results of operations for any quarter are not necessarily indicative of the results that may be achieved for a full year or for any future quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Quarterly Results." DEPENDENCE ON TRADEMARKS AND COPYRIGHTS The Company uses a number of trademarks, certain of which the Company has registered with the United States Patent and Trademark Office and in certain foreign countries. The Company believes that its registered and common law trademarks have significant value and that its trademarks, copyrights and other intellectual property are instrumental in its ability to create and sustain demand for and market its products. Accordingly, the Company devotes substantial resources to the establishment and protection of its trademarks on a worldwide basis. The Company believes that there are no currently pending material challenges to the use or registration of any of the Company's trademarks. There can be no assurance, however, that the Company's current or future use of its primary trademarks in new, non-apparel product categories or the use of more newly developed trademarks in all categories do not or will not violate the proprietary rights of others, that they would be upheld if challenged or that the Company would, in such an event, not be prevented from using its trademarks in those categories. See "Business--Trademarks." From time to time the Company discovers products in the marketplace that infringe upon trademark rights held by the Company. Although the Company aggressively pursues such infringements, it may determine that it is not cost effective to pursue smaller infringements in all instances. In addition, enforcement actions against infringements may be expensive and there can be no assurance that the Company's claims will prevail. Continued sales of infringing products could adversely impact the BIG DOGS-Registered Trademark- brand and image, result in loss of sales and a shift of consumer preferences away from the Company and generally have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Trademarks." ECONOMIC CONDITIONS AND CONSUMER SPENDING The Company's apparel and related products are sold in an industry that has been, and will likely continue to be, subject to substantial cyclical variations. By its focus on basic apparel, the Company believes that it is less affected by such cycles than many fashion apparel companies. However, purchases of the Company's apparel and related products are nevertheless discretionary for consumers and, as a result, may be affected by adverse trends in the national economy or one or more regional economies. The success of the Company's operations therefore depends upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income, such as employment, business conditions, future economic prospects, interest rates and taxation. In addition, substantially all of the Company's stores are located in tourist 9 areas and outlet malls and the Company's sales depend on a high level of traffic in these locations. The Company, therefore, depends on the ability of these tourist destinations and malls to continue to generate a high volume of consumer traffic in the vicinity of the Company's stores. Tourism and outlet mall traffic may be adversely affected by economic downturns, adverse weather, political conditions, natural disasters, changing consumer preferences, highway or surface street traffic, the closing of high profile stores near the Company's stores and declines in the desirability of the shopping environment in a particular tourist destination or mall. Any of the factors set forth above could adversely affect the Company's business, financial condition and results of operations. SUBSTANTIAL COMPETITION Although the level and nature of competition differ among the Company's product categories, the Company competes primarily on the basis of its brand image, offering a unique combination of quality, value and fun, and on other factors including product assortment, price, store location and layout, and customer service. The markets for each of the Company's products are highly competitive. The Company believes that its long-term competitive position will depend upon its ability to anticipate and respond effectively to changing consumer demands and to offer customers a wide variety of high-quality, fun products at competitive prices. Although the Company believes it does not compete directly with any single company with respect to its entire range of merchandise, within each merchandise category the Company competes with well-known apparel and specialty retail companies such as The GAP, Eddie Bauer, Warner Brothers Stores and The Disney Stores, as well as a large number of national and regional department stores, specialty retailers and apparel designers and manufacturers. In addition, in recent years, the amount of casual sportswear and activewear manufactured specifically for department stores and sold under their own labels has significantly increased. Many of Big Dogs' competitors are significantly larger and more diversified and have substantially greater financial, distribution, marketing and other resources and have achieved greater recognition for their brand names than the Company. There can be no assurance that the Company will be able to compete successfully with its competitors in the future. Any failure to successfully compete could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Competition." CONTROL BY EXISTING STOCKHOLDERS AND ANTITAKEOVER PROVISIONS Upon completion of this offering, Fred Kayne will beneficially own approximately 49.2% of the Company's outstanding Common Stock and the Company's current directors and executive officers, including Mr. Kayne, will collectively beneficially own approximately 63.5% of the Common Stock. As a result, Mr. Kayne, acting either individually or in concert with the Company's current directors and executive officers, will be able to control the election of directors and, in general, to determine the outcome of any matter submitted to a vote of the Company's stockholders for approval. This concentration of ownership, together with the anti-takeover effects of certain provisions of the Delaware General Corporation Law and the Company's Certificate of Incorporation and Bylaws, may have the effect of delaying or preventing a change in control of the Company, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the prevailing market price of the Common Stock. The Company has authorized 3,000,000 shares of Preferred Stock having such designations, rights and preferences as may be determined from time to time by the Board of Directors, without any vote or further action by the stockholders of the Company. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of Preferred Stock that may be issued in the future. In addition, under the Company's 1997 Performance Award Plan (the "1997 Plan"), upon a "Change in Control Event" (as defined in the 1997 Plan) each option and stock appreciation right issued under the 1997 Plan will become immediately exercisable; restricted stock issued under the 1997 Plan will immediately vest free of restrictions; and the number of shares, cash or other property covered by each "performance share award" issued under the 1997 Plan will be issued to the grantee of such award, unless the Board of Directors (or the Committee thereof appointed to administer the 1997 Plan) determines to the contrary. The issuance of Preferred 10 Stock and the grant or acceleration of rights under the 1997 Plan could make it more difficult for a third party to acquire the Company. The Company has no present plan to issue any of its Preferred Stock. See "Management", "Principal and Selling Stockholders," and "Description of Capital Stock." NO PRIOR MARKET AND VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop subsequent to this offering or, if developed, that it will be sustained. The initial public offering price of the Common Stock offered hereby will be determined by negotiations among the Company, the Selling Stockholders and the Representatives and may not be indicative of the market price for the Common Stock after the offering. See "Underwriting." Upon commencement of this offering, the Common Stock will be quoted on The Nasdaq National Market, which has experienced, and is likely to continue to experience, significant price and volume fluctuations which could adversely affect the market price of the Common Stock without regard to the operating performance of the Company. In addition, the market prices for shares of common stock issued in an initial public offering are often volatile, as are shares of companies in the apparel business, and the price of the shares offered hereby may in particular fluctuate based upon a number of factors, including, without limitation, quarter-to-quarter variations in the Company's results of operations, fluctuations in the Company's comparable store sales, announcements by other apparel, accessory and gift item manufacturers and retailers, the condition of the overall economy and those other factors listed in this "Risk Factors" section. Due to the foregoing and other factors in this "Risk Factors" section, it is possible that the Company's actual results of operations may be below investors' and research analysts' expectations, and, as a result, research analysts may change their earnings per share projections, both of which could have a material adverse effect on the market price of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 12,960,550 shares of Common Stock outstanding (based upon shares of Common Stock outstanding as of July 31, 1997 and assuming no exercise of outstanding options or warrants). Of these shares, the 2,800,000 shares sold by the Company and the 700,000 sold by the Selling Stockholders in this offering, plus any additional shares sold upon exercise of the Underwriters' over-allotment option, will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" of the Company ("Affiliates"), as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 9,460,550 shares of Common Stock (the "Restricted Shares") held by existing stockholders upon completion of this offering will be "restricted" securities within the meaning of Rule 144 and may not be sold except in compliance with the registration requirements of the Securities Act or an applicable exemption under the Securities Act, including an exemption pursuant to Rule 144 or Rule 701. All stockholders of the Company (who in the aggregate hold 10,160,550 shares of Common Stock), all warrantholders of the Company (who in the aggregate have the right to purchase 240,000 shares of Common Stock), and all holders of options exercisable within 180 days after this offering (who in the aggregate have the right to purchase 73,333 shares of Common Stock within that period), have agreed, pursuant to Lock-Up Agreements, that they will not, without the prior written consent of Robertson, Stephens & Company, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them (except for shares sold in this offering) for a period of 180 days after the date of this Prospectus. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the Lock-Up Agreements. See "Underwriting." Upon the expiration of the 180-day lock-up period, approximately 8,533,883 Restricted Shares will become eligible for sale in the public market pursuant to Rule 144 or Rule 701. 11 As of August 1, 1997, there were warrants outstanding for the purchase of 240,000 shares of Common Stock. The underlying shares may be resold under Rule 144 upon the expiration of either the one or two-year holding periods, which commence upon exercise of the warrant. As of August 1, 1997, options to purchase 92,500 shares were outstanding under the 1997 Stock Option Plan and options to purchase 55,000 shares were outstanding under non-plan option agreements with the Company's Chairman. Upon expiration of the 180-day lock-up period and subject to vesting and exercisability restrictions, all shares issued pursuant to the exercise of these stock options may be resold pursuant to Rule 701. 73,333 of such options will be exercisable at the end of the 180-day lock-up period. In addition, options to purchase 282,500 shares of Common Stock were granted under the 1997 Plan as of August 1, 1997 and 717,500 shares of Common Stock are available for future grant under the 1997 Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act 90 days after the date of this Prospectus to register the shares issuable under the 1997 Plan. Such registration statement is expected to become effective upon filing. After the effective date of such registration statement, shares of Common Stock issued under the 1997 Plan will be immediately eligible for sale in the public market, subject to vesting and exercisability restrictions. No options granted under the 1997 Plan will become exercisable prior to August 1, 1998. See "Shares Eligible for Future Sale." IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS The amount by which the initial public offering price per share of Common Stock exceeds the adjusted net tangible book value per share of the Common Stock after this offering constitutes dilution to investors in this offering. Investors purchasing shares of Common Stock in this offering will incur immediate and substantial dilution of $10.10 per share at an assumed initial public offering price of $13.00. See "Dilution." The Company has never paid dividends on its outstanding shares of capital stock and does not anticipate paying any dividends in the foreseeable future. See "Dividend Policy." 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,800,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses, are estimated to be approximately $33.5 million. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The net proceeds will be used as follows: (i) approximately $8.0 million to repay certain promissory notes due through November 4, 2003 that bear interest at 10% per annum, (ii) to repay outstanding advances under the Company's revolving credit facility (which were in the principal amount of $4.9 million as of July 31, 1997) that mature May 2, 1998 and that bear interest at the prime rate of its bank lender (8.5% per annum as of July 31, 1997), (iii) approximately $6.4 million to repay certain promissory notes issued to the Company's Chairman and majority stockholder due June 30, 1999 and November 4, 2003 that bear interest at 10% per annum, and (iv) approximately $1.0 million to repay capital lease obligations. The Company intends to use the remaining net proceeds of this offering for working capital and other general corporate purposes. Pending such uses, the net proceeds will be invested in short-term, investment-grade, interest-bearing securities. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends on its capital stock in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of the Company's Board of Directors, will be subject to applicable law and will depend upon the Company's results of operations, earnings, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. In addition, the Company's revolving credit facility prohibits the payment of dividends by the Company. 13 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of June 30, 1997, on an actual basis and as adjusted to give effect to the sale of the 2,800,000 shares of Common Stock offered by the Company hereby based upon an assumed initial public offering price of $13.00 per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1997 -------------------------- ACTUAL AS ADJUSTED(2) --------- --------------- (in thousands, except share and per share amounts) Total short-term debt................................................................. $ 7,409 $ -- --------- ------- --------- ------- Obligations under capital leases, net of current portion.............................. $ 514 $ -- Subordinated debt..................................................................... 14,400 -- --------- ------- Total long-term debt.............................................................. 14,914 -- --------- ------- Stockholders' equity: Preferred stock, $.01 par value per share; 3,000,000 shares authorized; no shares issued or outstanding actual or as adjusted....................................... Common stock, $.01 par value per share; 30,000,000 shares authorized; 10,160,550 issued and outstanding, actual; 12,960,550 issued and outstanding, as adjusted (1)............................................................................... 102 130 Additional paid-in capital.......................................................... 5,705 39,129 Retained earnings (deficit)......................................................... (736) (736) Notes receivable on common stock.................................................... (732) (732) --------- ------- Total stockholders' equity........................................................ 4,339 37,791 --------- ------- Total capitalization............................................................ $ 19,253 $ 37,791 --------- ------- --------- -------
- ------- (1) Based on the number of shares of Common Stock outstanding at June 30, 1997. Excludes (i) 147,500 shares of Common Stock issuable upon the exercise of options outstanding at June 30, 1997 at a weighted average exercise price of $4.93 per share; (ii) 282,500 shares of Common Stock issuable upon the exercise of options granted after June 30, 1997 at an exercise price of $12.00 per share; (iii) 240,000 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 1997 at a weighted average exercise price of $3.50 per share; and (iv) 717,500 shares of Common Stock available for future grant under the 1997 Plan, of which the Company intends to grant options for up to 50,000 shares to certain employees and 30,000 shares to the initial three non-employee directors at the initial public offering price on the effective date of this offering. See "Management--Stock and Incentive Plans" and "Description of Capital Stock." (2) Adjusted to reflect the sale of 2,800,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.00 per share and the application of the estimated net proceeds therefrom. 14 DILUTION The net tangible book value of the Company as of June 30, 1997 was approximately $4.1 million, or $0.41 per share of Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of 2,800,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the adjusted net tangible book value of the Company as of June 30, 1997 would have been $37.6 million, or $2.90 per share. This represents an immediate increase in net tangible book value of $2.49 per share to existing stockholders and an immediate dilution in net tangible book value of $10.10 per share to investors purchasing shares of Common Stock in this offering. The following table illustrates the per share dilution: Assumed initial public offering price........................ $ 13.00 Net tangible book value at June 30, 1997................... $ 0.41 Increase attributable to new investors..................... 2.49 --------- Adjusted net tangible book value after the offering.......... 2.90 --------- Dilution to new investors.................................... $ 10.10 --------- ---------
The following table summarizes, as of June 30, 1997, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by the new investors at the assumed initial public offering price of $13.00 per share.
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE ----------------------- ------------------------ PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ----------- ----------- ----------- ----------- Existing stockholders....... 10,160,550 78.4% $ 5,807,000 13.8% $ 0.57 New investors............... 2,800,000 21.6 36,400,000 86.2 $ 13.00 ---------- ----- ----------- ----- Total................... 12,960,550 100.0% $42,207,000 100.0% ---------- ----- ----------- ----- ---------- ----- ----------- -----
- ------- (1) Sales by the Selling Stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 9,460,550 shares, or 73.0% (8,935,550 shares, or 68.9%, if the Underwriters' over-allotment option is exercised in full), of the total number of shares of Common Stock to be outstanding after this offering, and will increase the number of shares held by new investors to 3,500,000 shares, or 27.0% (4,025,000 shares, or 31.1%, if the Underwriters' over-allotment option is exercised in full) of the total number of shares of Common Stock to be outstanding after this offering. See "Principal and Selling Stockholders." The calculation of net tangible book value and the other computations above assume no exercise of outstanding options or warrants. As of June 30, 1997, 387,500 shares of Common Stock were issuable upon exercise of outstanding stock options and warrants at a weighted average exercise price of $4.04 per share, of which options and warrants to purchase 295,000 shares were then exercisable at a weighted average exercise price of $3.43 per share. On August 1, 1997, the Company granted options for the purchase of 282,500 shares of Common Stock to over 60 employees under the 1997 Plan at an exercise price of $12.00 per share. To the extent the outstanding options are exercised and any shares of Common Stock reserved for issuance are issued with exercise prices below the initial public offering price, there will be further dilution to new investors. See "Management--Stock and Incentive Plans" and "Shares Eligible for Future Sale." 15 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The consolidated statement of operations data set forth below for each of the years ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data as of December 31, 1995 and 1996 have been derived from the Company's consolidated financial statements, which statements have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere in this Prospectus. The consolidated statement of operations data presented for the seven months ended December 31, 1992 and the year ended December 31, 1993 and the consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are derived from the Company's audited consolidated financial statements, which are not included in this Prospectus. The data presented as of June 30, 1996 and 1997 and for the six months ended June 30, 1996 and 1997 are derived from unaudited consolidated financial statements included elsewhere in this Prospectus. In the opinion of management, all unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the data for such periods. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year or for any future period, particularly due to the seasonality of the Company's business. The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
SIX MONTHS SEVEN MONTHS ENDED ENDED DECEMBER YEAR ENDED DECEMBER 31, JUNE 30, 31, ------------------------------------------ --------- 1992 (1) 1993 1994 1995 1996 1996 --------------- --------- --------- --------- --------- --------- (in thousands, except per share and operating data) STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 3,000 $ 11,413 $ 28,404 $ 51,541 $ 68,683 $ 24,351 Cost of goods sold................................... 1,789 5,946 12,857 21,571 29,720 10,617 ------ --------- --------- --------- --------- --------- Gross profit......................................... 1,211 5,467 15,547 29,970 38,963 13,734 ------ --------- --------- --------- --------- --------- Selling, marketing and distribution expenses......... 1,166 3,873 12,993 24,814 32,309 13,685 General and administrative expenses.................. 562 1,341 1,746 3,167 3,937 1,976 ------ --------- --------- --------- --------- --------- Total operating expenses............................. 1,728 5,214 14,739 27,981 36,246 15,661 ------ --------- --------- --------- --------- --------- Operating income (loss).............................. (517) 253 808 1,989 2,717 (1,927) Interest expense..................................... 26 306 397 1,189 1,647 667 ------ --------- --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes.............................................. (543) (53) 411 800 1,070 (2,594) Provision (benefit) for income taxes................. 1 1 19 162 435 (1,054) ------ --------- --------- --------- --------- --------- Net income (loss).................................... $ (544) $ (54) $ 392 $ 638 $ 635 $ (1,540) ------ --------- --------- --------- --------- --------- ------ --------- --------- --------- --------- --------- Net income (loss) per common share................... $ (0.06) $ (0.01) $ 0.04 $ 0.07 $ 0.06 $ (0.15) Weighted average common and common share equivalents outstanding........................................ 9,225 9,225 9,225 9,728 10,230 10,038 OPERATING DATA: Number of stores: (2) Open at beginning of period........................ 4 5 16 51 91 91 Stores added (net of closures)..................... 1 11 35 40 30 14 ------ --------- --------- --------- --------- --------- Open at end of period.............................. 5 16 51 91 121 105 Comparable store sales increase (decrease) (3)....... N/A 31.8% (1.5)% 9.0% 3.2% (4.6)% 1997 ----------- STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 31,143 Cost of goods sold................................... 13,208 ----------- Gross profit......................................... 17,935 ----------- Selling, marketing and distribution expenses......... 17,764 General and administrative expenses.................. 2,111 ----------- Total operating expenses............................. 19,875 ----------- Operating income (loss).............................. (1,940) Interest expense..................................... 967 ----------- Income (loss) before provision (benefit) for income taxes.............................................. (2,907) Provision (benefit) for income taxes................. (1,104) ----------- Net income (loss).................................... $ (1,803) ----------- ----------- Net income (loss) per common share................... $ (0.17) Weighted average common and common share equivalents outstanding........................................ 10,491 OPERATING DATA: Number of stores: (2) Open at beginning of period........................ 121 Stores added (net of closures)..................... 11 ----------- Open at end of period.............................. 132 Comparable store sales increase (decrease) (3)....... 9.6%
DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- --------- (in thousands) BALANCE SHEET DATA: Working capital................................. $ 1,141 $ 1,506 $ 3,072 $ 8,030 $ 13,742 $ 8,565 $ 10,730 Total assets.................................... 3,623 5,756 13,647 19,011 25,773 26,477 32,976 Total indebtedness (4).......................... 1,530 2,272 6,141 10,732 15,697 17,791 22,323 Stockholders' equity............................ 556 2,502 3,094 4,737 6,142 3,623 4,339
- --------- (1) The Company acquired the BIG DOGS-Registered Trademark- trademark and related assets as of May 29, 1992 and the statement of operations reflects results since that date. See "Business--General." (2) Excludes two temporary stores open for a portion of 1995 and four temporary stores open for a portion of 1996. (3) Comparable store sales represent net sales of stores open at least one full year. Stores are considered comparable beginning on the first day of the first month following the one-year anniversary of their opening. Stores that are relocated but remain in the same shopping area remain in the comparable store base. (4) Includes subordinated debt, obligations under the bank line of credit and obligations under capital leases. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The statements contained in this Prospectus that are not purely historical are forward-looking statements, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements in this document are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Notwithstanding the Company's dramatic growth in sales and profitability during recent periods, the Company faces significant risks and, as a result, there can be no assurance that the Company's historical growth will be indicative of future performance. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained elsewhere in this Prospectus. Certain minor differences in rounding and additions in the tables and text of Management's Discussion and Analysis of Financial Condition and Results of Operations result from basing the calculations on amounts as shown in Selected Consolidated Financial and Operating Data. GENERAL Big Dogs develops, markets and retails a branded, lifestyle collection of unique, high-quality, popular-priced consumer products, including activewear, casual sportswear, accessories and gifts. Big Dogs products were first sold in 1983, and operations remained limited through 1992 when the current controlling stockholders acquired the BIG DOGS-Registered Trademark- brand and related assets. Following the acquisition, Big Dogs initiated a strategy of leveraging the brand through dramatic expansion of its product lines and rapid growth in its retail stores. The Company's net sales have grown from $11.4 million in 1993 (the Company's first full year of operation) to $68.7 million in 1996, a compound annual growth rate of 82%. The number of Company stores has grown from 5 in 1993 to 134 as of July 31, 1997, and over the last three years, the Company recruited a team of key executives and invested in management information systems and other infrastructure improvements that the Company believes have been critical in achieving this growth and positioning it to manage its anticipated future growth. The Company attained this dramatic growth during a highly competitive retail environment and, despite substantial infrastructure investments for growth, the Company achieved increases in operating income in each full year of operation. As of July 31, 1997, the Company operated 133 stores in 39 states and one store in England. The Company expects its primary growth in the next few years to come from the opening of new stores. After opening 35 and 40 stores (net of closures) in 1994 and 1995, respectively, beginning in 1996, the Company moderated its planned annual store openings to 30 in order to implement a new merchandising information system, integrate new executive management, develop and validate its smaller store format, test-market additional venues in which to open Big Dog stores and, beginning in March 1997, implement its store retrofitting program. The Company plans to open 30 net new stores during 1997, 13 of which were open as of July 31, 1997 and at least 30 stores in 1998. In 1997, the Company began a store retrofitting program, under which it is installing more flexible and higher capacity wall and floor fixtures, which are designed to better display products and improve in-stock positions on the selling floor. As of July 31, 1997, the Company had retrofitted 32 stores and plans to retrofit approximately 20 additional stores in the remainder of 1997. The Company believes that much of the corporate infrastructure to absorb and manage its anticipated growth over the next few years is in place. During the last three years, several key executives with substantial industry experience were recruited and joined the Big Dogs team. The Company has also strengthened its merchandising, product development and store operations staff and, in late 1995 and early 1996, implemented a more advanced management information system to facilitate planning and execution of its merchandising strategies. The Company expects to leverage certain of these infrastructure investments through the opening of new stores, as well as by selling BIG DOGS-Registered Trademark- products through other distribution channels. 17 While the Company believes the primary source of future growth will be from new store openings, it also expects to increase sales by (A) continued comparable store sales increases as a result of, among other things, (i) continued new product development across all product lines; (ii) further penetration of existing products, themes and categories, particularly in its recently introduced children's, Big and Tall and non-apparel lines; (iii) fuller utilization of its merchandising information systems to capitalize on regional and seasonal trends and build sales by category; (iv) the impact of recent additions to the Company's merchandising and store operations staff, as well as higher productivity associated with the maturation of its existing merchandising, product development and store management staff; and (v) the current retrofitting program for existing stores; (B) expansion of existing channels of distribution through a new and more focused strategy of growth; (C) pursuit of international sales through various channels; and (D) selective brand leveraging through licensing and media activities. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain selected statement of operations data expressed as a percentage of net sales:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold.................................. 45.3 41.9 43.3 43.6 42.4 --------- --------- --------- --------- --------- Gross profit........................................ 54.7 58.1 56.7 56.4 57.6 --------- --------- --------- --------- --------- Selling, marketing and distribution expenses........ 45.7 48.1 47.0 56.2 57.0 General and administrative expenses................. 6.1 6.1 5.7 8.1 6.8 --------- --------- --------- --------- --------- Total operating expenses............................ 51.9 54.3 52.8 64.3 63.8 --------- --------- --------- --------- --------- Income (loss) from operations....................... 2.8% 3.9% 4.0% (7.9)% (6.2)% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 NET SALES. Net sales consist of sales from the Company's stores, catalog, and wholesale accounts, all net of returns and allowances. Net sales increased to $31.1 million in the first six months of 1997 from $24.4 million for the same period in 1996, an increase of $6.8 million, or 27.9%. Of the $6.8 million increase, $5.7 million was attributable to stores not yet qualifying as comparable stores and $1.8 million came from the 9.6% comparable store sales increase for the period. These increases were partially offset by a $0.7 million decline in non-retail sales. Management believes comparable store sales increased because of continued improvements in Company operations. These improvements include (i) the addition and maturation of key executives in store operations, merchandising and distribution and (ii) the better merchandising associated with the Company's utilization of its management information system as a result of the availability of detailed data on which to base planning and allocation decisions. In particular, continued strong growth in the Company's recently introduced categories of children's, Big and Tall and non-apparel products contributed to the increase. The Company also benefited from easier comparisons to sales in the first half of 1996. GROSS PROFIT. Gross profit increased to $17.9 million in the first six months of 1997 from $13.7 million for the same period in 1996, an increase of $4.2 million, or 30.6%. As a percentage of net sales, gross profit increased to 57.6% in the first six months of 1997 from 56.4% in the same period in 1996. This increase as a percentage of net sales was primarily attributable to better purchasing of certain key products. Also contributing to the percentage increase were continued improvements in merchandising, planning and allocation which led to better product sell-throughs. 18 SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses consist of expenses associated with creating, distributing, and selling products through all channels of distribution, including occupancy, payroll and catalog costs. Selling, marketing and distribution expenses increased to $17.8 million in the first six months of 1997 from $13.7 million for the same period in 1996, an increase of $4.1 million, or 29.8%. As a percentage of net sales, these expenses increased to 57.0% in the first six months of 1997 from 56.2% in the same period in 1996, primarily as a result of infrastructure investments. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist of administrative salaries, corporate occupancy costs and other corporate expenses. General and administrative expenses increased to $2.1 million in the first six months of 1997 from $2.0 million in the same period in 1996. As a percentage of net sales, these expenses decreased to 6.8% in the first six months of 1997 from 8.1% in the comparable 1996 period, reflecting the leverage of spreading them over a larger revenue base. INTEREST EXPENSE. Interest expense increased to $1.0 million in the first six months of 1997 from $0.7 million in the same period in 1996, an increase of $0.3 million, primarily as a result of an increase in amounts due under outstanding subordinated notes and increased borrowings under the Company's revolving credit facility. YEARS ENDED DECEMBER 31, 1996 AND 1995 NET SALES. Net sales increased to $68.7 million in 1996 from $51.5 million in 1995, an increase of $17.1 million, or 33.3%. Of the $17.1 million increase, $19.6 million was attributable to stores not yet qualifying as comparable stores and $1.2 million was attributable to the 3.2% comparable store sales increase for the period. These increases were partially offset by a decline of $3.7 million in non-retail sales as a result of the Company's streamlining of its catalog and wholesale operations which it initiated with the objectives of improving their profitability and positioning them for future growth. Comparable store sales increased in the fall and Holiday periods, which management believes was primarily a result of fundamental improvements in store operations. These improvements include integration of newly recruited executive management in merchandising, store operations and distribution, utilization of the new computer system to improve merchandising decisions and product allocation and improvements in warehouse operations. Comparable store sales also increased as a result of the continued growth of the three relatively new product lines (children's, Big and Tall and non-apparel products) and new promotional techniques. GROSS PROFIT. Gross profit increased to $39.0 million in 1996 from $30.0 million in 1995, an increase of $9.0 million, or 30.0%. However, as a percentage of net sales, gross profit decreased to 56.7% in 1996 from 58.1% in 1995. This decline in gross profit as a percentage of net sales is primarily attributable to certain inefficiencies throughout the year related to the integration of the new merchandising information system. In addition, the Company experienced lower than expected retail gross profit margins in the fourth quarter of 1996 due to product mix and out-of-stock issues in December related to better than expected sell-throughs in October and November. SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses increased to $32.3 million in 1996 from $24.8 million in 1995, an increase of $7.5 million, or 30.2%. As a percentage of net sales, these expenses decreased to 47.0% in 1996 from 48.1% in 1995. This decrease in operating expenses as a percentage of net sales was primarily attributable to the Company's decision to streamline its catalog operations. This decrease was offset in part by higher occupancy costs and payroll costs as a percentage of net sales related primarily to the timing of new store openings. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $3.9 million in 1996 from $3.2 million in 1995, an increase of $0.8 million or 24.3%. As a percentage of net sales, these expenses decreased to 5.7% in 1996 from 6.1% in 1995, reflecting the leverage of spreading these expenses over a larger revenue base. 19 INTEREST EXPENSE. Interest expense increased to $1.6 million in 1996 from $1.2 million in 1995, an increase of $0.4 million, as a result of a $6.1 million increase in the amount of subordinated notes outstanding during the year and increased borrowings under the Company's revolving credit facility. PROVISION FOR INCOME TAXES. The effective tax rate in 1996 was 40.7% as compared to 20.3% in 1995. The lower effective tax rate in 1995 was primarily attributable to the utilization of net operating loss carryforwards. As of December 31, 1995, the Company had fully utilized its net operating loss carryforwards. YEARS ENDED DECEMBER 31, 1995 AND 1994 NET SALES. Net sales increased to $51.5 million in 1995 from $28.4 million in 1994, an increase of $23.1 million, or 81.5%. Of the $23.1 million increase, $21.2 million was attributable to stores not yet qualifying as comparable stores, $1.4 million was attributable to the 9.0% comparable store sales increase for the period, and $0.5 million was attributable to increases in non-retail sales. The increase in comparable store sales in 1995 was based on strong sales in a few high-volume stores within a relatively small comparable store base. GROSS PROFIT. Gross profit increased to $30.0 million in 1995 from $15.5 million in 1994, an increase of $14.4 million, or 92.8%. As a percentage of net sales, gross profit increased to 58.1% in 1995 from 54.7% in 1994. Factors contributing to the higher gross profit as a percentage of net sales include the continued shift of the Company's business away from wholesale to higher margin retail and catalog sales. SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses increased to $24.8 million in 1995 from $13.0 million in 1994, an increase of $11.8 million, or 91.0%. As a percentage of net sales, these expenses increased to 48.1% in 1995 from 45.7% in 1994. These expenses increased primarily because of a reduction in the level of wholesale operations, which have lower selling, marketing and distribution expenses than the Company's other operations. In addition, catalog expenses increased as a percentage of net sales to 9.5% in 1995 from 7.6% in 1994 due to higher paper and postage costs. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $3.2 million in 1995 from $1.7 million in 1994, an increase of $1.4 million or 81.4%. As a percentage of net sales, these expenses remained constant at 6.1% in both periods. INTEREST EXPENSE. Interest expense increased to $1.2 million in 1995 from $0.4 million in 1994, an increase of $0.8 million, as a result of a $4.8 million increase in the amount of subordinated notes outstanding during the year and increased borrowings under the Company's revolving credit facility. PROVISION FOR INCOME TAXES. The effective tax rate was 20.3% in 1995 as compared to 4.6% in 1994. The tax rate for both periods was lower than the statutory rate due primarily to the utilization of net operating loss carryforwards. SEASONALITY AND QUARTERLY RESULTS The Company believes its seasonality is somewhat different than many apparel retailers since a significant number of the Company's stores are located in tourist areas and outdoor malls that have different visitation patterns than urban and suburban retail centers. The third and fourth quarters (consisting of the summer vacation, back-to-school and Christmas seasons) have historically accounted for the largest percentage of the Company's annual net sales and profits. In 1996, excluding sales generated by stores not open for all of 1996, substantially all the Company's operating income and approximately 28% and 33% of the Company's net sales were generated during the third and fourth quarters, respectively. In addition, the Company has historically incurred operating losses in its first quarter and anticipates that it will continue to do so during the first quarter of each year for the foreseeable future. The Company's quarterly results of operations may also fluctuate as a result of a variety of factors, including the timing of store openings, the amount of revenue contributed by new stores, changes in comparable store 20 sales, changes in the mix of products sold, customer acceptance of new products, the timing and level of markdowns, competitive factors and general economic conditions. The following table sets forth certain data for each of the Company's last six fiscal quarters. The quarterly data set forth below were derived from unaudited consolidated financial statements of the Company, which in the opinion of management of the Company contain all adjustments (consisting only of normal adjustments) necessary for a fair presentation of such data.
1996 1997 -------------------------------------------------- ------------------------ FIRST SECOND THIRD FOURTH FIRST SECOND QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- ----------- (in thousands, except per share and operating data) STATEMENT OF OPERATIONS DATA: Net sales................................. $ 9,131 $ 15,220 $ 19,652 $ 24,680 $ 12,265 $ 18,878 Gross profit.............................. 4,812 8,922 11,311 13,918 6,670 11,265 Selling, marketing and distribution expenses................................ 6,091 7,594 8,631 9,993 8,454 9,310 General and administrative expenses....... 979 997 976 985 1,035 1,076 Total operating expenses.................. 7,070 8,591 9,607 10,978 9,489 10,386 Income (loss) from operations............. (2,258) 331 1,704 2,940 (2,819) 879 Net income (loss)......................... (1,522) (18) 755 1,420 (2,031) 228 Net income (loss) per common share........ $ (0.15) $ (0.00) $ 0.07 $ 0.14 $ (0.19) $ 0.02 Weighted average common and common equivalent shares outstanding........... 9,971 10,123 10,252 10,491 10,491 10,491 AS A PERCENTAGE OF NET SALES: Gross profit.............................. 52.7% 58.6% 57.6% 56.4% 54.4% 59.7% Selling, marketing and distribution expenses................................ 66.7 49.9 43.9 40.5 68.9 49.3 General and administrative expenses....... 10.7 6.6 5.0 4.0 8.4 5.7 Total operating expenses.................. 77.4 56.4 48.9 44.5 77.4 55.0 Income (loss) from operations............. (24.7) 2.2 8.7 11.9 (23.0) 4.7 Net income (loss)......................... (16.7) (0.1) 3.8 5.8 (16.6) 1.2 OPERATING DATA: Comparable store sales increase (decrease).............................. (6.2)% (3.8)% (2.8)% 16.1% 16.4% 5.5% Stores open at end of period.............. 95 105 113 121 121 132
21 LIQUIDITY AND CAPITAL RESOURCES During the last three years and the first six months of 1997, the Company's primary uses of cash have been to finance store openings and purchase merchandise inventories. The Company has satisfied its cash requirements principally from the sale of debt and equity securities and a revolving line of credit with its bank. Cash used in operating activities was $2.2 million and $1.8 million in 1995 and 1996, respectively, and $6.8 and $3.4 million for the first six months of 1996 and 1997, respectively. Working capital was $10.7 million at June 30, 1997 compared to $8.6 million at June 30, 1996, an increase of $2.1 million. Inventories at June 30, 1997 were $18.8 million compared to $17.1 million at June 30, 1996, an increase of $1.6 million. The Company's average inventories vary throughout the year and increase in advance of its peak selling periods during the summer, back-to-school and Christmas seasons. The Company maintains substantially all of its inventories in finished goods rather than fabrics or work-in-process. In addition, the Company believes that it has generally negotiated favorable terms with its overseas vendors, who in many instances allow the Company to pay for goods when received rather than post letters of credit in advance. Cash used in investment activities in 1995 and 1996 was $2.4 million and $3.5 million, respectively, and for the six months ended June 30, 1996 and 1997 was $1.2 and $2.2 million, respectively. Cash flows used in investing activities relate primarily to new store openings, and in 1995 and 1996, also the acquisition and implementation of a new computer system. Cash provided by financing activities in 1995 and 1996 was $4.5 million and $5.2 million, respectively, and $7.3 million and $6.6 million for the first six months of 1996 and 1997, respectively. In April 1995, the Company received net proceeds of $5.0 million from the sale of 10% subordinated notes and Common Stock. In February 1996, the Company received net proceeds of $2.5 million from the sale of 10% subordinated notes and Common Stock. In November 1996, the Company received net proceeds of $4.2 million from the sale of 10% subordinated notes and warrants to purchase Common Stock. In addition, from time to time, the Company's majority stockholder and Chairman advanced the Company funds in exchange for subordinated notes, of which approximately $6.4 million in principal amount was outstanding at June 30, 1997, all of which will be repaid with the proceeds of this offering. The Company has a revolving credit facility with a bank that expires in May 1998. The revolving credit facility provides for a $10.5 million revolving line of credit that can be used for cash advances and letters of credit. Interest on advances under the revolving credit facility is payable monthly at the bank's prime rate (8.5% at June 30, 1997). As of June 30, 1997, the Company had $6.9 million in advances and $1.5 million of letters of credit outstanding. This facility is collateralized by substantially all the assets of the Company and subjects it to various restrictive covenants, including maintenance of minimum working capital and tangible net worth levels, limitations on indebtedness and a prohibition on the payment of dividends. Amounts outstanding under this credit facility will be repaid with the proceeds of this offering. The Company plans to open approximately 30 net new stores in 1997, 13 of which were open as of July 31, 1997, and at least 30 stores in 1998. The Company's average cost to open a store in 1996, including leasehold improvements and furniture and fixtures, was approximately $50,000 (net of tenant improvement allowances). The average per store initial inventory (partially financed by trade payables) for the new 1996 stores was approximately $78,000 and pre-opening expenses averaged approximately $13,000 per store. The average total cost to build new stores will vary in the future, depending on various factors, including local construction expenses, changes in store format and design and tenant improvement allowances. In addition to new store openings, the Company had retrofitted 32 stores through July 31, 1997 at an average cost of $11,000. The Company plans to retrofit approximately 20 stores in the second half of 1997. Capital expenditures are estimated to be approximately $5.0 million for 1997, of which approximately $2.6 million had been expended as of July 31, 1997, and approximately $5.0 million in 1998. The Company believes that cash provided by operations together with funds available under its revolving credit facility and the net proceeds from this offering will be sufficient to fund its operations and planned 22 expansion at least through the end of 1998. The Company may be required to seek additional sources of funds for accelerated growth after that point, and there can be no assurance that such funds will be available on satisfactory terms. Failure to obtain such financing could delay or prevent the Company's planned growth, which could adversely affect the Company's business, financial condition and results of operations. INFLATION The Company does not believe that inflation has had a material effect on operations in the past year. However, there can be no assurance that the Company's business will not be affected by inflation in the future. 23 BUSINESS [LOGO] The following discussion contains forward-looking statements that involve risks and uncertainties. The statements contained in this Prospectus that are not purely historical are forward-looking statements, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements in this document are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Notwithstanding the Company's dramatic growth in sales and profitability during recent periods, the Company faces significant risks and, as a result, there can be no assurance that the Company's historical growth will be indicative of future performance. GENERAL Big Dogs develops, markets and retails a branded, lifestyle collection of unique, high-quality, popular-priced consumer products, including activewear, casual sportswear, accessories and gifts. BIG DOGS-Registered Trademark- is an All-American, family-oriented brand that the Company believes has established a unique niche in its dedication to providing quality, value and fun. Big Dogs products were first sold in 1983, and operations remained limited through 1992 when the current controlling stockholders acquired the BIG DOGS-Registered Trademark- brand and related assets. Following the acquisition, Big Dogs initiated a strategy of leveraging the brand through dramatic expansion of its product line and rapid growth in its retail stores. The Company's net sales have grown from $11.4 million in 1993 (the Company's first full year of operation) to $68.7 million in 1996, a compound annual growth rate of 82%. The number of the Company's stores has grown from 5 in 1993 to 134 as of July 31, 1997, and over the last three years, the Company recruited a team of key executives and invested in management information systems and other infrastructure improvements that the Company believes have been critical in achieving this growth and positioning it to manage its anticipated future growth. The Company attained this dramatic growth in a highly competitive retail environment and, despite its substantial infrastructure investments for growth, the Company achieved increases in operating income in each full year of operation. The Company's collection is centered around its signature BIG DOGS-Registered Trademark- name, logo and "Big Dog" characters and is designed to appeal to a broad range of customers when they are in the "Big Dog state of mind." The BIG DOGS-Registered Trademark- brand conveys a sense of fun, humor and a "Big Dog attitude," whereby each customer can feel that he or she is a "Big Dog." The Big Dog attitude and sense of fun are brought to life through the Company's graphic capabilities that portray the Big Dog characters in a number of engaging, positive and inspiring situations and activities. The Big Dog attitude is further defined by a number of slogans such as "If You Can't Run with the Big Dogs Stay on the Porch"-Registered Trademark-, "Unless You're the Lead Dog, the Scenery Never Changes," and "Lead, Follow or Get Out of the Way." These graphics and slogans combine a bold, spirited attitude with wry, lighthearted humor. The appeal of the brand is further strengthened through a customer's personal identification with particular sports and other activities depicted in these graphics. In addition to its focus on fun, Big Dogs develops customer loyalty and enhances its brand image by providing a consistently high level of quality at moderate price points. Big Dogs accomplishes this primarily through (i) selling its own brand directly to the consumer, (ii) low-cost product development, and (iii) sourcing high-volume/low-cost basic apparel with limited fashion risk. The BIG DOGS-Registered Trademark- brand is designed to appeal to men, women and children of all ages, particularly baby boomers and their kids, when they are engaged in leisure or recreational activities. Furthermore, the Company believes that the millions of dog and other pet owners in the United States, as well as children, have a strong natural affinity toward the dog-related images and themes in Big Dogs graphics. In addition, the Company believes that the positive image the brand brings to being a "Big Dog" has a special appeal to large-size customers. The Company's apparel products, which include a wide variety of basic apparel and related products, are developed with an emphasis on being functional rather than fashion-forward or trendy. These apparel products include graphic T-shirts, shorts, knit and woven shirts, fleece items, loungewear and boxer shorts. In addition to its BIG DOGS-Registered Trademark- line of activewear and casual sportswear for men and women, the 24 Company has successfully introduced and expanded its LITTLE BIG DOGS-TM- line of infants' and children's apparel and its BIG BIG DOGS-TM- line of Big and Tall apparel. The Company has also successfully expanded its non-apparel products, including plush animals, stationery and pet products, which feature Big Dog graphics and are developed to complement its apparel. The Company reinforces its brand image by distributing BIG DOGS-Registered Trademark- products primarily through its own retail stores. This distribution strategy enables the Company to present a complete selection of its merchandise in a creative and fun environment. In addition, this strategy enables it to more effectively reach its targeted customers by locating stores in tourist-oriented and other casual environments where it believes consumers are more likely to be in the "Big Dog state of mind." The Company operates its retail stores in both outlet and full-price formats, depending on the location. Big Dogs' traditional emphasis has been on outlet malls because those malls are often located in tourist areas and therefore attract significant numbers of Big Dogs' targeted customers. More recently, the Company has increased its focus on opening full-price, stand-alone stores in locations frequented by tourist and leisure shoppers. The Company plans to open 30 net new stores during 1997, 13 of which were open as of July 31, 1997, and at least 30 stores in 1998. In addition to its retail stores, Big Dogs markets its products through other channels, including its catalog and better wholesale accounts. INDUSTRY OVERVIEW APPAREL. The BIG DOGS-Registered Trademark- brand is designed to appeal to men, women and children of all ages, particularly baby boomers and their kids, when they are engaged in leisure or recreational activities. According to the United States Department of Commerce, Bureau of the Census, in 1996 there were approximately 86 million men and women ages 30 to 50, and 39 million children ages 0 to 9 in the United States, together representing nearly half of the total 266 million U.S. population. The Company believes that, particularly within this baby boomer market, there is an increased demand for family-oriented products, services and activities as families seek to spend time together, including taking vacations together and shopping together for entertainment. The Company also believes there has been a trend toward greater "casualization" in dress and in lifestyles generally that has led to an increased demand for more casual apparel. A majority of the Company's products is comprised of apparel in the adult, children and Big and Tall categories. According to the NPD Group, a national statistical research agency, $161 billion was spent on apparel at retail in 1996, of which women's apparel comprised approximately $85 billion, men's approximately $49 billion, boys' approximately $12 billion, girls' approximately $9 billion, and infants' and toddlers' approximately $6 billion. Furthermore, the Company believes the demand for large-size apparel will continue to increase as the population, particularly baby boomers, continues to age and increase in weight. The Company believes that as a result of having developed a large and loyal customer base and its recent investments in infrastructure, it is well- positioned to take advantage of market and distribution opportunities. OUTLET MALLS. Increases in sales per square foot of apparel at outlet malls have recently outpaced sales per square foot at traditional malls. Although the growth in sales per square foot for the full year in 1996 was higher in traditional malls than in outlet malls, beginning in the fourth quarter of 1996, apparel sales per square foot in outlet malls increased 4.8% over the same period in the prior year as compared to 2.2% in traditional malls. This trend continued in the first quarter of 1997, with apparel sales per square foot in outlet malls increasing 9.7%, compared to 1.1% in traditional malls. The Company believes that this increase in sales per square foot in outlet malls is due in part to the increased presence of upscale brands in outlet malls, the continued consumer trend toward value shopping and increased development of large, upscale outlet malls which have become "destination" shopping locations. In addition, the Company believes that outlet mall customers have a greater representation of the Company's target customers, particularly baby boomers and tourist and leisure-oriented customers, than traditional malls. Due to these purchasing trends and customer demographics at outlet malls, outlet malls are an important part of the Company's location strategy, as are other locations attracting similar customer traffic. 25 NON-APPAREL. In addition to apparel, the Company offers an assortment of toys, pet products, stationery and other paper goods, gift items and other products all bearing Big Dog graphics. The Company believes that the markets in these product categories are very substantial and present significant opportunities for growth. BUSINESS STRATEGY [LOGO] Big Dogs' mission is to build a brand that is recognized throughout the world for providing high quality, good value and fun and functional products. To achieve this goal, the Company has adopted the following operating and growth strategies: OPERATING STRATEGIES PROMOTE THE BIG DOG SPIRIT OF FUN. A key and unique element in the Company's brand image is its focus on fun. This spirit of fun revolves around the Company's Big Dog character that has broad appeal to men, women and children of all ages. The Company fosters this spirit by creating positive, humorous, topical and inspiring graphics and slogans which it applies to its merchandise. More than just a logo, the Big Dog represents the leader, athlete, child, comedian, musician, boss, traveler, parent and dog lover in everyone. Big Dog products are fun, not only because of their graphics and slogans, but also because they are designed for recreational, sports and leisure activities and make ideal gifts. Big Dogs' focus on fun is further enhanced by the lively, enjoyable atmosphere in its retail stores and is also reflected in its catalog and marketing promotions and activities. DELIVER HIGH QUALITY AT A GOOD VALUE. Big Dogs' products are constructed using high-quality fabrics and other materials. Many of its products feature unique graphics characterized by advanced print techniques, as well as unique appliques and embroideries on many of its apparel products. The Company believes that this combination of quality fabrics and graphics in its apparel products provides the customer with a product that has an exceptional look and feel. Big Dogs is able to deliver this level of quality at reasonable prices primarily as a result of (i) selling its own brand direct to the consumer, (ii) low-cost product development, (iii) sourcing of basic apparel, and (iv) low marketing costs. The Company believes that delivering quality and value is instrumental in generating customer appeal and brand loyalty for its products, particularly those that do not prominently feature Big Dog graphics. ENHANCE FUNCTIONAL PRODUCTS WITH GRAPHICS. Big Dog develops functional rather than fashion-forward products. The Company believes it has a special competency in creating distinctive, popular graphics which it uses to differentiate its products from those of its competitors. Big Dogs has developed a broad assortment of classic, functional clothing ("basics") in traditional, less fashion-forward colors. The Company's focus on basics and its ability to leverage its graphics across multiple product categories have allowed the Company to eliminate the need for a traditional buyer or design staff, and thereby lower its product development costs compared to most fashion apparel companies. Furthermore, since its graphics are added in the last stage of production, the Company is able to be more responsive to customer preferences while also lowering its inventory risk. TARGET A BROAD, DIVERSE CUSTOMER BASE. Big Dogs believes it has established an All-American, family-oriented brand featuring products, graphic themes, slogans and promotions that appeal to a broad range of consumers. Although its marketing focus is on baby boomers and their kids, Big Dogs' customers include men, women and children of all ages, and span a wide range of geographic areas and income levels. Furthermore, the Company believes that the millions of dog and other pet owners in the United States, as well as children, have a strong natural affinity for the dog-related images and themes in Big Dogs graphics. In addition, the Company believes that the positive image the brand brings to being a "Big Dog" has a special appeal to large-size customers. MAINTAIN CONTROLLED DISTRIBUTION. Big Dogs' sells its products primarily through its own stores and, to a lesser extent, through its catalog. By selling direct to its customers, Big Dogs is able to present its complete line of merchandise in a creative and fun environment. This also allows it to target its customers more precisely by locating its stores in tourist-oriented and other high-traffic areas, where the Company believes consumers are 26 more likely to be in the "Big Dog state of mind." Selling direct to the consumer also allows the Company (i) to enhance its margins while still providing customer value, (ii) to be more responsive to customer feedback, especially with regard to new product development, (iii) to reduce its need to build brand awareness through large-scale media advertising, and (iv) to collect customer names for its catalog through in-store sign-ups. CREATE AN ENTERTAINING SHOPPING EXPERIENCE. Big Dogs seeks to create a distinctive and fun shopping environment in its stores through an innovative display of its graphic art and humor, including in-store "T-shirt walls" and other displays that are designed to immediately put the customer in the "Big Dog state of mind." By showcasing the Company's complete product line, Big Dogs stores offer something for everyone in the family. Effective cross-merchandising in the stores is designed to add excitement and prompt add-on purchases. The Company believes the customer's shopping experience is further enhanced by the Company's knowledgeable and enthusiastic sales staff. EMPHASIZE GRASSROOTS MARKETING. The Company believes its most effective marketing is its products themselves and their presentation in the Company's retail stores and catalog. As a result, the Company has spent relatively little on advertising. Also important to Big Dogs' marketing strategy is its targeted "grassroots" marketing activities. These activities include local and charity sponsorships (such as high school sports teams), community-oriented promotional events (such as the Company's annual dog parade in Santa Barbara), and corporate cross-promotions with leading consumer product companies (such as Nabisco and IAMS). [LOGO] [LOGO] GROWTH STRATEGIES The Company seeks to expand its business in a controlled manner that enhances the BIG DOGS-Registered Trademark- brand. The Company believes much of the corporate infrastructure required to absorb and manage its anticipated growth over the next few years is in place, including (i) recent additions of key executives with substantial industry experience to enhance the depth and breadth of its management team, and (ii) the implementation of an advanced management information system. In addition, the Company believes that it has established relationships with product vendors capable of meeting its anticipated growth requirements for the foreseeable future. Big Dogs' primary growth strategies are: CONTINUE STORE EXPANSION. Big Dogs' primary growth strategy is the continued expansion of its retail stores. The Company plans to open 30 net new stores during 1997, 13 of which were open as of July 31, 1997, and at least 30 stores in 1998. The Company opens stores in locations and venues that management believes best target its customers and can be obtained on terms that meet its unit profitability requirements. Depending on the location, the Company will open new stores in either an outlet or full-price format. Although Big Dogs' traditional emphasis has been on outlet malls, the Company has more recently increased its focus on opening full-price, stand-alone stores in tourist and leisure locations. Accordingly, the Company anticipates that the stores it opens in the near future will be located in a variety of venues, including outlet malls, stand-alone stores in tourist areas, tourist-oriented malls and, to a lesser extent, regional malls and metropolitan locations. INCREASE SALES IN EXISTING STORES. The Company expects to increase sales in its existing stores through, among other things, (i) continued new product development across all categories; (ii) further penetration of existing products, themes and categories, particularly in its recently introduced children's, Big and Tall and non-apparel categories; (iii) fuller utilization of merchandising information systems to capitalize on regional and seasonal trends and build sales by category; (iv) the impact of recent additions to the Company's merchandising and store operations staff, as well as higher productivity associated with the maturation of its existing merchandising, product development and store management teams; and (v) the current retrofitting program for existing stores, which includes the introduction of more flexible and higher capacity wall and floor fixtures that better display product and improve in-stock positions on the selling floor. The Company plans to retrofit approximately 52 stores during 1997, 32 of which were completed as of July 31, 1997, and over 40 stores in 1998. EXPAND NON-RETAIL CHANNELS OF DISTRIBUTION. Big Dogs continues to focus on the expansion of its catalog and traditional wholesale channels, as well as other existing and potential channels of distribution, including corporate sales, premium programs, internet sales and strategic relationships with non-apparel wholesale 27 accounts. Although after streamlining its catalog and wholesale operations in late 1996 the revenues of those operations declined in the first half of 1997, the Company believes that these and other channels of distribution present significant opportunities for profitable expansion. PURSUE INTERNATIONAL OPPORTUNITIES. Big Dogs products are not currently sold outside the United States, with the exception of one store in England and incidental other sales. The Company plans to expand the worldwide sale of its products through a variety of means, which may vary by country, and may include retail stores, exporting to resellers, licensing and catalog sales. The Company believes that there is a significant potential international market for Big Dog products due to their unique brand image, strong American association and tourist orientation. EXPLORE SELECTIVE BRAND LEVERAGING. Big Dogs intends to carefully evaluate and pursue opportunities to leverage the power of the BIG DOGS-Registered Trademark- brand through various activities that are consistent with its brand image, which may include selective product licensing, co-branding and entertainment and media activities. MERCHANDISING [LOGO] Big Dogs' product line features a branded, lifestyle collection of unique, high-quality, popular-priced consumer products, including activewear, casual sportswear, accessories and gifts. Big Dogs' apparel lines include full collections of classic unisex casual sportswear and activewear for adults, as well as recently introduced collections for infants and children and the Big and Tall market. Big Dogs has also in recent years further expanded its product lines to include not only a wide variety of apparel accessories, but also a collection of gift and consumer products. The Company continuously explores opportunities to further leverage its brand and graphics into new product lines. The Company's apparel products are manufactured from premium cotton, or, in some instances, cotton/ synthetic blends. Big Dogs' apparel is characterized by quality fabrics, construction and embellishments, and is distinguished from other apparel lines by the BIG DOGS-Registered Trademark- name, dog logo, graphics and slogans. In addition to its distinctive graphics, the Company believes it has achieved recognition for the quality and performance of its products. For example, the Company's solid nylon volley shorts and madras plaid shorts were selected by the Atlanta Committee for the Olympic Games to be officially licensed shorts for the 1996 Atlanta Olympics. Prices for most of the Company's products range from $1 to $100, with the large majority of products selling for between $5 and $30. The following table sets forth the approximate contribution that each of the Company's product categories made to total net sales in the Company's retail stores for the year ended December 31, 1996:
% OF TOTAL RETAIL STORE NET SALES --------------------- Adult Apparel and Accessories................................ 66.4% Infants' and Children's Apparel and Accessories.............. 16.4 Big and Tall Apparel......................................... 8.8 Adult and Children's Non-Apparel Products (1)................ 8.4 ------ Total.................................................... 100.0% ------ ------
- ------- (1) Approximately one-half of non-apparel product sales are of products that are primarily child-related, such as toys. ADULT APPAREL AND ACCESSORIES. Big Dogs has a complete line of adult unisex activewear and casual sportswear. The Company offers screen-printed and embroidered T-shirts and sweatshirts, in a variety of styles and colors, that generally prominently display the Big Dogs graphics and slogans. In addition, the Company offers shorts, knit and woven casual and sport shirts, fleece tops and bottoms, loungewear, boxer shorts, swimwear and sleepwear, all of which feature print designs or simply the BIG DOGS-Registered Trademark- name and/or dog logo. The Company's adult apparel line primarily focuses on basic items that recur with relatively minor variation 28 from season-to-season and year-to-year. Although the Company introduces new apparel and other products throughout the year, certain classic, popular items and graphics have been in the Big Dogs line with very little change for over ten years. Big Dogs leverages its trademarks, characters and more popular graphics by carefully translating them to a wide variety of apparel accessories, including caps, ties, socks, sunglasses, belts, bags, watches and wallets. These products are developed and introduced based on their consistency with Big Dog's brand image and whether they complement the Company's other products. The Company's introduction of accessories not only provides an opportunity to create add-on purchases, but also minimizes product development costs and inventory risk by utilizing graphics and slogans that have first proven popular on the Company's graphic T-shirts. See "--Managing the Creative Process." [LOGO] INFANTS' AND CHILDREN'S APPAREL AND ACCESSORIES. Based on the natural appeal of dog themes to children and the sell-throughs of certain test items, in the fall of 1995 the Company successfully introduced a line of infants' and children's apparel and accessories under its LITTLE BIG DOGS-Registered Trademark- brand. In 1996, sales of the Company's LITTLE BIG DOGS-Registered Trademark- line grew to approximately 16.4% of its total retail store net sales and the Company believes that the children's market presents a significant opportunity. In addition to the appeal of dogs to children, the Company believes that the black and white image of its dog character makes it easily recognizable and appealing to very young children. Moreover, the Company believes the recurring need to purchase new clothes for children increases the potential for growth in this category. The Company believes these factors provide an opportunity to increase comparable store sales. The LITTLE BIG DOGS-Registered Trademark- line includes infants, toddlers, kids and youth sizes. Products in this line include graphic T-shirts, shirts, fleece items, infant and toddler one-pieces, boxer shorts, dresses and shorts, virtually all of which feature distinctive graphics. The graphics and fabrics of this line are designed to mirror many of the more popular graphics and fabrics in the BIG DOGS adult line in order to encourage family purchases and leverage overall product development costs. The Company sells its LITTLE BIG DOGS-Registered Trademark- line primarily through its retail stores and catalog, and wholesales it to certain specialty and better department stores, such as Nordstrom. The Company believes there is a void in the wholesale market for moderately priced, branded children's apparel, and therefore is exploring the expansion of the wholesale distribution of this line on a limited basis. Based on the initial success of LITTLE BIG DOGS-Registered Trademark- apparel, and to enable customers to assemble complete outfits for their children, the Company has recently expanded its children's category to include accessories such as caps, socks and sunglasses. In addition, the Company has expanded its assortment of non-apparel items for children such as plush dogs, stickers, sportballs and other toys (see "Adult's and Children's Non-Apparel Products" below). The Company believes that customers' ability to assemble complete outfits and the relatively low price of the children's items provide the Company with an opportunity to increase add-on sales. BIG AND TALL APPAREL. The Company believes that the BIG DOGS-Registered Trademark- image and the positive emphasis the brand gives to being a "Big Dog" have a unique appeal to consumers who wear large sizes. In the spring of 1996, the Company significantly expanded its BIG BIG DOGS-Registered Trademark- category targeting Big and Tall customers. In 1996, sales of the Company's BIG BIG DOGS-Registered Trademark- line grew to approximately 8.8% of its total retail store net sales and the Company believes that the Big and Tall market presents a significant opportunity for expansion. The Company believes that this market is generally underserved and presents an opportunity to develop strong customer loyalty due to the relatively limited availability of large-size casual sportswear. The Company believes these factors provide an opportunity to increase comparable store sales. The Company's BIG BIG DOGS-TM- category offers a line of unisex activewear and casual sportswear. As with the regular adult sizes, this category features screen-printed and embroidered T-shirts and sweatshirts, in a variety of styles and colors, that generally prominently display the Big Dogs graphic themes and slogans. In addition, the Company offers shorts, knit and woven casual and sports shirts, fleece tops and bottoms, loungewear, boxer shorts, swimwear and sleepwear, which may feature print designs or simply the BIG DOGS-Registered Trademark-name and/or dog logo. Products in this line are offered from size 1X to 5X and MT to XLT. The Company sells its BIG BIG DOGS-TM- line primarily through its retail stores and catalog and also through selected wholesale accounts, such as Casual Male. 29 ADULT'S AND CHILDREN'S NON-APPAREL PRODUCTS. Big Dogs further leverages its trademarks, characters and more popular graphics by applying them to a wide variety of adult's and children's non-apparel items, including pet products, plush animals and other toys, sporting goods, stationery, calendars, mousepads and screen savers. As with apparel accessories, new non-apparel products are developed and introduced based on whether they are consistent with Big Dogs' brand image and complement the Company's other products. As with apparel accessories, the graphics applied to these products have first proven popular on the Company's T-shirts, resulting in lower product development costs and inventory risk. In general, non-apparel items have higher gross margins than many of the Company's other products. The Company believes that the relatively low price of non-apparel items and their particular appeal to children provide the opportunity to increase comparable store sales through add-on purchases. MARKETING The Company strives to maintain a consistent brand image through the coordination of its merchandising, marketing and sales efforts. The goal of the Company's marketing efforts is to present a distinctive image of quality, value and fun that consumers will associate with the Company's products and thereby enhance the BIG DOGS-Registered Trademark- brand image. The BIG DOGS brand image has been developed with relatively little advertising, as the Company believes its most effective marketing is its products themselves and their presentation in the Company's retail stores and catalog. The Company's catalog serves not only as a means of product distribution, but also as the key marketing piece for the Company's retail stores. Also important to the Company's marketing strategy is its targeted "grassroots" marketing activities. These activities include local and charity sponsorships (such as high school sports teams), community-oriented promotional events (such as the Company's annual dog parade in Santa Barbara), and corporate cross-promotions with leading consumer product companies (such as Nabisco and IAMS). The Company trains and incentivizes its store managers to actively involve their stores in local, grassroots activities. In addition, the Company utilizes billboard advertising designed to direct customers to local Big Dogs retail stores. MANAGING THE CREATIVE PROCESS The Company's product development begins with the creation of distinctive, often topical, graphics and slogans that embody the Big Dogs image of a fun and active lifestyle. Ideas are generated and developed by the Company's Graphics Committee that includes the Company's President and the heads of the art, merchandising and marketing departments. In creating new graphic themes and ideas, this Committee closely monitors current consumer interests in various activities such as recreational and spectator sports, hit movies and other hobbies and leisure pursuits. Big Dogs also closely monitors sales of the Company's existing graphics and slogans to identify trends and generate new ideas. Once a concept is conceived, the Company's ten-person art department develops a preliminary graphic, which is then further reviewed and refined. Approved designs are initially applied to screen-printed T-shirts. Due to the ready availability of blank T-shirts, the Company is able to quickly and inexpensively respond to customer preferences and the current popularity of particular sports, movies and other events, in some instances getting product into its stores in as little as two weeks. In addition, since the graphics are applied to T-shirts in the last stage of production, the Company is able to test the popularity of new graphics before making large inventory commitments. Big Dogs' merchandising staff closely monitors the sales of new T-shirt graphics and evaluates the opportunity to rapidly expand their production and also profitably leverage them onto other products. Big Dogs believes that this product development strategy enables it to create distinctive products while limiting its inventory risk. The Company's focus on basics and its ability to leverage its graphics across multiple product categories has allowed the Company to eliminate the need for a traditional buyer or design staff and thereby lower its product development costs compared to most fashion apparel companies. In addition to its graphics-oriented clothing and other products, the Company also develops apparel products that simply feature the BIG DOGS name and logo, particularly where the Company has developed strong brand identity for quality and value and fun and functional products, such as for its Classic Shorts-TM-. The Company's merchandising staff identifies popular, established apparel and other products that it believes will make effective "Big Dog" products. 30 RETAIL STORES Big Dogs seeks to create a distinctive and fun shopping environment in its stores through the innovative display of its graphic art and humor, including in-store "T-shirt walls" and other displays designed to immediately put the customer in the "Big Dog state of mind." In addition, the Company's cross-merchandising and colorful signage are designed to add excitement in the stores and prompt add-on purchases. While maintaining a consistent Big Dog "look" throughout the chain, many stores incorporate graphics and props which are consistent with the store's local environment (for example, a car racing theme in Indianapolis and an Old Spanish Days theme in Santa Barbara). By showcasing the Company's complete product line and broad assortment, Big Dogs stores offer something for everyone in the family and are particularly appealing to the dedicated Big Dogs customer. In 1996, the Company's retail stores contributed approximately 88% of total net sales. As of July 31, 1997, the Company operated 133 stores in 39 states and one store in England. Big Dogs stores are typically located in tourist and recreation-oriented shopping locations and other casual environments where the Company believes consumers are more likely to be in the "Big Dog state of mind." In making site selections, the Company also considers a variety of other factors, including proximity to large population centers, area income, the prestige and potential customer-draw of the other tenants in the center or area, projected profitability, store location and visibility within the center, and the accessibility and visibility of the center from nearby thoroughfares. Following is a map of the Company's store locations as of July 31, 1997: [LOGO] [MAP] 31 The Company operates its retail stores in both outlet and full-price formats, depending on the location. Big Dogs' traditional emphasis has been on outlet malls because those malls are often located in tourist areas and attract significant numbers of Big Dogs' targeted customers. More recently, the Company has increased its focus on opening full-price, stand-alone stores in tourist and leisure locations. As of July 31, 1997, 119 of the Company's stores were in outlet malls, with the balance in locations with large tourist traffic such as the Mall of America (Minnesota), South Hampton (New York), and Laguna Beach and Carmel (California). The Company's outlet mall stores average approximately 3,000 square feet. The Company's outlet stores offer a complete and current line of the Company's products priced approximately 25% less than the same items are sold for in the Company's catalog and the Company's full-price stores and by other retailers. In addition, the Company has tested a smaller format store which it intends to open in certain circumstances. This smaller format will carry substantially all of the Company's product categories, but will be more densely merchandised to accommodate the smaller square footage. The Company plans to open 30 net new stores during 1997, 13 of which were open as of July 31, 1997, and at least 30 stores in 1998. The Company's average cost to open a store in 1996, including leasehold improvements and furniture and fixtures, was approximately $50,000 (net of tenant improvement allowances). The average per store initial inventory (partially financed by trade payables) for the new 1996 stores was approximately $78,000 and pre-opening expenses averaged approximately $13,000 per store. The average total cost to build new stores will vary in the future, depending on various factors, including local construction costs, changes in store format and design and tenant improvement allowances. The Company anticipates that the stores it opens in the near future will be in a variety of venues, including outlet malls, stand-alone stores in tourist areas, tourist-oriented malls and, to a lesser extent, regional malls and metropolitan locations. Big Dogs store operations are managed by a Senior Vice President--Retail, three regional managers and 20 district and area managers. Each of the stores is managed and operated by a store manager, an assistant manager and full-time and part-time sales associates. The Company seeks to further enhance its customers' shopping experience by developing a knowledgeable and enthusiastic sales staff to distinguish Big Dogs from its competition. In this regard, the Company has implemented employee training and incentive programs and encourages its sales associates to be friendly and courteous and to guide customers to graphics and products that tie into their individual interests. The Company believes its commitment to customer service enhances its ability to generate repeat business and to attract new customers. The Company also believes that the fun nature of its products and the growth of the Company create employee enthusiasm and positive morale that in turn enhance customer service and contribute to the fun shopping experience. NON-RETAIL DISTRIBUTION Non-retail channels of distribution, including catalog, wholesale and, to a lesser extent, corporate sales, premium programs, international and internet sales, contributed approximately 12% of the Company's total net sales in 1996. In the second half of 1996, the Company streamlined its catalog and wholesale operations to focus the scope of their operations and improve their profitability. Although in the first half of 1997 revenues for these operations have declined, management believes that these and other channels of distribution present significant opportunities for profitable expansion. CATALOG. Introduced in late 1992, the Company's catalog is a key marketing piece for its products and stores, and enables it to reach customers who are not located near a Big Dogs store. The Company's proprietary mailing list has been developed largely through sign-ups by customers in its retail stores rather than through active prospecting. Big Dogs' proprietary mailing list has over 600,000 active customer names. The Company's catalog sales in 1996 were approximately $4.2 million, or approximately 6% of total net sales, and it believes that significant opportunities exist to expand the sales and profitability of this business. WHOLESALE. Although the Company does not actively solicit wholesale accounts through a sales force, it does participate in trade shows and distributes its products to better department stores and specialty shops such 32 as Nordstrom and Mercantile Stores. During 1996, the Company sold to over 600 wholesale accounts throughout the United States. In addition, the Company is exploring distribution through a range of non-traditional apparel retailers such as theme parks and pet product retailers. The Company's wholesale sales in 1996 were approximately $2.9 million, or approximately 4% of total net sales. INTERNATIONAL. Big Dogs products are not currently sold outside of the United States, with the exception of one store in England and incidental other sales. The Company plans to expand the sale of its products worldwide through efficient, profitable and brand-enhancing means, which may vary by country and may include retail stores, exporting to resellers, licensing and catalog sales. The Company believes that there is a significant potential international market for Big Dog products due to their unique brand image, strong American association and tourist orientation. OTHER BRAND LEVERAGING. Big Dogs intends to carefully evaluate and pursue opportunities to leverage the power of the BIG DOGS-Registered Trademark- brand through various activities that are consistent with the brand image, which may include selective product licensing, co-branding (such as a current co-branding program for ski jackets with Columbia Sportswear) and entertainment and media activities. SOURCING DOMESTIC AND INTERNATIONAL SOURCING. The Company does not own or operate any manufacturing facilities and sources its products through third-party contractors with manufacturing facilities that are primarily overseas. The Company believes that outsourcing allows it to enhance production flexibility and capacity, while substantially reducing capital expenditures and avoiding the costs of managing a large production workforce. In addition, outsourcing allows the Company to leverage working capital, transfer risk and focus its energy and resources on merchandising, marketing and sales. Big Dogs' domestic sourcing is primarily limited to graphic T-shirts. Substantially all of its graphic T-shirts are purchased from a commonly controlled company, Fortune Fashions, based near Los Angeles, California. Fortune Fashions purchases blank T-shirts and other products and provides screen printing and embroidery services to the Company for these products. In 1996, the Company purchased over 80% of its graphic T-shirts and certain other products from Fortune Fashions, constituting 23% of the Company's total 1996 product purchases (in dollar volume of purchases). The Company believes that the services provided by Fortune Fashions are readily available elsewhere and that it could replace Fortune Fashions as a vendor without significant disruption to the Company's operations. See "Certain Relationships and Related Transactions." The majority of Big Dogs' other products are manufactured overseas. Big Dogs sources product from over 100 unaffiliated vendors, including over 35 foreign vendors in 18 countries. The Company believes that utilizing a diverse group of vendors reduces the Company's exposure to production risks and delays relating to any one vendor or country. In order to enhance its sourcing flexibility, the Company uses purchasing agents rather than operating its own foreign sourcing office. These agents assist the Company in selecting and overseeing third-party vendors, sourcing fabric and monitoring quotas and other trade regulations. The Company does not have supply contracts with any of its suppliers. Although the loss of major suppliers could have a significant effect on the Company's immediate operating results, the Company believes alternate sources of merchandise for most product categories are available at comparable prices and that it could replace these suppliers without any long-term adverse effect on the Company. The Company forecasts production requirements to secure necessary manufacturing capacity and quota. Since the Company's foreign manufacturers are located at greater geographic distances from the Company than its domestic manufacturers, the Company generally allows greater lead-times for foreign orders. However, due to the Company's focus on widely available basics rather than fashion items, the Company believes these lead times do not present significant risks. QUALITY CONTROL. The Company's quality control program is designed to ensure that all goods bearing BIG DOGS-Registered Trademark- trademarks meet the Company's standards. With respect to its products, the Company, through its 33 employees and sourcing agents, develops and inspects prototypes of each product prior to manufacture. For apparel products, the Company, through its employees and sourcing agents, inspects the prototypes and fabrics prior to cutting by the contractors, establishes fittings based on the prototype and inspects samples. The Company or its sourcing agents inspect the final product prior to shipment to the Company's warehouse or at the warehouse prior to payment. During 1996, less than 1.5% of the Company's products were returned by its customers due to defects. MANAGEMENT INFORMATION SYSTEMS The Company is committed to utilizing technology to enhance its competitive position. The Company has put in place computer hardware, systems applications and networks that are the same as those used by a number of large retailers. These systems support the sales and distribution of products to its stores and customers and improve the integration and efficiency of its domestic and foreign sourcing operations. Big Dogs' MIS system provides integration of store, merchandising, distribution and financial systems. These systems include stock keeping unit ("SKU") and classification inventory tracking, purchase order management, open-to-buy, merchandise distribution, automated ticket making, general ledger, sales audit, accounts payable, fixed asset management, payroll and integrated financials. These systems operate on an IBM AS 400 platform, and a Novell server network and utilize Island Pacific software. The Company's point-of-sale ("POS") system consists of registers providing price look-up, e-mail and credit card and check authorization. Through automated two-way communication with each store, sales information and e-mail are uploaded to the host system, and receiving, price changes and systems maintenance are down-loaded through the POS devices. Sales are updated daily in the merchandising report systems by polling sales from each store's POS terminals. The Company evaluates information obtained through daily polling, including a daily tracking of gross margin, to implement merchandising decisions regarding reorders, markdowns and allocation of merchandise. Wholesale and catalog operations are also supported by MIS applications from established vendors, designed specifically to meet the unique requirements of these segments of the business. These applications include customer service phone center, order processing and mailing list maintenance. ALLOCATION AND DISTRIBUTION OF MERCHANDISE Allocation and distribution of the Company's inventory is performed centrally at the store, merchandise classification and SKU levels using integrated third-party software. Utilizing its MIS capabilities, the Company's planning and allocation group works closely with the merchandising and retail departments to monitor and respond to customer purchasing trends and meet the seasonal and locale-specific merchandising requirements of the Company's retail stores. The Company is currently implementing fuller utilization of its merchandising information systems to capitalize on regional and seasonal trends and on individual store characteristics. Big Dogs maintains two distribution facilities: a main facility of approximately 67,000 square feet located in Commerce, California and a mail order warehouse and fulfillment facility of approximately 21,000 square feet in Ventura, California. All merchandise is delivered by vendors to these facilities, where it is inspected, entered into the Company's allocation software system, picked and boxed for shipment to the stores or customers. The Company ships merchandise to its stores at least weekly, providing a steady flow of merchandise. TRADEMARKS [LOGO] The Company utilizes a variety of trademarks which it owns, including the registered trademarks BIG DOGS-Registered Trademark-, BIG DOG SPORTSWEAR-Registered Trademark- and dog logo and the trademarks BIG DOG-TM-, LITTLE BIG DOGS-TM- and BIG BIG DOGS-TM-. The Company has 30 registered trademarks and 15 pending registration applications in a wide variety of product categories for these and other trademarks in the United States. In addition, the Company has 21 registered trademarks and 14 pending registration applications in 14 other countries. The Company regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. The Company vigorously protects its trademarks against infringement, including through the use of cease and desist letters, administrative proceedings and lawsuits. 34 COMPETITION Although the level and nature of competition differ among the Company's product categories, the Company competes primarily on the basis of its brand image, offering a unique combination of quality, value and fun, and on other factors including product assortment, price, store location and layout, and customer service. The markets for each of the Company's products are highly competitive. The Company believes that its long-term competitive position will depend upon its ability to anticipate and respond effectively to changing consumer demands and to offer customers a wide variety of high-quality, fun products at competitive prices. Although the Company believes it does not compete directly with any single company with respect to its entire range of merchandise, within each merchandise category the Company competes with well-known apparel and specialty retail companies such as The GAP, Eddie Bauer, Warner Brothers Stores and The Disney Stores, as well as a large number of national and regional department stores, specialty retailers and apparel designers and manufacturers. In addition, in recent years, the amount of casual sportswear and activewear manufactured specifically for department stores and sold under their own labels has significantly increased. Many of Big Dogs' competitors are significantly larger and more diversified and have substantially greater financial, distribution, marketing and other resources and have achieved greater recognition for their brand names than the Company. There can be no assurance that the Company will be able to compete successfully with its competitors in the future. Any failure to successfully compete could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES At July 31, 1997, the Company had approximately 460 full-time and 530 part-time employees. The number of part-time employees fluctuates significantly based on seasonal needs. None of the Company's employees are covered by collective bargaining agreements and the Company considers its relations with its employees to be good. PROPERTIES The Company's corporate headquarters are located in Santa Barbara, California in two leased buildings comprising approximately 23,000 square feet under leases that expire in December 1997 and July 1999, respectively. The Company has options to extend these leases for six years and five years, respectively. The Company's distribution facilities are located in Ventura and Commerce, California in two leased buildings comprising approximately 88,000 square feet under leases that expire in April 1999 and August 1998, respectively. The Company has options to extend these leases for five years and four years, respectively. The Company believes that its currently occupied space adequately meets it needs in the near term and it does not expect difficulties in obtaining additional space on reasonable terms as the need arises. The Company leases all of its store locations. Store leases are typically for a term of 5 years with a 5-year option and provide for base rent plus contingent rent based upon a percentage of sales in excess of agreed-upon sales levels. LITIGATION The Company is not involved in any legal proceedings other than certain actions arising in the ordinary course of its business. While the outcome of such proceedings and threatened proceedings cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters individually or in the aggregate will not have a material adverse effect on the Company's business, financial condition or results of operations. 35 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers, directors and certain other key employees of the Company are as follows:
NAME AGE POSITION - ---------------------------------- --- ------------------------------------------------------------ Fred Kayne........................ 59 Chairman of the Board Andrew D. Feshbach................ 36 President, Chief Executive Officer and Director Douglas N. Nilsen................. 49 Executive Vice President--Merchandising Anthony J. Wall................... 41 Executive Vice President--Business Affairs, General Counsel, Secretary and Director Andrew W. Wadhams................. 36 Senior Vice President--Retail Jeffrey Cowen..................... 44 Senior Vice President--Production Jonathan S. Howe.................. 44 Chief Financial Officer and Treasurer Roberta J. Morris................. 37 Senior Vice President--Finance, Assistant Treasurer and Assistant Secretary Steven C. Good (1)................ 55 Director Robert H. Schnell (1)............. 57 Director David J. Walsh (1)................ 37 Director
- ------- (1) Messrs. Good, Schnell and Walsh have agreed to become directors immediately after the completion of this offering. FRED KAYNE co-founded the Company in May 1992 and has served as Chairman of the Company since that time. Mr. Kayne co-founded Fortune Fashions, a custom manufacturer of embellished apparel for the tourist industry, in 1991 and has served as Chairman and President since that time. Mr. Kayne also founded Fortune Financial, a private merchant banking firm, in 1986 and has served as its Chairman and President since that time. Mr. Kayne founded Cottonsmith Incorporated, an international fabric and apparel sourcing company, in 1993 and has served as its Chairman and President since that time. From 1985 to 1986, Mr. Kayne served as a managing director and a member of the Board of Directors of Bear Stearns & Co. Inc., and from 1978 until 1985 was a partner of its predecessor partnership, Bear Stearns & Co. Mr. Kayne co-founded First Los Angeles Bank in 1973 and served as a director of the bank until 1984. Mr. Kayne serves as a director of The Right Start, Inc. ("The Right Start"), an infant products retailer and catalog company. Mr. Kayne has a Bachelor of Science degree in engineering from the Massachusetts Institute of Technology. ANDREW D. FESHBACH co-founded the Company in May 1992 and has served as President, Chief Executive Officer and as a director since that time. From June 1992 until May 1997, Mr. Feshbach also served as Chief Financial Officer of the Company. Mr. Feshbach co-founded Fortune Fashions in 1991 and has served as a director since that time, and, from 1991 until June 1992, served as its Chief Financial Officer. From 1988 until 1990, Mr. Feshbach was a partner in Maiden Lane Associates, Ltd., a merchant banking subsidiary of AmBase Corporation specializing in leveraged buy-outs ("Maiden Lane"). From 1984 until 1988, Mr. Feshbach served as Vice President of Corporate Finance with Bear Stearns & Co. Inc. From 1990 until the present, he has served as a Vice President of Fortune Financial. Mr. Feshbach serves as a director of The Right Start. Mr. Feshbach has an M.B.A. from Harvard University. DOUGLAS N. NILSEN joined the Company in October 1995 and has served as Executive Vice President-- Merchandising since December 1995. From October 1995 until December 1995, he served as Senior Vice President of the Company. From 1990 to September 1995, he served as Director of Merchandise at Walt Disney Attractions, Inc. for its U.S. theme parks and resorts, and in such capacity was responsible for merchandising all 36 apparel and accessories. From 1976 to 1990, Mr. Nilsen was employed by Macy's California in various capacities, most recently as Vice President of Merchandising in both the Accessories and Men's Divisions. Mr. Nilsen has an M.B.A. from New York University. ANTHONY J. WALL joined the Company in September 1994 and has served as Executive Vice President since March 1996. He has served as General Counsel and Secretary of the Company since September 1994 and as a director of the Company since November 1995. From September 1994 until March 1996, he served as Senior Vice President of the Company. From 1981 until 1994, Mr. Wall practiced as an attorney with Gibson, Dunn & Crutcher and, from 1990 until 1994, was a partner in the corporate department of that firm. Mr. Wall also serves as Vice President and General Counsel of Fortune Fashions and Vice President of Fortune Financial. Mr. Wall has a J.D. from the University of Southern California. ANDREW W. WADHAMS joined the Company in August 1996 as Senior Vice President--Retail. From January 1994 to June 1996, Mr. Wadhams served as Vice President of Retail Operations of Imaginarium, Inc., a retailer of children's games and educational items. From 1986 to November 1993, Mr. Wadhams was employed in various capacities by The Gap Inc. in its Gap, GapKids, Gap International and Banana Republic divisions, most recently as Regional Manager--Retail Operations of Banana Republic from 1991 to 1994. JEFFREY COWEN joined the Company in November 1994 as Senior Vice President--Production. From May 1994 to September 1994, Mr. Cowen served as Vice President--Sales and Production for Global Vision, an apparel sourcing company. From May 1992 to May 1994, he served as Vice President of Production and Global Sourcing for B.U.M. Equipment, an apparel company. From 1991 to 1992, he served as Vice President-- Production for Stage II, an activewear company. From 1988 to 1991, he was the President of Clothing Concepts, an apparel company. From 1985 to 1988, he served as Director of Merchandising for Gotcha Sportswear. JONATHAN S. HOWE joined the Company in May 1997 as Chief Financial Officer and Treasurer. From May 1997 to the present, Mr. Howe has served as Chief Financial Officer of Fortune Fashions. From March 1996 to the present, Mr. Howe has served as Senior Vice President of Fortune Financial. From August 1994 until March 1996, Mr. Howe was a Vice President of SSI Investment Management Inc., an investment advisory firm. From June 1992 to August 1994, Mr. Howe was an independent financial consultant. Mr. Howe has an M.B.A. from the University of Southern California. ROBERTA J. MORRIS joined the Company in August 1993 and has served as Senior Vice President--Finance since January 1995. She served as Vice President--Finance of the Company from August 1993 to January 1995. From 1988 to August 1993, Ms. Morris was employed by Deloitte & Touche LLP, a national accounting firm, serving as a Senior Manager from August 1992 until August 1993. Ms. Morris is a certified public accountant. STEVEN C. GOOD has agreed to become a director immediately after the completion of this offering. Mr. Good founded Good, Swartz & Berns, an accountancy corporation, in 1993 and is the senior partner of that firm. From 1976 to 1993, Mr. Good was a partner in the firm of Block, Good and Gagerman, an accounting firm that he co-founded in 1976. Mr. Good co-founded CU Bancorp in 1982 and served as its Chairman from 1982 through 1989. Mr. Good serves as a director of Opto Sensors, Incorporated and of Arden Realty Company. ROBERT H. SCHNELL has agreed to become a director immediately after the completion of this offering. From October 1986 until its sale in August 1994, Mr. Schnell served as Chairman of the Board of Cosmar Corporation, a designer and, through an affiliated company, manufacturer of artificial nail and nail care products. Since September 1994, Mr. Schnell has been a private investor. From 1978 to 1985, Mr. Schnell served as Group Vice President and General Manager of the Health and Beauty Aids Division of Charles of the Ritz, a division of Squibb, which manufactured and marketed fragrances and other consumer products. From 1970 to 1977, Mr. Schnell served as Vice President of Sales for Prince Matchiabelli, a division of Chesebrough Ponds. DAVID J. WALSH has agreed to become a director immediately after the completion of this offering. Since January 1994, Mr. Walsh has served as Senior Vice President-Strategic Planning of Transaction Network Services, Inc., a provider of data communications services. From 1991 through January 1994, Mr. Walsh served as President of Fortune Telecommunications, Inc., a provider of validation and fraud control computer services 37 to the telecommunications industry. From 1988 to 1991, Mr. Walsh served as a Managing Director of Maiden Lane. From 1984 to 1988, Mr. Walsh was a Principal in the Mergers and Acquisitions Group of Ernst & Young, a national accounting and consulting firm. Mr. Walsh has an M.B.A. from Harvard University. No executive officer or director of the Company has a family relationship with any other executive officer or director. BOARD OF DIRECTORS The Company's Board of Directors is currently comprised of Messrs. Kayne, Feshbach and Wall. Immediately after completion of this offering, Mr. Wall intends to resign from the board and the Company intends to appoint not less than three directors, including Messrs. Good, Schnell and Walsh, who are neither officers nor employees of the Company. The Company's Certificate of Incorporation divides the Company's Board of Directors into three classes, with the members of each class serving for terms of office expiring at the third annual meeting of stockholders following their election and until successors are duly qualified. The initial terms of the Class I, Class II and Class III directors expire at the annual meetings of stockholders in 1998, 1999 and 2000, respectively. Upon the appointment of the additional directors, the Board of Directors will establish an Audit Committee and a Compensation Committee, comprised of non-employee directors. The Audit Committee will be responsible for recommending to the Board of Directors the engagement of the independent auditors, the scope and results of the audits, the internal accounting controls of the Company, monitoring transactions with affiliates, audit practices and the professional services furnished by the independent auditors. The Compensation Committee will be responsible for reviewing and approving all compensation arrangements for officers of the Company, including the administration of the Company stock option and other employee benefit plans. DIRECTOR COMPENSATION Directors of the Company currently receive no compensation for serving on the Board of Directors, except that in March 1996 the Company granted Mr. Kayne a stock option for the purchase of 35,000 shares of Common Stock exercisable at $2.59 per share and in August 1996 granted him a stock option for the purchase of 20,000 shares of Common Stock exercisable at $4.00 per share for serving as Chairman. Following the completion of this offering, Mr. Kayne will be paid $120,000 per year for serving as Chairman, and the other non-employee directors who join the Board will receive a fee of $10,000 per year for their services. All non-employee directors will be reimbursed for expenses incurred in connection with their attendance at board or committee meetings. In addition, each non-employee director joining the Board of Directors after this offering, other than Mr. Kayne, will receive stock options under the Company's 1997 Plan. See "--Stock and Incentive Plans." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company did not have a Compensation Committee during 1996. Mr. Kayne and Mr. Feshbach, the Company's Chairman and Chief Executive Officer, respectively, determined executive compensation during 1996. Mr. Feshbach also serves as a director and Executive Vice President of Fortune Fashions and Mr. Kayne also serves as Chairman and President of Fortune Fashions. See "Certain Relationships and Related Transactions." 38 EXECUTIVE COMPENSATION The following table sets forth the compensation, earned by the Company's Chief Executive Officer and each of the Company's three other most highly compensated executive officers or employees whose salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1996. The persons named in the table are sometimes referred to herein as the "Named Executive Officers." SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION (1) AWARDS --------------------------------------------- ----------------- NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK ALL OTHER POSITION SALARY ($) BONUS ($) COMPENSATION ($)(2) (#) COMPENSATION ($) - ------------------------- ----------- ----------- ------------------- ----------------- ----------------- Andrew D. Feshbach ...... $ 200,000 -- $ 26,011 -- -- President and Chief Executive Officer Douglas N. Nilsen ....... $ 147,000 $ 10,000 -- 20,000 -- Executive Vice President Jeffrey Cowen ........... $ 150,000 $ 4,000 -- -- -- Senior Vice President Anthony J. Wall ......... $ 104,000 -- -- 20,000 -- Executive Vice President, General Counsel and Secretary
- ------- (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the compensation described in this table does not include medical, group life insurance or other benefits received by the Named Executive Officers which are available generally to all salaried employees of the Company, and certain perquisites and other personal benefits received by the Named Executive Officers which do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table. (2) Other annual compensation for Mr. Feshbach includes a car allowance in the amount of $21,955 for the fiscal year ended December 31, 1996. STOCK AND INCENTIVE PLANS 1996 STOCK INCENTIVE PLAN. The 1996 Stock Incentive Plan (the "1996 Plan") was adopted by the Board of Directors and approved by the stockholders on June 1, 1996. In July 1996, the Company sold 347,500 shares of restricted Common Stock (the "Restricted Stock") to 18 executives, officers, senior managers and consultants (the "Participants"). Participants paid for 95% of the purchase price by issuing a promissory note bearing interest at 7% per annum to the Company. One-third of the Restricted Stock was vested upon the date of sale and the remaining two-thirds vests in two equal annual installments on the first and second anniversary of the date of sale. Non-vested shares may not be sold or otherwise transferred. Prior to this offering, vested shares of Restricted Stock may only be sold or otherwise transferred with the consent of the Board. Upon the completion of this offering, vested shares become freely transferable, subject to restriction under (i) applicable securities laws, (ii) an escrow agreement which provides that even after the offering no vested shares may be transferred without first repaying the interest and principal due under the promissory note the stockholder issued to finance the purchase, and (iii) the Lock-Up Agreements with the Underwriters in this offering. See "Shares Eligible for Future Sale." 39 The Company has the right to repurchase the Restricted Stock (the "Purchase Option") upon the termination of employment, whether voluntary or involuntary, with or without cause. All of the Restricted Stock is subject to the Purchase Option until the completion of this offering. After completion of this offering, the Purchase Option expires as to vested shares. Whether Restricted Stock has become vested also determines the repurchase price that must be paid for the Restricted Stock if the Purchase Option is exercised. If the Company exercises the Purchase Option upon termination of a Participant's employment, the Participant's unvested shares may be purchased at his or her original purchase price. Vested shares subject to the Purchase Option must be purchased at their then fair market value as determined in the discretion of the Board of Directors, which determination is binding on the stockholder. No further grants will be made under the 1996 Plan but any unvested Restricted Stock will continue to be governed by its terms after this offering. 1997 STOCK OPTION PLAN. The 1997 Stock Option Plan (the "Old Plan") was adopted by the Board of Directors and approved by the stockholders on January 31, 1997. The Old Plan provides for the grant of options that are characterized as "nonqualified" for federal income tax purposes. The Board of Directors has granted options for the purchase of 92,500 shares of Common Stock to eight officers, key employees and other eligible persons under the Old Plan. The exercise price of such options is either $5.00 or $7.50 per share (representing the fair market value of the Common Stock as of the date of grant). Such options become exercisable in equal annual installments over a period of three years and expire ten years from the date of grant. No further grants will be made under the Old Plan, but it will continue to govern the outstanding options previously granted thereunder. 1997 PERFORMANCE AWARD PLAN. The 1997 Performance Award Plan was adopted by the Board of Directors and approved by the stockholders on August 1, 1997 and an amended and restated version was adopted by the Board of Directors and approved by the stockholders on September 12, 1997 (as so amended, the "1997 Plan"). The 1997 Plan was adopted to attract, reward and retain directors, officers, other key employees and certain other eligible persons (collectively, "Eligible Persons") who may be granted awards from time to time by the Company's Board of Directors or a committee appointed by the Board of Directors (the "Compensation Committee") or, for non-employee directors, under a formula provided in the 1997 Plan. The maximum number of shares reserved for issuance is 1,000,000, subject to adjustment for certain changes in the Company's capital structure and other extraordinary events. Shares subject to awards that are not paid for or exercised before they expire or are terminated are available for other grants under the 1997 Plan. Awards under the 1997 Plan may be in the form of nonqualified stock options, incentive stock options, stock appreciation rights ("SAR's"), limited SAR's, restricted stock, performance shares, stock bonuses, or cash bonuses based on performance. Awards may be granted singly or in combination with other awards. Any cash bonuses under the 1997 Plan will depend upon the extent to which performance goals set by the Board of Directors or the Compensation Committee are met during the performance period. Awards under the 1997 Plan generally will be nontransferable by the holder of the award (a "Holder") (other than by will or the laws of descent and distribution) and rights thereunder generally will be exercisable, during the Holder's lifetime, only by the Holder, subject to such exceptions as may be authorized by the Compensation Committee. No incentive stock option may be granted at a price that is less than the fair market value of the Common Stock (less than 110% of fair market value of the Common Stock on the date of grant for certain participants) on the date of grant. Nonqualified stock options and other awards may be granted at prices below the fair market value of the Common Stock on the date of grant, though the Company currently has no intention to do so. ADMINISTRATION. The 1997 Plan will initially be administered by the Board of Directors. After the completion of this offering, the Board of Directors intends to appoint the Compensation Committee to administer the 1997 Plan. The Compensation Committee will have broad authority to (i) designate recipients of discretionary awards, (ii) determine or modify the terms and provisions of awards, including the price, vesting provisions, 40 terms of exercise and expiration dates, (iii) approve the form of award agreements, and (iv) construe and interpret the 1997 Plan. The Compensation Committee will have the discretion to accelerate and extend the exercisability or term and establish the events of termination or reversion of outstanding awards. CHANGE IN CONTROL. Upon a Change in Control Event, each option and SAR will become immediately exercisable; restricted stock will immediately vest free of restrictions; and the number of shares, cash or other property covered by each performance share award will be issued to the Holder, unless the Compensation Committee determines to the contrary. A "Change in Control Event" is defined generally to include (i) certain changes in a majority of the membership of the Board of Directors over a period of two years or less, (ii) the acquisition of more than 50% of the outstanding voting securities of the Company by any person other than Fred Kayne, the Company's principal stockholder, or one of his affiliates, successors, heirs, relatives or certain donees, or (iii) stockholder approval of a transfer of substantially all of the Company's assets, the dissolution or liquidation of the Company, or a merger, consolidation or reorganization (other than with an affiliate) whereby stockholders immediately prior to such event own less than 50% of the outstanding voting securities of the surviving entity after such event. PLAN AMENDMENT; TERMINATION AND TERM. The Company's Board of Directors has the authority to amend, suspend or discontinue the 1997 Plan at any time, but no such action will affect any outstanding award in any manner materially adverse to a participant without the consent of the participant. The 1997 Plan may be amended by the Board of Directors without stockholder approval unless such approval is required by applicable law. The 1997 Plan will remain in existence as to all outstanding awards until such awards are exercised or terminated. The maximum term of options, SAR's and other rights to acquire Common Stock under the 1997 Plan is ten years after the initial date of award, subject to provisions for further deferred payment in certain circumstances. No award can be made after July 31, 2007. AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS. Under the 1997 Plan, each director who is not an officer or employee, other than Mr. Kayne (each a "Non-Employee Director"), will be granted a nonqualified stock option to purchase 10,000 shares of Common Stock upon becoming a Non-Employee Director at an exercise price equal to the market price of the Common Stock at the close of trading on that date. In addition, on the day of the annual stockholders meeting in each calendar year beginning in 1998 and continuing for each subsequent year during the term of the 1997 Plan, each then-continuing Non-Employee Director will be granted a nonqualified stock option to purchase 5,000 shares of Common Stock at an exercise price equal to the market price of the Common Stock at the close of trading on that date. No Non-Employee Director may receive options to purchase more than 10,000 shares of Common Stock under the 1997 Plan in any one year. All Non-Employee Director stock options will have a 10-year term and will become exercisable in equal annual installments over a five-year period commencing on the first anniversary of the grant date. If a Non-Employee Director's services are terminated for any reason other than the Non-Employee Director's death, disability or retirement, any stock options held by such Non-Employee Director that are exercisable will remain exercisable for six months after such termination of service or until the expiration of the option term, whichever occurs first. If the Non-Employee Director dies, becomes disabled or retires, stock options held by such Non-Employee Director will, as of the date of such death, disability or retirement, become fully exercisable for all of the shares of Common Stock at the time subject to the option and will remain exercisable for two years after the date of such termination of services. Upon a Change in Control Event, each automatic option grant to a Non-Employee Director will become immediately exercisable for all of the shares at the time subject to that option and remain exercisable to the extent provided above, subject to the adjustment and termination provisions of the 1997 Plan. Any outstanding automatic option grant that is not exercised prior to a Change in Control Event in which the Company is not to survive will terminate, unless such option is assumed or replaced by the surviving corporation. GRANT OF OPTIONS. On August 1, 1997, the Board of Directors of the Company granted options under the 1997 Plan for the purchase of 282,500 shares of Common Stock to certain Eligible Persons, at an exercise price of 41 $12.00 per share. Such options become exercisable in equal annual installments over a period of five years and expire seven years from the date of grant. PAYMENT FOR SHARES. The exercise price of options and other awards may be paid in cash or (subject to certain restrictions) shares of Common Stock. The Company may finance the exercise or purchase and (subject to any applicable legal limits) offset shares to cover the exercise or purchase price and withholding taxes. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS The Company currently does not have any employment contracts with its Chief Executive Officer or any other executive officers. Under the 1997 Plan, upon a "Change in Control Event" (as defined in the 1997 Plan) each option and stock appreciation right issued under the 1997 Plan will become immediately exercisable; restricted stock issued under the 1997 Plan will immediately vest free of restrictions; and the number of shares, cash or other property covered by each "performance share award" issued under the 1997 Plan will be issued to the grantee of such award, unless the Board of Directors (or the Committee thereof appointed to administer the 1997 Plan) determines to the contrary. 42 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Fred Kayne, the Company's majority stockholder and Chairman of its Board of Directors, owns 60% of the outstanding stock of Fortune Fashions. Andrew Feshbach, the President, Chief Executive Officer and a director of the Company, owns approximately 10% of the outstanding stock of Fortune Fashions. Fortune Fashions is a custom manufacturer of embellished apparel for the tourist industry. Fortune Fashions manufactured approximately 23% of the Company's products (by dollar value of purchases) in 1996, including over 80% of the Company's graphic T-shirts. Fortune Fashions sold approximately $8.0 million and $4.1 million of goods, primarily graphic T-shirts, to Big Dogs during 1996 and the first six months of 1997, respectively. The Company intends to continue purchasing graphic T-shirts from Fortune Fashions in the near future, but is exploring the economic feasibility of building or purchasing its own screen-printing facilities or entering into other arrangements. In addition, certain directors and executive officers of the Company are also directors and/or executive officers of Fortune Fashions: Mr. Kayne is Chairman and President of Fortune Fashions; Mr. Feshbach is a director of Fortune Fashions; Jonathan Howe, Chief Financial Officer and Treasurer of Big Dogs, is also Chief Financial Officer of Fortune Fashions; and Anthony Wall, Executive Vice President, General Counsel, Secretary and a director of Big Dogs, is also a Vice President and General Counsel of Fortune Fashions. See "Management." None of these officers, other than Mr. Kayne, is significantly involved in the day-to-day operations or management of Fortune Fashions. In September 1996, the Company refinanced certain outstanding notes to Mr. Kayne by issuing a promissory note in the amount of $4,380,000 due June 30, 1998 and borrowed an additional $2,000,000 from Mr. Kayne pursuant to a second promissory note due September 30, 1998. In addition, on October 15, 1996, the Company borrowed an additional $2,000,000 from Mr. Kayne pursuant to a promissory note due September 30, 1998. Such promissory notes bear interest at 10% per annum. Mr. Kayne has also guaranteed 20% of the Company's obligations under its revolving credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In November 1996, Mr. Kayne purchased 10 B Units from the Company for $212,000 per Unit, for an aggregate purchase price of $2,120,000. Each B Unit is comprised of a $200,000 promissory note due November 2003 bearing interest at 10% per annum and a warrant for the purchase of 12,000 shares of the Company's Common Stock for $5.00 per share (which pursuant to the terms of the warrants, was automatically reduced to $4.00 as of June 30, 1997). In November 1996, Mr. Kayne also purchased one-half of an A Unit for $106,000. Each full A Unit is comprised of a $200,000 promissory note due November 2003 bearing interest at 10% per annum and a warrant for the purchase of 12,000 shares of Common Stock for $4.00 per share (which, pursuant to the terms of the warrants, was automatically reduced to $3.00 as of June 30, 1997). The remaining 9 1/2 A Units were sold to independent investors. The purchase price paid by Mr. Kayne for the B Units was the same as that paid by the independent investors for the A Units, though the exercise price of the warrants associated with the B Units was one dollar higher. All of the notes associated with the A and B Units will be repaid with the proceeds of the offering. As of June 30, 1997, the aggregate unpaid principal balance of all Company promissory notes held by Mr. Kayne was $6,380,000, all of which will be repaid by the Company from its proceeds of this offering. Mr. Kayne is the President, Chairman of the Board and majority stockholder of Cottonsmith Incorporated, an international apparel and fabric sourcing company ("Cottonsmith"). During 1996 and the first six months of 1997, Cottonsmith sold approximately $64,000 and $107,000 of goods, respectively, to Big Dogs. Big Dogs has no plans to do further business with Cottonsmith. Mr. Kayne is also the sole stockholder, Chairman of the Board and President of Fortune Financial, a private merchant banking firm. Big Dogs is party to a one-year, renewable consulting agreement with Fortune Financial, pursuant to which Fortune Financial provides business and financial consulting services to the Company. During 1996, Fortune Financial was paid $160,000 under such agreement, and currently is being paid $10,000 per month. It is expected that upon the completion of this offering this consulting agreement will be terminated and that Fortune Financial will not provide significant services to Big Dogs thereafter. Messrs. Feshbach, Wall and Howe serve as unpaid officers of Fortune Financial. 43 The Company believes that each of the above transactions was on terms no less favorable to the Company than could have been obtained with unrelated third parties. As of January 1, 1997, the Company, Mr. Kayne and Mr. Feshbach entered into a Buy-Sell Agreement providing that, in the event of Mr. Feshbach's death, his estate would have the right to sell his shares of Common Stock to the Company, which agreement will expire upon the completion of this offering. In connection with the purchase of Common Stock from the Company under its 1996 Plan, the Company accepted promissory notes with a ten-year term bearing interest at a rate of seven percent (7%) per annum as partial payment from participants in the 1996 Plan. Promissory notes evidencing 1996 Plan participant indebtedness exceeding $60,000 were executed in favor of the Company by Jonathan Howe, Chief Financial Officer, and Andrew Wadhams, Senior Vice President--Retail. Mr. Howe executed a note on July 29, 1996 evidencing a loan in the principal amount of $135,328 and secured by the pledge of 55,000 shares of Common Stock. The maximum amount of indebtedness, including accrued interest, outstanding under the loan during 1996 was $139,376. Mr. Wadhams executed a note on July 29, 1996 evidencing a loan in the principal amount of $123,025 and secured by the pledge of 50,000 shares of Common Stock. The maximum amount of indebtedness, including accrued interest, outstanding under the loan during 1996 was $126,706. 44 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of July 31, 1997 and as adjusted to reflect the sale of the shares offered hereby by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director and Named Executive Officer of the Company, (iii) each Selling Stockholder and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING OFFERING (1) SHARES TO BE (1)(2) ---------------------- SOLD IN ---------------------- NAME AND ADDRESS NUMBER PERCENT OFFERING (2) NUMBER PERCENT - ------------------------------------------------ --------- ----------- ------------- --------- ----------- Fred Kayne (3) ................................. 6,801,110 65.8% 335,000 6,466,110 49.2% c/o Fortune Financial 1800 Avenue of the Stars Suite 1112 Los Angeles, CA 90067 Andrew D. Feshbach (4) ......................... 1,350,000 13.3% 135,000 1,215,000 9.4% c/o Big Dog Sportswear 121 Gray Avenue Santa Barbara, CA 93101 Robert H. Schnell (5)........................... 351,220 3.4% 50,000 301,220 2.3% Richard Scott................................... 135,000 1.3% 35,000 100,000 * Andrea and Jacob Kaufman........................ 125,000 1.2% 35,000 90,000 * Stephen Kayne................................... 125,000 1.2% 35,000 90,000 * Anthony J. Wall................................. 115,000 1.1% -- 115,000 * Douglas N. Nilsen............................... 100,000 * -- 100,000 * Jeffrey Cowen................................... 70,000 * -- 70,000 * Jonathan Hirsh.................................. 37,500 * 37,500 -- -- Lee Rosenblatt.................................. 37,500 * 37,500 -- -- United Jewish Fund.............................. -- -- (6) -- -- All directors and executive officers as a group (10 persons).................................. 8,846,110 85.6% 505,000 8,341,110 63.5%
- --------- * Less than one (1) percent. (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as otherwise stated herein and subject to community property laws where applicable, the Company believes, based on information furnished by such persons, that the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 10,160,550 shares of Common Stock outstanding as of July 31, 1997 and 12,960,550 shares of Common Stock outstanding after the completion of this offering. (2) Assumes no exercise of the Underwriters' over-allotment option. If such option is exercised in full, (i) Fred Kayne will sell an additional 240,000 shares and may donate an additional 200,000 shares to the United Jewish Fund (the "Fund"), which in turn may sell such shares pursuant to the over-allotment option, and (ii) Andrew Feshbach will sell an additional 75,000 shares and may donate an additional 10,000 shares to the Fund, which in turn may sell such shares pursuant to the over-allotment option. If Mr. Kayne does not donate such 200,000 shares or Mr. Feshbach does not donate such 10,000 shares to the Fund, Mr. Kayne and Mr. Feshbach will sell such respective amounts of shares in the over-allotment option. In addition, if Mr. Kayne or Mr. Feshbach donate such respective amounts of shares to the Fund, but the Fund then elects not to make such shares subject to the over-allotment option, Mr. Kayne and Mr. Feshbach will sell additional shares in such respective amounts in the over-allotment option, which would reduce their shares beneficially owned after the offering to 5,826,110 (44.3%) for Mr. Kayne and 1,120,000 (8.6%) for Mr. Feshbach. Accordingly, in any event, if the over-allotment option is exercised in full, an aggregate of 525,000 shares will be sold pursuant thereto. (3) Includes warrants to purchase 120,000 shares of Common Stock and options to purchase 55,000 shares of Common Stock that are currently exercisable. Also includes 38,610 shares of Common Stock held in a trust for the benefit of certain relatives, to which Mr. Kayne disclaims beneficial ownership. (4) Includes 1,339,000 shares owned by the Feshbach Trust, of which Mr. Feshbach is a co-trustee. Also includes 11,000 shares held by custodians for certain relatives, to which Mr. Feshbach disclaims beneficial ownership. (5) Includes 327,220 shares owned by the Robert and Renee Schnell Living Trust, of which Mr. Schnell is co-trustee. Also includes 24,000 shares of Common Stock subject to immediately exercisable warrants. (6) If the Underwriters exercise their over-allotment option, Fred Kayne may donate up to 200,000 shares and Andrew Feshbach may donate up to 10,000 shares to the United Jewish Fund, which may in turn sell such shares pursuant to the option. See Footnote (2) above. 45 DESCRIPTION OF CAPITAL STOCK The following description of the capital stock of the Company is a summary and is subject in all respects to the provisions of the Company's Certificate of Incorporation (the "Certificate") and Bylaws ("Bylaws"), copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. References herein to the Company's Certificate and Bylaws refer to the Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on August 4, 1997, and the Amended and Restated Bylaws, as adopted by the Board of Directors of the Company on August 1, 1997, respectively. The Company was originally incorporated on December 31, 1993. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, $0.01 par value per share, and 3,000,000 shares of Preferred Stock, $0.01 par value per share. Immediately after the completion of this offering, the Company estimates that there will be outstanding an aggregate of 12,960,550 shares of Common Stock, approximately 387,500 shares will be issuable upon exercise of outstanding options and warrants and no shares of Preferred Stock will be issued or outstanding. COMMON STOCK Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, holders of Common Stock are entitled to receive ratably such dividends, if, as and when declared by the Company's Board of Directors out of funds legally available therefor. See "Dividend Policy." Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. There are no cumulative voting rights, the absence of which will, in effect, allow the holders of a majority of the outstanding shares of Common Stock to elect all the directors then standing for election. The absence of cumulative voting rights could have the effect of delaying, deterring or preventing a change of control of the Company. According to the Delaware General Corporation Law ("DGCL"), in the event of any liquidation, dissolution or winding up of the Company, holders of Common Stock will be entitled to share ratably in all assets remaining after payment of the Company's liabilities and the liquidation preference, if any, of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities and there are no redemption provisions with respect to such shares. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. The provisions described above will result in Fred Kayne, the majority stockholder of the Company, retaining substantial control over the Company. See "Risk Factors--Control by Existing Stockholders and Anti-Takeover Provisions." Application has been made for quotation of the Common Stock on The Nasdaq National Market under the symbol "BDOG". PREFERRED STOCK The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is expressly authorized, in the resolution or resolutions providing for the issuance of any wholly unissued series of Preferred Stock, to fix, state and express the powers, rights, designations, preferences, qualifications, limitations and restrictions thereof, including without limitation, the rate of dividends upon which and the times at which dividends on shares of such series shall be payable and the preference, if any, which such dividends shall have relative to dividends on shares of any other class or classes or any other series of stock of the Company; whether such dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which dividends on shares of such series shall be cumulative; the voting rights, if any, to be provided for shares of such series; the rights, if any, which the holders of shares of such series shall have in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company; the rights, if any, which the holders of shares of such series shall have to convert such shares into or exchange such shares for shares of stock of the Company, and the terms and conditions, including price and rate of exchange of such conversion or exchange; the 46 redemption rights (including sinking fund provisions), if any, for shares of such series; and other powers, rights, designations, preferences, qualifications, limitations and restrictions as the Board of Directors may desire to so fix. The Board of Directors is also expressly authorized to fix the number of shares constituting such series and to increase or decrease the number of shares of any series prior to the issuance of shares of that series and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not to decrease such number below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The Board of Directors, without further stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. No shares of Preferred Stock presently are outstanding and the Company currently has no plans to issue shares of Preferred Stock. The issuance of Preferred Stock in certain circumstances may have the effect of delaying or preventing a change of control of the Company without further action by the stockholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price and the voting and other rights of the holders of Common Stock. CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK The authorized but unissued shares of Common Stock and Preferred Stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved Common Stock and Preferred Stock may enable the Board of Directors to issue shares to persons friendly to current management which could render more difficult or discourage an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger, or otherwise, and thereby protect the continuity of the Company's management. CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS Certain provisions of the Certificate and Bylaws of the Company as summarized in the following paragraphs, may be deemed to have an anti-takeover effect and may delay, deter or prevent an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger or other transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. CLASSIFIED BOARD OF DIRECTORS. The Certificate provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, one-third of the Board of Directors will be elected each year. In addition, the Certificate provides that any Director or the entire Board of Directors may be removed by the affirmative vote of the holders of at least a majority of the combined voting power of all shares of the Company entitled to vote generally in the election of directors, voting together as a single class. Under the DGCL, in the case of a corporation having a classified board and not having a provision in its Certificate to the contrary (as is the case with the Company), stockholders may remove a director only for cause. Under the Bylaws, any vacancy in the Board of Directors unless and until filled by the stockholders, however occurring, may be filled by majority vote of the remaining directors, except that a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present. These provisions, together with the constraints placed on calling stockholder meetings as discussed below, may preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. SPECIAL MEETING OF STOCKHOLDERS. The Certificate provides that special meetings of stockholders of the Company may be called only by the Chairman of the Board of Directors or the President, or by the Chairman, the President or the Secretary at the written request of a majority of the total number of directors the Company 47 would have if there were no vacancies on the Board. The request shall be sent to the Chairman, the President and the Secretary and shall state the purposes of the proposed meeting. Special meetings of holders of the outstanding Preferred Stock may be called in the manner and for the purposes provided in the resolutions of the Board of Directors providing for the issue of such stock. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice of meeting. These provisions will make it more difficult for stockholders to take actions opposed by the Board of Directors. ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. The Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at a meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the Company fewer than 70 days prior to the date of such annual meeting, notice by the stockholder to be timely must be received no later than the close of business on the tenth (10th) day following the day on which such public announcement was made by the Company. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual meeting or from making nominations for directors at a stockholders meeting. VOTING REQUIREMENTS REGARDING CERTAIN ACTIONS. Certain provisions of the Certificate require the affirmative vote of the holders of at least two-thirds of the combined voting power of all shares of the Company entitled to vote generally in the election of directors, voting together as a single class, for certain activities. Such an affirmative vote is required for any Business Combination (as defined in the Certificate) (unless the Business Combination has been approved by two-thirds of the whole Board of Directors) and for the adoption of new Bylaws or the repeal or amendment of existing Bylaws by the stockholders. Similarly, such a vote is required for alteration, change, amendment, or repeal of, or adoption of any provision inconsistent with, the provisions of the Certificate relating to classification, terms and removal of directors, provisions relating to special meetings of stockholders, and provisions defining certain key terms. LIMITATION OF LIABILITY The Certificate provides that to the fullest extent permitted by the DGCL, as that law may be amended and supplemented from time to time, a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived any improper personal benefit. The effect of the provision of the Certificate is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent behavior) except in the situations described in clauses (i) through (iv) above. The Bylaws also set forth certain indemnification provisions. The foregoing provision of the Certificate may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breaches of their fiduciary duties, even though such an action, if successful, otherwise might have benefited the Company and its stockholders. 48 INDEMNIFICATION AGREEMENTS In addition, the Company plans to enter into agreements (the "Indemnification Agreements") with each of its directors and certain of its officers pursuant to which the Company agrees to indemnify such director or officer against expenses, judgments, fines or amounts paid in settlement incurred by such director or officer and arising out of his capacity as a director, officer, employee and/or agent of the Company or other enterprise of which he is a director, officer, employee or agent acting at the request of the Company to the maximum extent permitted by applicable law, subject to certain limitations. In addition, such director or officer shall be entitled to an advance of expenses, to the maximum extent authorized or permitted by law, to meet the obligations indemnified against, subject to certain limitations. Finally, under Delaware law, the Company may purchase and maintain insurance for the benefit and on behalf of its directors and officers insuring against all liabilities that may be incurred by such director or officer in or arising out of his capacity as a director, officer, employee and/or agent of the Company. DELAWARE LAW AND CERTAIN CORPORATE PROVISIONS Upon the consummation of this offering, the Company will be subject to the provisions of Section 203 of the DGCL. Section 203 of the DGCL contains certain provisions that may make more difficult the acquisition of control of the Company by means of a tender offer, open market purchase, proxy fight or otherwise. These provisions are designed to encourage persons seeking to acquire control of the Company to negotiate with the Board of Directors. However, these provisions could have the effect of discouraging a prospective acquirer from making a tender offer or otherwise attempting to obtain control of the Company. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares or could depress the market price of shares. Set forth below is a description of the relevant provisions of Section 203 of the DGCL. This description is intended as summary only and is qualified in its entirety by reference to Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging under certain circumstances in a "business combination" with an "interested stockholder," for a period of three years after the date on which the stockholder became an interested stockholder (the "Time"), unless (i) prior to the Time the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (ii) the stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, or (iii) on or subsequent to the Time, the business combination with the interested stockholder is approved by the board of directors and also approved at a stockholders' meeting by the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation's voting stock other than shares held by the interested stockholder. For purposes of Section 203, a "business combination" includes certain mergers, asset sales or other transactions resulting in a financial benefit to the interested stockholder. The Company, at its option, may exclude itself from the coverage of Section 203 by amending its Certificate or Bylaws by action of its stockholders to exempt itself from coverage, provided that such Bylaw or Certificate amendment shall not become effective until 12 months after the date it is adopted and shall not apply to any business combination between the Company and any person who became an interested stockholder on or prior to such adoption (unless the Company, among other things, does not have a class of voting stock listed on a national securities exchange or on the NASDAQ Stock Market). To date, the Company has not elected to opt out of Section 203 of the DGCL pursuant to its terms. In addition to the requirements of Section 203, under the Certificate, the approval of the holders of two-thirds of the voting power in the Company is required for certain business combinations involving the Company and "interested stockholders," defined as persons who, together with affiliates and associates, own (or within two years, did own) 10% or more of the Company's voting stock. 49 The Certificate provides that the Company is subject to the provision of Section 302 of the DGCL. In general, this statute allows any court of equitable jurisdiction in the State of Delaware, upon proper application by the Company or any of its creditors or stockholders, to order a meeting of creditors or stockholders whenever a compromise or arrangement is proposed between the Company and its creditors or the Company and its stockholders. Any compromise, arrangement or reorganization of the Company that is approved by a majority in a number representing three-fourths in value of the creditors or stockholders, as the case may be, and sanctioned by the court to which the application was made shall be binding on all of the creditors or stockholders, as the case may be, and the Company. TRANSFER AGENT The transfer agent and registrar for the Common Stock is U.S. Stock Transfer Corporation. 50 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 12,960,550 shares of Common Stock outstanding (based upon shares of Common Stock outstanding as of July 31, 1997 and assuming no exercise of outstanding options, warrants or the Underwriters' over-allotment option). Of these shares, the 2,800,000 shares sold by the Company and the 700,000 sold by the Selling Stockholders in this offering, plus any additional shares sold upon exercise of the Underwriters' over-allotment option, will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 9,460,550 shares of Common Stock (the "Restricted Shares") held by existing stockholders upon completion of this offering are "restricted" securities within the meaning of Rule 144 and may not be sold except in compliance with the registration requirements of the Securities Act or an applicable exemption under the Securities Act, including an exemption pursuant to Rule 144 or Rule 701. LOCK-UP AGREEMENTS All stockholders of the Company (who in the aggregate hold 10,160,550 shares of Common Stock), all warrantholders of the Company (who in the aggregate have the right to purchase 240,000 shares of Common Stock), and all holders of options exercisable within 180 days after this offering (who in the aggregate have the right to purchase 73,333 shares of Common Stock), have agreed, pursuant to Lock-Up Agreements, that they will not, without the prior written consent of Robertson, Stephens & Company, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them (except for shares sold in this offering) for a period of 180 days after the date of this Prospectus. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the Lock-Up Agreements. See "Underwriting." SALES OF RESTRICTED SHARES Upon the expiration of the 180-day lock-up period, approximately 8,533,883 Restricted Shares will become eligible for sale in the public market pursuant to Rule 144 or Rule 701. In general, under Rule 144, a person (or persons whose shares are aggregated) including an Affiliate, who has beneficially owned shares for at least one year (including the holding period of certain prior owners), will be entitled to sell in "brokers' transactions" or to market makers, within any three-month period commencing 90 days after the Company becomes subject to the reporting requirements of Section 13 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a number of shares that does not exceed the greater of (i) one percent (1%) of the then-outstanding shares of Common Stock (approximately 129,606 shares immediately after this offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding such sale, subject, generally, to the filing of a Form 144 with the Commission with respect to such sales and certain other limitations and restrictions relating to manner of sale and availability of public information. In addition, a person (or person whose shares are aggregated), who is not deemed to have been an Affiliate at any time during the 90 days immediately preceding the sale and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. Further, Rule 144A under the Securities Act as currently in effect permits the immediate sale of restricted shares to certain qualified institutional buyers without regard to the volume restrictions described above. In general, under Rule 701, any employee, consultant or advisor of the Company who purchased shares from the Company in connection with a compensatory stock or option plan or other written compensatory agreement is entitled to resell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144, and Affiliates are entitled to sell their Rule 701 shares 51 without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the Company becomes subject to the reporting requirements of Section 13 or 15 of the Exchange Act. WARRANTS As of August 1, 1997, there were warrants outstanding for the purchase of 240,000 shares of Common Stock. The underlying shares may be resold under Rule 144 upon the expiration of either the one or two-year holding periods described above, which commence upon exercise of the warrant. OPTIONS As of August 1, 1997, options to purchase 92,500 shares were outstanding under the Old Plan and options to purchase 55,000 shares were outstanding under non-plan option agreements with the Company's Chairman. Upon expiration of the 180-day lock-up period and subject to vesting and exercisability restrictions, all shares issued pursuant to the exercise of these stock options may be sold pursuant to Rule 701. Of such options, 73,333 will be exercisable at the end of the 180-day lock-up period. In addition, options to purchase 282,500 shares of Common Stock were granted under the 1997 Plan as of August 1, 1997 and 717,500 shares of Common Stock are available for future grant under the 1997 Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act 90 days after the date of this Prospectus to register the shares issuable under the 1997 Plan. Such registration statement is expected to become effective upon filing. After the effective date of such registration statement, shares of Common Stock issued under the 1997 Plan will be immediately eligible for sale in the public market, subject to vesting and exercisability restrictions. No options granted under the 1997 Plan will become exercisable prior to August 1, 1998. 52 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement among the Company, the Selling Stockholders and each of the underwriters named below (the "Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell to each of the Underwriters, and each of the Underwriters, for whom Robertson, Stephens & Company, Hambrecht & Quist LLC and Needham & Company, Inc. are acting as the Representatives, severally have agreed to purchase from the Company and the Selling Stockholders the number of shares of Common Stock set forth opposite its name below. In the Underwriting Agreement, the several underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock offered hereby, if any are purchased. In the event of default by an Underwriter, the Underwriting Agreement provides that, in certain circumstances, purchase commitments of the nondefaulting Underwriters may be increased or the Underwriting Agreement may be terminated.
NUMBER UNDERWRITERS OF SHARES - ----------------------------------------------------------------- ---------------- Robertson, Stephens & Company LLC................................ Hambrecht & Quist LLC............................................ Needham & Company, Inc........................................... -------- Total........................................................ 3,500,000 -------- --------
The Underwriters have advised the Company that they propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. Certain Selling Stockholders have granted to the Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to an additional 525,000 shares of Common Stock to cover over-allotments, if any, at the initial public offering price set forth on the cover page hereof, less the underwriting discount. If the Underwriters exercise this option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the foregoing table is of the 3,500,000 shares of Common Stock initially offered hereby. All officers and directors of the Company, all stockholders of the Company, all warrantholders of the Company and optionholders of the Company holding options exercisable within 180 days of the effective date of this offering have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell or grant any option to purchase or otherwise transfer or dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, without the prior written consent of Robertson, Stephens & Company, for a period of 180 days after the date of this Prospectus. The foregoing does not prohibit the Selling Stockholders from selling shares of Common Stock in this offering including pursuant to the Underwriters' over-allotment option. The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Representatives have advised the Company that the Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. 53 Prior to this offering, there has been no market for the Common Stock of the Company. The initial public offering price was determined through negotiations among the Company, the Selling Stockholders and the Representatives. Among the factors considered in determining the initial public offering price, in addition to prevailing market conditions, were price/earnings ratios of publicly traded companies that the Representatives believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the offering at or above the initial public offering price. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with the offering when the shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on The Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. Application has been made for quotation of the Common Stock on The Nasdaq National Market under the symbol "BDOG." 54 LEGAL MATTERS Certain legal matters with respect to the Common Stock offered hereby is being passed upon for the Company and the Selling Stockholders by Kimball & Weiner LLP, Los Angeles, California. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS The consolidated balance sheets of the Company as of December 31, 1995 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1996 included in this Prospectus and the registration statement of which this Prospectus is a part have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and in the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, exhibits and schedules. Statements contained in this Prospectus regarding the contents of any contract or any other document are summaries and, in each such instance, reference is hereby made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza, Washington, D.C., 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at the prescribed rates. Also, the Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Web site is http://www.sec.gov. 55 BIG DOG HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Independent Auditors' Report............................................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996, and June 30, 1997 (Unaudited)................ F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996, and for the six months ended June 30, 1996 and 1997 (Unaudited).......................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996, and for the six months ended June 30, 1997 (Unaudited)............................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996, and for the six months ended June 30, 1996 and 1997 (Unaudited).......................................................... F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Big Dog Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Big Dog Holdings, Inc. and subsidiary (the "Company") as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California January 31, 1997 (August 1, 1997 as to Note 10) F-2 BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1995 1996 ------------- ------------- JUNE 30, 1997 ------------- (UNAUDITED) ASSETS (NOTE 3) CURRENT ASSETS: Cash.............................................................. $ 769,000 $ 723,000 $ 1,650,000 Receivables: Trade, net of allowance for doubtful accounts of $67,000, $90,000 and $99,000 at December 31, 1995 and 1996, and June 30, 1997, respectively........................................ 567,000 353,000 636,000 Other........................................................... 190,000 617,000 249,000 Inventories (Notes 1 and 9)....................................... 10,826,000 15,403,000 18,763,000 Prepaid expenses and other current assets......................... 371,000 478,000 1,315,000 Deferred income taxes (Note 6).................................... 224,000 144,000 1,277,000 ------------- ------------- ------------- Total current assets.......................................... 12,947,000 17,718,000 23,890,000 PROPERTY AND EQUIPMENT, Net (Notes 1, 2 and 5)...................... 5,434,000 7,445,000 8,540,000 INTANGIBLE ASSETS, Net (Note 1)..................................... 373,000 266,000 191,000 OTHER ASSETS (Note 1)............................................... 257,000 344,000 355,000 ------------- ------------- ------------- TOTAL............................................................... $ 19,011,000 $ 25,773,000 $ 32,976,000 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings (Note 3).................................... $ 1,225,000 $ -- $ 6,892,000 Current portion of obligations under capital leases (Note 5)...... 380,000 530,000 517,000 Accounts payable (Note 9)......................................... 1,876,000 1,235,000 4,138,000 Income taxes payable (Note 6)..................................... 364,000 400,000 -- Accrued expenses and other current liabilities (Note 4)........... 1,072,000 1,811,000 1,613,000 ------------- ------------- ------------- Total current liabilities..................................... 4,917,000 3,976,000 13,160,000 DEFERRED RENT (Note 7).............................................. 230,000 488,000 563,000 OBLIGATIONS UNDER CAPITAL LEASES, Net of current portion (Note 5)... 727,000 767,000 514,000 SUBORDINATED DEBT (Note 4).......................................... 8,400,000 14,400,000 14,400,000 ------------- ------------- ------------- Total liabilities............................................. 14,274,000 19,631,000 28,637,000 ------------- ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Notes 4 and 8): Common stock $.01 par value, authorized 30,000,000 shares; issued and outstanding 9,670,000 at December 31, 1995 and 10,160,550 at December 31, 1996 and June 30, 1997............................. 97,000 102,000 102,000 Additional paid-in capital........................................ 4,208,000 5,705,000 5,705,000 Retained earnings (deficit)....................................... 432,000 1,067,000 (736,000) Notes receivable from common stockholders......................... -- (732,000) (732,000) ------------- ------------- ------------- Total stockholders' equity.................................... 4,737,000 6,142,000 4,339,000 ------------- ------------- ------------- TOTAL............................................................... $ 19,011,000 $ 25,773,000 $ 32,976,000 ------------- ------------- ------------- ------------- ------------- -------------
See notes to consolidated financial statements. F-3 BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) NET SALES (Note 9)............... $28,404,000 $51,541,000 $68,683,000 $24,351,000 $31,143,000 COST OF GOODS SOLD (Note 9)...... 12,857,000 21,571,000 29,720,000 10,617,000 13,208,000 ----------- ----------- ----------- ----------- ----------- GROSS PROFIT..................... 15,547,000 29,970,000 38,963,000 13,734,000 17,935,000 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling, marketing and distribution (Note 1)........ 12,993,000 24,814,000 32,309,000 13,685,000 17,764,000 General and administrative (Note 9)..................... 1,746,000 3,167,000 3,937,000 1,976,000 2,111,000 ----------- ----------- ----------- ----------- ----------- Total operating expenses..... 14,739,000 27,981,000 36,246,000 15,661,000 19,875,000 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS.... 808,000 1,989,000 2,717,000 (1,927,000) (1,940,000) INTEREST EXPENSE (Notes 3, 4 and 5)............................. 397,000 1,189,000 1,647,000 667,000 967,000 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES..... 411,000 800,000 1,070,000 (2,594,000) (2,907,000) PROVISION (BENEFIT) FOR INCOME TAXES (Note 6)................. 19,000 162,000 435,000 (1,054,000) (1,104,000) ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS)................ $ 392,000 $ 638,000 $ 635,000 $(1,540,000) $(1,803,000) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) PER COMMON SHARE (Note 1)................. $ 0.04 $ 0.07 $ 0.06 $ (0.15) $ (0.17) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING (Note 1)........... 9,225,000 9,728,000 10,230,000 10,038,000 10,491,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements. F-4 BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES COMMON STOCK ADDITIONAL RETAINED RECEIVABLE --------------------- PAID-IN EARNINGS FROM COMMON SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDERS TOTAL ---------- --------- ---------- ----------- ------------- ---------- BALANCE, JANUARY 1, 1994......... 9,000,000 $ 90,000 $3,210,000 $ (598,000) -- $2,702,000 Net income..................... -- -- -- 392,000 -- 392,000 ---------- --------- ---------- ----------- ------------- ---------- BALANCE, DECEMBER 31, 1994....... 9,000,000 90,000 3,210,000 (206,000) -- 3,094,000 Common stock issued (Note 4)..................... 670,000 7,000 998,000 -- -- 1,005,000 Net income..................... -- -- -- 638,000 -- 638,000 ---------- --------- ---------- ----------- ------------- ---------- BALANCE, DECEMBER 31, 1995....... 9,670,000 97,000 4,208,000 432,000 -- 4,737,000 Common stock issued (Notes 4 and 8).............. 540,550 5,000 1,395,000 -- $ (855,000) 545,000 Warrants issued (Note 4)....... -- -- 240,000 -- -- 240,000 Shares reacquired (Note 8)..... (50,000) -- (138,000) -- 123,000 (15,000) Net income..................... -- -- -- 635,000 -- 635,000 ---------- --------- ---------- ----------- ------------- ---------- BALANCE, DECEMBER 31, 1996....... 10,160,550 102,000 5,705,000 1,067,000 (732,000) 6,142,000 Net loss (Unaudited)........... -- -- -- (1,803,000) -- (1,803,000) ---------- --------- ---------- ----------- ------------- ---------- BALANCE, JUNE 30, 1997 (Unaudited).................... 10,160,550 $ 102,000 $5,705,000 $ (736,000) $ (732,000) $4,339,000 ---------- --------- ---------- ----------- ------------- ---------- ---------- --------- ---------- ----------- ------------- ----------
See notes to consolidated financial statements. F-5 BIG DOG HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------------------- ---------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $ 392,000 $ 638,000 $ 635,000 $(1,540,000) $(1,803,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization................... 460,000 1,059,000 1,931,000 824,000 1,183,000 Provision for losses on receivables............. 127,000 57,000 174,000 24,000 14,000 Loss on disposition of property and equipment... -- -- 35,000 -- 37,000 Deferred income taxes........................... (155,000) (224,000) 80,000 (1,172,000) (1,133,000) Changes in operating assets and liabilities: Receivables................................... (516,000) 327,000 (387,000) (410,000) 71,000 Inventories................................... (4,889,000) (2,980,000) (4,577,000) (6,303,000) (3,360,000) Prepaid expenses and other assets............. 106,000 (225,000) (45,000) (1,059,000) (838,000) Accounts payable.............................. 2,615,000 (1,463,000) (641,000) 3,054,000 2,903,000 Income taxes payable.......................... -- 360,000 35,000 (364,000) (400,000) Accrued expenses and other current liabilities................................. 971,000 2,000 740,000 (24,000) (198,000) Deferred rent................................. -- 230,000 258,000 190,000 75,000 ---------- ---------- ---------- ---------- ---------- Net cash used in operating activities....... (889,000) (2,219,000) (1,762,000) (6,780,000) (3,449,000) ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.............................. (2,516,000) (2,346,000) (3,377,000) (1,188,000) (2,219,000) Other............................................. 17,000 (18,000) (108,000) (21,000) (14,000) ---------- ---------- ---------- ---------- ---------- Net cash used in investing activities....... (2,499,000) (2,364,000) (3,485,000) (1,209,000) (2,233,000) ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock............ -- 1,005,000 545,000 500,000 -- Repurchase of common stock........................ -- -- (15,000) -- -- Proceeds from issuance of warrants................ -- -- 114,000 -- -- Proceeds from subordinated debt................... 3,250,000 8,270,000 7,900,000 2,000,000 -- Principal repayments of subordinated debt......... -- (3,500,000) (1,774,000) -- -- Principal repayments under capital lease obligations..................................... -- -- (344,000) (299,000) (283,000) Short-term borrowings, net........................ 789,000 (1,286,000) (1,225,000) 5,123,000 6,892,000 ---------- ---------- ---------- ---------- ---------- Net cash provided by financing activities... 4,039,000 4,489,000 5,201,000 7,324,000 6,609,000 ---------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH..................... 651,000 (94,000) (46,000) (665,000) 927,000 CASH, BEGINNING OF PERIOD........................... 212,000 863,000 769,000 769,000 723,000 ---------- ---------- ---------- ---------- ---------- CASH, END OF PERIOD................................. $ 863,000 $ 769,000 $ 723,000 $ 104,000 $1,650,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest........................................ $ 238,000 $1,225,000 $1,521,000 $ 631,000 $ 885,000 Income taxes.................................... $ 4,000 $ 42,000 $ 367,000 $ 475,000 $ 429,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: The Company entered into capital lease obligations of $1,108,000, $533,000, $235,000 and $18,000 for new equipment for the years ended 1995 and 1996, and the six months ended June 30, 1996 and 1997, respectively (see Note 5). In 1996, the Company refinanced $138,000 of capital lease obligations (see Note 5). In 1996, a stockholder converted $2,226,000 of short-term subordinated debt to $2,100,000 of long-term subordinated debt and warrants valued at $126,000. In July 1996, certain key employees and other individuals issued $855,000 of long-term notes receivable to the Company as payment for common stock (see Note 8). In December 1996, the Company repurchased 50,000 shares of common stock for $138,000, $123,000 of which was by the retirement of a related long-term note receivable (see Note 8). See notes to consolidated financial statements. F-6 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS The consolidated financial statements include the accounts of Big Dog Holdings, Inc. and its wholly owned subsidiary, Big Dog USA, Inc. (the "Company"). All significant intercompany accounts and transactions have been eliminated. The Company principally develops and markets apparel and other consumer products through Company-operated retail stores, wholesale accounts and a catalog. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited consolidated financial statements for the six months ended June 30, 1996 and 1997 are presented on a basis consistent with the audited consolidated financial statements and reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results thereof. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company has cash on deposit with a high credit quality financial institution which is at times in excess of the Federal Deposit Insurance Corporation limit. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of receivables, accounts payable, and short-term borrowings approximate their carrying values because of the short-term maturity of these instruments or the stated interest rates are indicative of market interest rates. A reasonable estimate of fair value is not practicable for subordinated debt due to the limited availability of similar financing. INVENTORIES Inventories, consisting substantially of finished goods, are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives, ranging from two to seven years. Amortization of leasehold improvements is computed using the straight-line method based upon the life of the improvement or the term of the lease, whichever is shorter. F-7 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS Intangibles assets are stated at cost and are amortized using the straight-line method over five years. Accumulated amortization was $256,000, $393,000 and $471,000, at December 31, 1995 and 1996, and June 30, 1997, respectively. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial and Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If the carrying value is less than the future net cash flows, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Adoption of this statement did not have an impact on the Company's consolidated financial statements. OTHER ASSETS Other assets include long-term deposits of $210,000, $293,000 and $303,000 at December 31, 1995 and 1996 and June 30, 1997, respectively, which relate primarily to leased retail stores. SELLING, MARKETING AND DISTRIBUTION EXPENSES Included in this classification are approximately $590,000, $640,000, $439,000, $229,000 and $275,000 in 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997, respectively, of store preopening expenses, which are expensed as incurred. INCOME TAXES Deferred income taxes reflect the income tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, (b) net operating loss and tax credit carryforwards, and (c) valuation allowances, when necessary, to reduce deferred income tax assets to the amount expected to be realized (see Note 6). INCOME (LOSS) PER SHARE Income (loss) per share is based upon the weighted average number of common shares and dilutive equivalent shares outstanding. Pursuant to the requirements of the Securities and Exchange Commission, common shares, stock options and warrants issued by the Company during the twelve months immediately preceding an initial public offering have been included in the calculation of the weighted average shares outstanding as if they were outstanding for all periods using the treasury stock method. RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to improve the earnings per share ("EPS") information F-8 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of data on an international basis. SFAS No. 128 also makes a number of changes to existing disclosure requirements. SFAS No. 128 is effective for financial statements issued for periods ending after December 31, 1997, including interim periods. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company beginning January 1, 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company has determined that the adoption of SFAS No. 131 will not have a material impact on its current disclosures. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, JUNE 30, ----------------------- 1997 1995 1996 (UNAUDITED) ---------- ----------- ----------- Leasehold improvements...................... $2,924,000 $ 3,926,000 $ 4,498,000 Equipment and fixtures (Note 5)............. 3,878,000 6,548,000 8,099,000 ---------- ----------- ----------- 6,802,000.. 10,474,000 12,597,000 Less accumulated depreciation and amortization.............................. (1,368,000) (3,029,000) (4,057,000) ---------- ----------- ----------- Property and equipment, net................. $5,434,000 $ 7,445,000 $ 8,540,000 ---------- ----------- ----------- ---------- ----------- -----------
Depreciation and amortization expense on property and equipment totaled $340,000, $932,000, $1,794,000, $752,000 and $1,105,000 in 1994, 1995 and 1996, and the six months ended June 30, 1996 and 1997, respectively. 3. SHORT-TERM BORROWINGS The Company has a line of credit arrangement with a bank whereby the Company may borrow up to $10,500,000 as cash advances and letters of credit. Outstanding balances on the line of credit totaled $1,028,000, $0 and $6,892,000 at December 31, 1995 and 1996 and June 30, 1997, respectively. The line of credit currently bears interest at the bank's prime lending rate, expires on May 2, 1998, and is collateralized by substantially all assets of the Company. The short-term borrowings bore interest at the rate of 9.25%, 8.75% and 8.5% at December 31, 1995 and 1996 and June 30, 1997, respectively. Certain stockholders of the Company guarantee 20% of the outstanding advances under the credit arrangement. This credit arrangement contains various restrictive covenants, including maintenance of minimum working capital and tangible net worth levels and limitations on indebtness. The credit arrangement also prohibits the payment of dividends by the Company. The Company was in compliance with all debt covenants as of December 31, 1996 and June 30, 1997. The Company has commitments under letters of credit totaling $1,523,000 at June 30, 1997. The letters of credit expire through December 31, 1997. F-9 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SHORT-TERM BORROWINGS (CONTINUED) At December 31, 1995, the Company had a short-term note payable to the bank, totaling $197,000, under the same terms as described above. 4. SUBORDINATED DEBT In April 1995, the Company completed a private placement of 67 units to new investors, each unit consisting of a $60,000 promissory note, which bears interest at 10%, and 10,000 shares of common stock of Big Dog Holdings, Inc. at $1.50 per share. Proceeds from the offering, totaling $5,025,000, consisted of $1,005,000 from the issuance of 670,000 shares of common stock and $4,020,000 from the issuance of subordinated notes. Of the proceeds received, $3,500,000 was used to repay certain stockholder notes outstanding at December 31, 1994. The notes are due at the earlier of April 3, 2002 or the consummation of an initial public offering. During 1995, the Company also issued additional subordinated debt to an existing stockholder totaling $4,250,000 which is due in 1998 and bears interest at the rate of 10% per annum. In February 1996, the Company completed a private placement of 50 units to investors, each unit consisting of a $40,000 promissory note which bears interest at 10%, and 3,861 shares of common stock of Big Dog Holdings, Inc. at $2.59 per share. Proceeds from the offering, totaling $2,500,000, consisted of $500,000 from the issuance of 193,050 shares of common stock and $2,000,000 from the issuance of subordinated notes. The notes are due the earlier of November 4, 2003 or the consummation of an initial public offering. In November 1996, the Company completed a private placement of 10 "A" units and 10 "B" units to investors. Each "A" unit consisted of a $200,000 promissory note, which bears interest at 10%, and 12,000 redeemable "A" warrants. Each "B" unit consisted of a $200,000 promissory note, which bears interest at 10%, and 12,000 redeemable "B" warrants. Each "A" warrant is exercisable at any time for the purchase of one share of the Company's common stock at $3.00 per share. Each "B" warrant is exercisable at any time for the purchase of one share of the Company's common stock at $4.00 per share. All warrants expire in five years from the date of grant. Proceeds from the offering, totaling $4,240,000, consisted of $240,000 from the issuance of 120,000 "A" warrants and 120,000 "B" warrants and $4,000,000 from the issuance of subordinated debt. The Company may redeem all or part of any unexercised warrants at a price of $2.50 per warrant in the event that the Company has effected a registered public offering of its common stock and such stock trades at a price equal to or greater than 150% of the public offering price for a period of 20 out of 30 consecutive trading days. The notes are due the earlier of November 4, 2003 or the consummation of an initial public offering. At December 31, 1995 and 1996 and June 30, 1997, accrued interest on the notes discussed above totaled $19,000, $174,000 and $209,000, respectively. Interest expense on these notes for the years ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1996 and 1997 amounted to $208,000, $766,000, $1,535,000, $487,000 and $714,000, respectively. The following are the scheduled maturities of the subordinated debt:
YEAR ENDING DECEMBER 31, - ------------------------------------------------------------- 1998......................................................... $ 4,380,000 2002......................................................... 4,020,000 2003......................................................... 6,000,000 ----------- $14,400,000 ----------- -----------
F-10 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. OBLIGATIONS UNDER CAPITAL LEASES Capital lease assets included in property and equipment in the accompanying consolidated balance sheets amounted to $1,409,000, $1,988,000 and $2,006,000 at December 31, 1995 and 1996 and June 30, 1997, respectively. The related accumulated amortization amounted to $20,000, $415,000 and $619,000, at December 31, 1995 and 1996 and June 30, 1997, respectively. Capital leases have implicit interest rates ranging from 9.3% to 14.4% per annum with current aggregate monthly payments of approximately $57,000, including principal and interest, and mature in 2000. The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1996:
YEAR ENDING DECEMBER 31, - ----------------------------------------------------------------------- 1997................................................................... $ 637,000 1998................................................................... 580,000 1999................................................................... 170,000 2000................................................................... 106,000 ---------- Total minimum lease payments........................................... 1,493,000 Less amount representing interest...................................... (196,000) ---------- Present value of minimum lease payments................................ $1,297,000 ---------- ----------
6. INCOME TAXES Significant components of the Company's net deferred income tax assets are as follows:
DECEMBER 31, -------------------- 1995 1996 --------- --------- Deferred income tax assets: Allowance for doubtful receivables and sales returns....... $ 23,000 $ 36,000 Accrued vacation........................................... 11,000 34,000 Inventory uniform capitalization........................... 239,000 302,000 Intangible assets.......................................... 69,000 109,000 State income taxes......................................... 107,000 18,000 Alternative minimum tax credits............................ 125,000 88,000 Stockholders' accrued interest............................. -- 67,000 Other...................................................... 20,000 -- --------- --------- Total deferred income tax assets............................. 594,000 654,000 --------- --------- Deferred income tax liabilities: Prepaid expenses........................................... (61,000) (59,000) Depreciation............................................... (309,000) (451,000) --------- --------- Total deferred income tax liabilities........................ (370,000) (510,000) --------- --------- Deferred income tax asset.................................... $ 224,000 $ 144,000 --------- --------- --------- ---------
F-11 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) The provision for income taxes is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Current: Federal......................................... $ 137,000 $ 324,000 $ 321,000 State........................................... 37,000 62,000 34,000 --------- --------- --------- Total............................................. 174,000 386,000 355,000 --------- --------- --------- Deferred: Federal......................................... (134,000) (202,000) 102,000 State........................................... (21,000) (22,000) (22,000) --------- --------- --------- Total............................................. (155,000) (224,000) 80,000 --------- --------- --------- Total income tax provision........................ $ 19,000 $ 162,000 $ 435,000 --------- --------- --------- --------- --------- ---------
The Company's effective income tax rate differs from the federal statutory income tax rate due to the following:
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Federal statutory income tax rate....................... 34.0 % 34.0 % 34.0 % State taxes, net of federal benefit..................... 3.7 4.7 2.4 Use of net operating loss carryforwards................. (36.7) (5.0) -- Alternative minimum credits............................. -- (15.6) -- Other, net.............................................. 3.6 2.2 4.3 ----- ----- ----- Total................................................... 4.6 % 20.3 % 40.7 % ----- ----- ----- ----- ----- -----
7. COMMITMENTS AND CONTINGENCIES LEASES The Company leases retail stores, office buildings and warehouse space under lease agreements that expire through 2006. Future minimum lease payments under noncancelable operating leases are as follows:
YEAR ENDING DECEMBER 31, - ------------------------------------------------------------- 1997......................................................... $10,021,000 1998......................................................... 9,600,000 1999......................................................... 8,396,000 2000......................................................... 6,579,000 2001......................................................... 3,800,000 Thereafter................................................... 4,126,000 ----------- Total........................................................ $42,522,000 ----------- -----------
F-12 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The above amounts do not include contingent rentals based on sales in excess of the stipulated minimum that may be paid under certain leases on retail stores and common area charges. Additionally, certain leases contain future adjustments in rental payments based on changes in a specified inflation index. The effective annual rent expense for the Company is the total rent paid over the term of the lease, amortized on a straight-line basis. The difference between the actual rent amount paid and the effective rent recognized for financial statement purposes is reported as deferred rent. Rent expense for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 totaled $1,784,000, $4,774,000, $8,431,000, $4,030,000 and $5,401,000, respectively, and includes contingent rentals of $19,000, $49,000, $79,000, $41,000 and $44,000 for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997, respectively. LICENSE AGREEMENT In 1994, the Company entered into a merchandise licensing agreement under which it was obligated to make royalty payments based on sales of certain products covered by the agreement. Under the terms of the agreement, the Company paid $50,000 and $250,000 in royalty payments for 1995 and 1996, respectively. No payments were made in 1994. The agreement expired on December 31, 1996. LITIGATION The Company is not involved in any legal proceedings other than certain actions arising in the ordinary course of its business. While the outcome of such proceedings and threatened proceedings cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters individually or in the aggregate will not have a material adverse effect on the Company's business, financial condition or results of operations. 8. STOCKHOLDERS' EQUITY COMMON STOCK The authorized capital stock of the Company is 30,000,000 shares of $.01 par value common stock. In 1996, the Company declared a 2-for-1 stock split effected in the form of a stock dividend as of December 31, 1995. All share amounts have been retroactively restated to reflect this split. (See Note 10) 1996 STOCK INCENTIVE PLAN In July 1996, the Company issued 347,500 shares of common stock under the 1996 Stock Incentive Plan (the "Plan"). The Plan authorized the issuance of up to 500,000 shares of the Company's common stock to key employees and other persons. The Plan was terminated on December 31, 1996. The shares were sold at $2.59 per share, which the Board of Directors determined to be at or above the fair market value, with proceeds to the Company consisting of $45,000 in cash and the balance of $855,000 in full recourse notes receivable. The notes receivable are due ten years from their date of issuance, bear interest at the rate of 7% per annum, and are secured by the common stock acquired. The Company has the option to repurchase at fair market value some or all of the shares sold upon the termination of the employee's employment or certain involuntary transfers of the stock. All of the shares sold are subject to these provisions until the Company effects an initial public offering of its common stock, at which time F-13 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCKHOLDERS' EQUITY (CONTINUED) the vested shares become freely transferable, subject to securities laws restrictions and the obligations to repay the purchase notes. The stock becomes vested over a two-year period, with one-third of the shares being vested at the purchase date. On December 31, 1996, the Company reacquired 50,000 shares at an average of $2.76 per share. STOCKHOLDER BUY-SELL AGREEMENT The Company has a buy-sell agreement with its President, which provides, for among other things, that in the event of the death of the President, his estate or other representatives shall have the right to sell all or part of his stock to the Company at the price of $5.00 per share. Such agreement expires upon the Company's effecting an initial public offering. STOCK OPTIONS In March 1996, the Company issued a five-year option to its chairman to acquire 35,000 shares of the Company's common stock at an exercise price of $2.59 per share. In August 1996, the Company issued an additional five-year option to the chairman to acquire an additional 20,000 shares at an exercise price of $4.00. The exercise prices were determined by the board of directors to be equal to or greater than the fair value of the Company's common stock at the date of grant. In January 1997, the Company adopted the 1997 Stock Option Plan authorizing the issuance of nonqualified stock options to directors, officers, employees, consultants and others to purchase common stock at prices equal to the fair value of the Company's shares at the grant dates. In 1997, options for 92,500 shares were granted at excercise prices from $5.00 to $7.50 per share. Such options vest one-third each year, beginning one year after the grant date and expire ten years from the date of grant. The 1997 Stock Option Plan was terminated on August 1, 1997 (see Note 10). The following summarizes stock option activity for the periods presented:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 -------------------------- -------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- --------------- --------- --------------- (UNAUDITED) -------------------------- Outstanding at beginning of period....................... -- -- 55,000 $ 3.10 Granted................................................ 55,000 $ 3.10 92,500 $ 6.01 --------- --------- Outstanding at end of period............................. 55,000 $ 3.10 147,500 $ 4.93 --------- --------- --------- --------- Options exercisable at period end........................ 55,000 85,333 Weighted-average fair value of options granted during the period.................................................. $ 1.55 $ 1.82
F-14 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCKHOLDERS' EQUITY (CONTINUED) The following unaudited table summarizes information about stock options outstanding at June 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------- ---------------------------------- NUMBER NUMBER OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE AT REMAINING AT JUNE 30, WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES JUNE 30, 1997 CONTRACTUAL LIFE 1997 EXERCISE PRICE - ------------------------------------- ------------- ---------------- ------------- ------------------- $2.59-$7.50 147,500 8.8--9.9 years 85,833 $ 4.93 ------------- ------ ----- ------------- ------ -----
The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income (loss) and net income (loss) per share had the Company adopted the fair value method as of the beginning of 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 2 to 8 years following vesting, if applicable; no stock price volatility; risk free interest rates of between 6.5% and 7.0%; and no dividends during the expected term. Forfeitures are recognized as they occur. If the computed fair values of the 1996 and 1997 awards had been amortized to expense over the vesting period of the awards, pro forma net income (loss) would have been reduced to the pro forma amounts indicated below. There were no stock options granted prior to 1996.
YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, -------------------------- 1996 1996 1997 ------------- ------------ ------------ (UNAUDITED) Net income (loss): As reported..................................... $ 635,000 $ (1,540,000) $ (1,803,000) Pro forma....................................... 584,000 (1,567,000) (1,844,000) Net income (loss) per common share: As reported..................................... $ 0.06 $ (0.15) $ (0.17) Pro forma....................................... 0.06 (0.16) (0.18)
9. RELATED PARTY TRANSACTIONS The Company's stockholders have ownership interests in certain merchandise vendors to the Company. Merchandise inventory purchased from these related vendors totaled $7,084,000, $6,696,000, $8,030,000, $5,458,000 and $4,201,000 for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997, respectively. Included in the accounts payable balance are $276,000, $62,000 and $1,449,000 due to these vendors at December 31, 1995 and 1996 and June 30, 1997, respectively. During 1996, the Company also processed certain sales for one of these merchandise vendors and recorded revenue of $71,000. F-15 BIG DOG HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RELATED PARTY TRANSACTIONS (CONTINUED) The Company also receives advisory, legal and consulting services from related parties. Such expenses incurred for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 were $220,000, $388,000, $208,000, $140,000 and $60,000, respectively. 10. SUBSEQUENT EVENTS (UNAUDITED) On August 1, 1997, the Company adopted the 1997 Performance Award Plan to attract, reward and retain officers and employees. The maximum number of shares reserved for issuance under this plan is 1,000,000. Awards under this plan may be in the form of unqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, stock bonuses, or cash bonuses based upon performance. The Company granted options under this plan relating to the purchase of 282,500 shares of Common Stock at an exercise price of $12.00 per share. On August 1, 1997 the Board of Directors of the Company approved the authorization of 3,000,000 shares of $0.01 par value Preferred Stock. To date, no shares of Preferred Stock have been issued. F-16 DESCRIPTION OF PICTURES AND CAPTIONS: INSIDE BACK COVER: MODEL PHOTOS, QVF LOGO AND SLOGAN "QUALITY, VALUE AND FUN FOR THE WHOLE FAMILY." PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses, other than underwriting discounts, which the Company expects to incur in connection with the issuance and distribution of the securities being registered under this registration statement. All expenses are estimated except for the Securities and Exchange Commission registration fee, the NASD filing fee and Nasdaq application fee. Securities and Exchange Commission Registration Fee....................... $ 17,076 Nasdaq National Market Application Fee.................................... 49,000 NASD Filing Fee........................................................... 6,135 Blue Sky Qualification Fees and Expenses.................................. 25,000 Legal Fees and Expenses................................................... 75,000 Accounting Fees and Expenses.............................................. 100,000 Printing and Engraving Expenses........................................... 100,000 Transfer Agent's and Registrar Fees....................................... 2,000 Miscellaneous............................................................. 25,789 --------- Total................................................................. $ 400,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware ("Section 145") permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit, or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In the case of an action by or in the right of the corporation, Section 145 permits the corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorney's fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification may be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee, or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in the proceeding two paragraphs, Section 145 II-1 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (CONTINUED) requires that such person be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 145 provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in Section 145. Article Tenth of the Company's Amended and Restated Certificate of Incorporation eliminates the personal liability of the directors of the Company to the Company or its stockholders for monetary damages for breach of fiduciary duty as directors, with certain exceptions. In addition, the Company's Bylaws require indemnification of directors and officers of the Company to the fullest extent permitted by Section 145. The Company will enter into indemnification agreements with its directors, a form of which is attached as Exhibit 10.14 hereto and incorporated herein by reference. The indemnification agreements provide the Company's directors with further indemnification to the maximum extent permitted by the DGCL. The Company will also obtain directors and officers insurance to insure its directors and officers against certain liabilities, including liabilities under the federal securities laws. The Underwriting Agreement filed herewith as Exhibit 1.1 provides for indemnification of the directors, certain officers, and controlling persons of the Company by the Underwriters against certain civil liabilities, including liabilities under the Securities Act. See Item 17 below. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following are all securities sold by the Company since July 31, 1994: 1. On January 1, 1995, the Company issued and sold 1,800,000 shares of its common stock (post-split) to its two then-existing stockholders for an aggregate of $3.0 million. 2. On April 3, 1995, the Company issued and sold 67 Units to seven investors for an aggregate purchase price of $5,025,000. Each Unit consisted of a $60,000 unsecured promissory note of the Company and 10,000 shares of Common Stock (post-split). 3. On February 27, 1996, the Company issued and sold 50 Units to three investors for an aggregate purchase price of $2,500,000. Each Unit consisted of a $40,000 unsecured promissory note of the registrant and 3,861 shares of Common Stock. 4. On July 29, 1996, the Company issued and sold 347,500 shares of Common Stock to 18 officers, key employees and consultants for an aggregate purchase price of $900,025, 5% of which was paid in cash and the balance of which was paid by delivering promissory notes bearing interest at 7% per annum and due in 2006. All such sales were made under the registrant's 1996 Stock Incentive Plan. 5. On November 4, 1996, the Company issued and sold 20 Units consisting of ten A Units and ten B Units to nine investors for an aggregate purchase price of $4,240,000. Each Unit consisted of a $200,000 unsecured promissory note of the Company and a warrant to purchase 12,000 shares of Common Stock. The terms of the A and B Units are the same except that the exercise price for the warrants included in the A Units is $4.00 per share (which, pursuant to the terms of the warrants, was automatically reduced to $3.00 as of June 30, 1997) and the exercise price for the warrants included in the B Units is $5.00 per share (which, pursuant to the terms of the warrants, was automatically reduced to $4.00 as of June 30, 1997). II-2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (CONTINUED) The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2), or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Company or otherwise, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement* 3.1 Amended and Restated Certificate of Incorporation* 3.1A Certificate of Correction 3.2 Amended and Restated Bylaws* 4.1 Reference is hereby made to Exhibits 3.1*, 3.1A and 3.2* 4.2 Specimen Stock Certificate 5.1 Opinion of Kimball & Weiner LLP 10.1 Amended and Restated Credit Agreement dated as of June 30, 1995 between Big Dog Holdings, Inc., Big Dog USA, Inc. and Fortune Dogs, Inc., as amended by First Amendment, dated as of February 15, 1996, Second Amendment dated as of April 30, 1996, and Third Amendment dated as of May 3, 1997* 10.2 Form of Stockholder Agreement made as of January 2, 1996 between Big Dog Holdings, Inc. and certain stockholders* 10.3 Forms of Notes and Warrants issued November 4, 1996* 10.4 Consulting Agreement between Big Dog Holdings, Inc. and Fortune Financial dated as of March 1, 1997* 10.5 Buy-Sell Agreement among Big Dog Holdings, Inc., Fred Kayne and Andrew D. Feshbach dated as of January 1, 1997* 10.6 1996 Stock Incentive Plan* 10.7 Form of Purchase Agreement under the Big Dog Holdings, Inc. 1996 Stock Incentive Plan* 10.8 1997 Stock Option Plan* 10.9 Form of Stock Option Agreement under the 1997 Stock Option Plan* 10.10 Amended and Restated 1997 Performance Award Plan 10.10A Form of Stock Option Agreement under 1997 Performance Award Plan 10.11 Lease Agreement between Big Dog Holdings, Inc. and State of California Public Retirement System dated January 13, 1995* 10.12 Lease Agreement between Big Dog Holdings, Inc. and S.V.B. Properties dated as of June 1, 1994, as amended by Lease Agreement dated as of December 1, 1994, Second Lease Amendment dated as of March 1, 1996 and Third Lease Amendment dated as of July 22, 1996* 10.13 Lease Agreement between Big Dog Holdings, Inc. and the Eldred Family Trust & Jason Eldred Trust dated as of April 4, 1996* 10.14 Form of Indemnification Agreement* 11.1 Statement regarding computation of per share earnings (loss)* 21.1 List of Subsidiaries of Big Dog Holdings, Inc.* 23.1 Consent of Kimball & Weiner LLP (included in Opinion filed in Exhibit 5.1) 23.2 Consent of Deloitte & Touche LLP 24.1 Power of Attorney (included in signature page)* 27.1 Financial data schedule*
II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (CONTINUED)
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 99.1 Consent of Robert Schnell 99.2 Consent of Steven C. Good 99.3 Consent of David J. Walsh 99.4 Consent of NPD Group
- ------- * Previously Filed ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement (filed herewith as Exhibit 1.1), certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described above in Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted against the Registrant by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Barbara, State of California, on September 15, 1997. BIG DOG HOLDINGS, INC. By: /s/ ANDREW D. FESHBACH ----------------------------------------- Andrew D. Feshbach PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ FRED KAYNE* - ------------------------------ Chairman of the Board September 15, 1997 Fred Kayne President, Chief Executive /s/ ANDREW D. FESHBACH Officer (Principal - ------------------------------ Executive Officer) and September 15, 1997 Andrew D. Feshbach Director /s/ ANTHONY J. WALL Executive Vice President, - ------------------------------ General Counsel, Secretary September 15, 1997 Anthony J. Wall and Director /s/ JONATHAN HOWE* Chief Financial Officer - ------------------------------ (Principal Financial September 15, 1997 Jonathan Howe Officer) Senior Vice President, /s/ ROBERTA MORRIS* Finance - ------------------------------ (Principal Accounting September 15, 1997 Roberta Morris Officer) *By: /s/ ANTHONY J. WALL - ------------------------------ Anthony J. Wall (ATTORNEY-IN-FACT)
II-5 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement* 3.1 Amended and Restated Certificate of Incorporation* 3.1A Certificate of Correction 3.2 Amended and Restated Bylaws* 4.1 Reference is hereby made to Exhibits 3.1*, 3.1A and 3.2* 4.2 Specimen Stock Certificate 5.1 Opinion of Kimball & Weiner LLP 10.1 Amended and Restated Credit Agreement dated as of June 30, 1995 between Big Dog Holdings, Inc., Big Dog USA, Inc. and Fortune Dogs, Inc., as amended by First Amendment, dated as of February 15, 1996, Second Amendment dated as of April 30, 1996, and Third Amendment dated as of May 3, 1997* 10.2 Form of Stockholder Agreement made as of January 2, 1996 between Big Dog Holdings, Inc. and certain stockholders* 10.3 Forms of Notes and Warrants issued November 4, 1996* 10.4 Consulting Agreement between Big Dog Holdings, Inc. and Fortune Financial dated as of March 1, 1997* 10.5 Buy-Sell Agreement among Big Dog Holdings, Inc., Fred Kayne and Andrew D. Feshbach dated as of January 1, 1997* 10.6 1996 Stock Incentive Plan* 10.7 Form of Purchase Agreement under the Big Dog Holdings, Inc. 1996 Stock Incentive Plan* 10.8 1997 Stock Option Plan* 10.9 Form of Stock Option Agreement under the 1997 Stock Option Plan* 10.10 Amended and Restated 1997 Performance Award Plan 10.10A Form of Stock Option Agreement under 1997 Performance Award Plan 10.11 Lease Agreement between Big Dog Holdings, Inc. and State of California Public Retirement System dated January 13, 1995* 10.12 Lease Agreement between Big Dog Holdings, Inc. and S.V.B. Properties dated as of June 1, 1994, as amended by Lease Agreement dated as of December 1, 1994, Second Lease Amendment dated as of March 1, 1996 and Third Lease Amendment dated as of July 22, 1996* 10.13 Lease Agreement between Big Dog Holdings, Inc. and the Eldred Family Trust & Jason Eldred Trust dated as of April 4, 1996* 10.14 Form of Indemnification Agreement* 11.1 Statement regarding computation of per share earnings (loss)* 21.1 List of Subsidiaries of Big Dog Holdings, Inc.* 23.1 Consent of Kimball & Weiner LLP (included in Opinion filed in Exhibit 5.1) 23.2 Consent of Deloitte & Touche LLP 24.1 Power of Attorney (included in signature page)* 27.1 Financial data schedule* 99.1 Consent of Robert Schnell 99.2 Consent of Steven C. Good 99.3 Consent of David J. Walsh 99.4 Consent of NPD Group
- ------- * Previously Filed EX-3.1(A) 2 CERT. OF CORRECTION EXHIBIT 3.1a CERTIFICATE OF CORRECTION FILED TO CORRECT A CERTAIN ERROR IN THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BIG DOG HOLDINGS, INC. FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE ON AUGUST 4, 1997 Big Dog Holdings, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Big Dog Holdings, Inc. 2. That an Amended and Restated Certificate of Incorporation of Big Dog Holdings, Inc. was filed by the Secretary of State of Delaware on August 4, 1997 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Amended and Restated Certificate to be corrected is as follows: the expiration dates of the classes of directors is to be corrected. 4. Article Seventh(b) of the Amended and Restated Certificate is corrected to read as follows: (b) The Directors shall be classified with respect to the time for which they severally hold office into three classes designated Class I, Class II and Class III, as nearly equal in number as possible, as shall be provided in the manner specified in the Bylaws of the Corporation. Each Director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the Director was elected; provided, however, that each initial Director in Class I shall hold office until the annual meeting of stockholders in 2000, each initial Director in Class II shall hold office until the annual meeting of stockholders in 1999, and each initial Director in Class III shall hold office until the annual meeting of stockholders in 1998. Notwithstanding the foregoing provisions of this Article, each Director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. IN WITNESS WHEREOF, said Big Dog Holdings, Inc. has caused this Certificate to be signed by Anthony J. Wall, its Executive Vice President and General Counsel on this 15th day of September, 1997. /s/ ANTHONY J. WALL ---------------------------------------- Anthony J. Wall Executive Vice President and General Counsel EX-4.2 3 EXHIBIT 4.2 - SPECIMEN STOCK CERTIFICATE NUMBER [LOGO] SHARES COMMON STOCK BIG DOGS COMMON STOCK INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS CUSIP 089128 10 2 This Certifies that is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF - --------------------------BIG DOG HOLDINGS, INC.-------------------------------- transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate property endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [SEAL] BIG DOG HOLDINGS, INC. CORPORATE 1993 DELAWARE SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: U.S. STOCK TRANSFER CORPORATION TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ......Custodian....... TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act.......................... tenants in common (State) UNIF TRF MIN ACT - ......Custodian (until age.......) (Cust) ............under Uniform Transfers (Minor) to Minors Act...................... (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED,___________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - ------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ----------------------------------------------------------------------Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated____________________ X___________________________________________________ X___________________________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND NOTICE: WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By____________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-5.1 4 EXHIBIT 5.1 - OPINION OF KIMBALL & WEINER LLP [LETTERHEAD] September 15, 1997 Big Dog Holdings, Inc. 121 Gray Avenue Santa Barbara, California 93101 Ladies and Gentlemen: We have acted as special counsel to Big Dog Holdings, Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing of the Registration Statement (File No. 333-33027) of the Company on Form S-1 (as amended, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), relating to the public offering (the "Offering") by the Company and the Selling Stockholders identified as such in the Registration Statement of an aggregate of 4,025,000 shares (including 525,000 shares subject to an over-allotment option) of Common Stock, par value $.01 per share of the Company ("Common Stock"). As such counsel, we have participated in the preparation of the Registration Statement, including the Prospectus contained therein (the "Prospectus"), and have reviewed certain corporate proceedings. In addition, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records and other documents, and such certificates or comparable documents of public officials and of officers and representatives, as we have deemed relevant and necessary as a basis for the opinion hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies. As to all questions of fact material to this opinion that have not been independently established, we have relied upon statements and certificates of officers and representatives of the Company. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that the shares of Common Stock to be registered for sale by the Company and the Selling Stockholders under the Registration Statement have been duly authorized, and the shares to be sold by the Selling Stockholders are, and the shares to be sold by the Company, when issued and paid for as contemplated by the Prospectus, will be, validly issued, fully paid and nonassessable. Big Dog Holdings, Inc. September 15, 1997 Page 2 The opinion expressed herein is limited to the corporate laws of the State of Delaware, and we express no opinion as to the effect on the matters covered by this letter of the laws of any other jurisdiction. The opinion expressed herein is rendered solely for your benefit in connection with the transactions described herein. This opinion may not be used or relied upon by any other person, nor may this letter or any copies thereof be furnished to a third party, filed with a governmental agency, quoted, cited or otherwise referred to without our prior written consent. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and consent to the use of our name under the heading "Legal Matters" in the Prospectus. Very truly yours, KIMBALL & WEINER LLP EX-10.10 5 EXHIBIT 10.10 -AMENDED & RESTATED 1997 PERF. AWARD BIG DOG HOLDINGS, INC. AMENDED AND RESTATED 1997 PERFORMANCE AWARD PLAN TABLE OF CONTENTS Page 1. THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Administration and Authorization; Power and Procedure . . . . 1 1.2.1 Committee . . . . . . . . . . . . . . . . . . . . . 1 1.2.2 Plan Awards; Interpretation; Powers of Committee . . . . . . . . . . . . . . . . . . . . . 1 1.2.3 Binding Determinations. . . . . . . . . . . . . . . 2 1.2.4 Reliance on Experts . . . . . . . . . . . . . . . . 2 1.2.5 Delegation. . . . . . . . . . . . . . . . . . . . . 2 1.3 Participation . . . . . . . . . . . . . . . . . . . . . . . . 3 1.4 Shares Available for Awards; Share Limits . . . . . . . . . . 3 1.4.1 Shares Available. . . . . . . . . . . . . . . . . . 3 1.4.2 Share Limits. . . . . . . . . . . . . . . . . . . . 3 1.4.3 Share Reservation; Replenishment and Reissue of Unvested Awards . . . . . . . . . . . . 3 1.5 Grant of Awards . . . . . . . . . . . . . . . . . . . . . . . 4 1.6 Award Period. . . . . . . . . . . . . . . . . . . . . . . . . 4 1.7 Limitations on Exercise and Vesting of Awards . . . . . . . . 4 1.7.1 Provisions for Exercise . . . . . . . . . . . . . . 4 1.7.2 Procedure . . . . . . . . . . . . . . . . . . . . . 4 1.7.3 Fractional Shares/Minimum Issue . . . . . . . . . . 4 1.8 Acceptance of Notes to Finance Exercise . . . . . . . . . . . 4 1.8.1 Principal . . . . . . . . . . . . . . . . . . . . . 5 1.8.2 Term. . . . . . . . . . . . . . . . . . . . . . . . 5 1.8.3 Recourse; Security. . . . . . . . . . . . . . . . . 5 1.8.4 Termination of Employment . . . . . . . . . . . . . 5 1.9 No Transferability; Limited Exception to Transfer Restrictions. . . . . . . . . . . . . . . . . . . . 5 1.9.1 Limit On Exercise and Transfer. . . . . . . . . . . 5 1.9.2 Exceptions. . . . . . . . . . . . . . . . . . . . . 6 1.9.3 Further Exceptions to Limits On Transfer. . . . . . 6 2. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Option Price. . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2.1 Pricing Limits. . . . . . . . . . . . . . . . . . . 7 2.2.2 Payment Provisions. . . . . . . . . . . . . . . . . 7 2.3 Limitations on Grant and Terms of Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . 7 2.3.1 $100,000 Limit. . . . . . . . . . . . . . . . . . . 7 2.3.2 Option Period . . . . . . . . . . . . . . . . . . . 8 i 2.3.3 Other Code Limits . . . . . . . . . . . . . . . . . 8 2.4 Limits on 10% Holders . . . . . . . . . . . . . . . . . . . . 8 2.5 Option Repricing/Cancellation and Regrant/Waiver of Restrictions. . . . . . . . . . . . . . . . . . . . 8 2.6 Effects of Termination of Employment; Termination of Subisidiary Status; Discretionary Provisions. . . . . . . . . 8 2.6.1 Options - Resignation or Dismissal. . . . . . . . . 9 2.6.2 Options - Death or Disability . . . . . . . . . . . 9 2.6.3 Options - Retirement. . . . . . . . . . . . . . . . 9 2.6.4 Certain SARs. . . . . . . . . . . . . . . . . . . . 10 2.6.5 Other Awards. . . . . . . . . . . . . . . . . . . . 10 2.6.6 Committee Discretion. . . . . . . . . . . . . . . . 10 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations . . . . . . . . . . . 10 3. STOCK APPRECIATION RIGHTS (INCLUDING LIMITED STOCK APPRECIATION RIGHTS). . . . . . 10 3.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Exercise of Stock Appreciation Rights . . . . . . . . . . . . 11 3.2.1 Exercisability. . . . . . . . . . . . . . . . . . . 11 3.2.2 Effect on Available Shares. . . . . . . . . . . . . 11 3.2.3 Stand-Alone SARs. . . . . . . . . . . . . . . . . . 11 3.2.4 Proportionate Reduction . . . . . . . . . . . . . . 11 3.3 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3.1 Amount. . . . . . . . . . . . . . . . . . . . . . . 11 3.3.2 Form of Payment . . . . . . . . . . . . . . . . . . 12 3.4 Limited Stock Appreciation Rights . . . . . . . . . . . . . . 12 4. RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . . . 12 4.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . 13 4.2.1 Pre-Vesting Restraints. . . . . . . . . . . . . . . 13 4.2.2 Dividend and Voting Rights. . . . . . . . . . . . . 13 4.2.3 Cash Payments . . . . . . . . . . . . . . . . . . . 13 4.3 Return to the Corporation . . . . . . . . . . . . . . . . . . 13 5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES . . . . . . . . . . . . 13 5.1 Grants of Performance Share Awards. . . . . . . . . . . . . . 13 5.2.1 Eligible Class. . . . . . . . . . . . . . . . . . . 14 5.2.2 Maximum Award . . . . . . . . . . . . . . . . . . . 14 5.2.3 Committee Certification . . . . . . . . . . . . . . 15 5.2.4 Terms and Conditions of Awards. . . . . . . . . . . 15 5.2.5 Stock Payout Features . . . . . . . . . . . . . . . 15 5.3 Grants of Stock Bonuses . . . . . . . . . . . . . . . . . . . 15 5.4 Deferred Payments . . . . . . . . . . . . . . . . . . . . . . 15 5.5 Cash Bonus Awards . . . . . . . . . . . . . . . . . . . . . . 15 5.5.1 Performance Goals . . . . . . . . . . . . . . . . . 15 5.5.2 Maximum Annual Amount . . . . . . . . . . . . . . . 16 5.5.3 Payment in Restricted Stock . . . . . . . . . . . . 16 ii 6. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 16 6.1 Rights of Eligible Persons, Participants and Beneficiaries . . . . . . . . . . . . . . . . . . . 16 6.1.1 Employment Status . . . . . . . . . . . . . . . . . 16 6.1.2 No Employment Contract. . . . . . . . . . . . . . . 16 6.1.3 Plan Not Funded . . . . . . . . . . . . . . . . . . 16 6.2 Adjustments; Acceleration . . . . . . . . . . . . . . . . . . 17 6.2.1 Adjustments . . . . . . . . . . . . . . . . . . . . 17 6.2.2 Acceleration of Awards Upon Change in Control . . . . . . . . . . . . . . . . . . . . . . 18 6.2.3 Possible Early Termination of Accelerated Awards . . . . . . . . . . . . . . . . . . . . . . 18 6.2.4 Golden Parachute Limitations. . . . . . . . . . . . 19 6.3 Effect of Termination of Employment . . . . . . . . . . . . . 19 6.4 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . 19 6.5 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . 19 6.5.1 Provision for Tax Withholding . . . . . . . . . . . 19 6.5.2 Tax Loans . . . . . . . . . . . . . . . . . . . . . 20 6.6 Plan Amendment, Termination and Suspension. . . . . . . . . . 20 6.6.1 Board Authorization . . . . . . . . . . . . . . . . 20 6.6.2 Stockholder Approval. . . . . . . . . . . . . . . . 20 6.6.3 Amendments to Awards. . . . . . . . . . . . . . . . 20 6.6.4 Limitations on Amendments to Plan and Awards . . . 20 6.7 Privileges of Stock Ownership . . . . . . . . . . . . . . . . 21 6.8 Effective Date of the Plan. . . . . . . . . . . . . . . . . . 21 6.9 Term of the Plan. . . . . . . . . . . . . . . . . . . . . . . 21 6.10 Governing Law/Construction/Severability . . . . . . . . . . . 21 6.10.1 Choice of Law . . . . . . . . . . . . . . . . . . . 21 6.10.2 Severability . . . . . . . . . . . . . . . . . . . 21 6.10.3 Plan Construction . . . . . . . . . . . . . . . . . 21 6.11 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.12 Effect of Change of Subsidiary Status . . . . . . . . . . . . 22 6.13 Plan Not Exclusive. . . . . . . . . . . . . . . . . . . . . . 22 7. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8. NON-EMPLOYEE DIRECTOR OPTIONS . . . . . . . . . . . . . . . . . . 28 8.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . 28 8.2 Annual Option Grants. . . . . . . . . . . . . . . . . . . . . 28 8.2.1 Time of Initial Award . . . . . . . . . . . . . . . 28 8.2.2 Subsequent Annual Awards. . . . . . . . . . . . . . 28 8.2.3 Maximum Number of Shares. . . . . . . . . . . . . . 28 8.3 Option Price. . . . . . . . . . . . . . . . . . . . . . . . . 28 8.4 Option Period and Exercisability. . . . . . . . . . . . . . . 29 8.5 Termination of Directorship . . . . . . . . . . . . . . . . . 29 8.6 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.7 Acceleration Upon a Change in Control Event . . . . . . . . . 29 iii BIG DOG HOLDINGS, INC. AMENDED AND RESTATED 1997 PERFORMANCE AWARD PLAN 1. THE PLAN 1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company and the interests of its stockholders by attracting, motivating, retaining and rewarding directors, officers, employees and others eligible persons with awards and incentives for high levels of individual performance and improved financial performance of the Company and to attract, motivate and retain experienced and knowledgeable independent directors through the benefits provided under Section 8. "CORPORATION" means Big Dog Holdings, Inc. and "COMPANY" means the Corporation and its Subsidiaries, collectively. These terms and other capitalized terms are defined in Section 7. 1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE. 1.2.1 COMMITTEE. This Plan will be administered by and all Awards to Eligible Employees will be authorized by the Committee. Action of the Committee with respect to the administration of this Plan will be taken pursuant to a majority vote or by written consent of its members. 1.2.2 PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the express provisions of this Plan, the Committee will have the authority to: (a) determine eligible the particular Eligible Employees who will receive Awards; (b) grant Awards to Eligible Employees, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards will become exercisable or will vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; 1 (c) approve the forms of Award Agreements (which need not be identical either as to type of Award or among Participants); (d) construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Employee Participants under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (e) cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Employees, subject to any required consent under Section 6.6; (f) accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards under Section 1.6; and (g) make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. but the provisions of Section 8 relating to Non-Employee Director Awards will be automatic and, to the maximum extent possible, self-effectuating. 1.2.3 BINDING DETERMINATIONS. Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan will be within the absolute discretion of that entity or body and will be conclusive and binding upon all persons. No member of the Board or Committee, or officer of the Corporation or any Subsidiary, will be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their absolute discretion in matters within their authority related to this Plan. 1.2.4 RELIANCE ON EXPERTS. In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No 2 director, officer or agent of the Company will be liable for any such action or determination taken or made or omitted in good faith. 1.2.5 DELEGATION. The Committee may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the Company. 1.3 PARTICIPATION. Awards may be granted by the Committee only to those persons that the Committee determines to be Eligible Persons. An Eligible Person who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee so determines. 1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS. 1.4.1 SHARES AVAILABLE. Subject to the provisions of Section 6.2, the capital stock that may be delivered under this Plan will be shares of the Corporation's authorized but unissued Common Stock and any shares of its Common Stock held as treasury shares. The shares may be delivered for any lawful consideration. 1.4.2 SHARE LIMITS. The maximum number of shares of Common Stock that may be delivered pursuant to Awards granted to Eligible Persons under this Plan will not exceed one million (1,000,000) shares (the "SHARE LIMIT"). The maximum number of shares subject to those options and Stock Appreciation Rights that are granted during any calendar year to any individual will be limited to two hundred thousand (200,000) and the maximum individual limit on the number of shares in the aggregate subject to all Awards that during any calendar year are granted under this Plan will be two hundred fifty thousand (250,000). Each of the foregoing numerical limits will be subject to adjustment as contemplated by this Section 1.4 and Section 6.2. 1.4.3 SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS. No Award may be granted under this Plan unless, on the date of grant, the sum of (a) the maximum number of shares issuable at any time pursuant to such Award, plus (b) the number of shares that have previously been issued pursuant to Awards granted under this Plan, other than reacquired shares available for reissue consistent with any applicable legal limitations, plus (c) the maximum number of shares that may be issued at any time after such date of grant pursuant to Awards that are outstanding on such date, does not exceed the Share Limit. Shares that are subject to or underlie Awards that expire or for any reason are canceled or terminated, are 3 forfeited, fail to vest, or for any other reason are not paid or delivered under this Plan, as well as reacquired shares, will again, except to the extent prohibited by law, be available for subsequent Awards under the Plan. Except as limited by law, if an Award is or may be settled only in cash, such Award need not be counted against any of the limits under this Section 1.4. 1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the Committee will determine the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award and, in the case of performance share awards, in addition to matters addressed in Section 1.2.2, the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the performance share award. Each Award will be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. 1.6 AWARD PERIOD. Any Option, SAR, warrant or similar right shall expire and any other Award shall either vest or be forfeited not more than 10 years after the date of grant; provided, however, that any payment of cash or delivery of stock pursuant to an Award may be delayed until a future date if specifically authorized by the Committee in writing. 1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS. 1.7.1 PROVISIONS FOR EXERCISE. Unless the Committee otherwise expressly provides, no Award will be exercisable or will vest until at least six months after the initial Award Date, and once exercisable an Award will remain exercisable until the expiration or earlier termination of the Award. 1.7.2 PROCEDURE. Any exercisable Award will be deemed to be exercised when the Corporation receives written notice of such exercise from the Participant, together with any required payment made in accordance with Section 2.2.2 or 8.4, as the case may be. 1.7.3 FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests will be disregarded, but may be accumulated. The Committee, however, may determine in the case of Eligible Persons that cash, other securities, or other property will be paid or transferred in lieu of any fractional share interests. No fewer than 100 shares may be purchased on exercise of any Award at one time unless the number 4 purchased is the total number at the time available for purchase under the Award. 1.8 ACCEPTANCE OF NOTES TO FINANCE EXERCISE. The Corporation may, with the Committee's express approval, accept one or more notes from any Eligible Person in connection with the exercise or receipt of any outstanding Award; but any such note will be subject to the following terms and conditions: 1.8.1 PRINCIPAL. The principal of the note will not exceed the amount required to be paid to the Corporation upon the exercise or receipt of one or more Awards under the Plan and the note will be delivered directly to the Corporation in consideration of such exercise or receipt. 1.8.2 TERM. The initial term of the note will be determined by the Committee; but the term of the note, including extensions, will not exceed a period of five years. 1.8.3 RECOURSE; SECURITY. The note will provide for full recourse to the Participant and will bear interest at a rate determined by the Committee but not less than the interest rate necessary to avoid the imputation of interest under the Code. If required by the Committee or by applicable law, the note will be secured by a pledge of any shares or rights financed thereby in compliance with applicable law. The terms, repayment provisions, and collateral release provisions of the note and the pledge securing the note will conform with applicable rules and regulations of the Federal Reserve Board as then in effect. 1.8.4 TERMINATION OF EMPLOYMENT. If the employment of the Participant terminates, the unpaid principal balance of the note will become due and payable on the 10th business day after such termination; but if a sale of such shares would cause such Participant to incur liability under Section 16(b) of the Exchange Act, the unpaid balance will become due and payable on the 10th business day after the first day on which a sale of such shares could have been made without incurring such liability assuming for these purposes that there are no other transactions (or deemed transactions in securities of this Corporation) by the Participant after such termination. 1.9 NO TRANSFERABILITY; LIMITED EXCEPTION TO TRANSFER RESTRICTIONS. 5 1.9.1 LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly provided in (or pursuant to) this Section 1.9, by applicable law and by the Award Agreement, as the same may be amended, (a) all Awards are non-transferable and will not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; Awards will be exercised only by the Participant; and (b) amounts payable or shares issuable pursuant to an Award will be delivered only to (or for the account of) the Participant. 1.9.2 EXCEPTIONS. The Committee may permit Awards to be exercised by and paid only to certain persons or entities related to the Participant pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer will be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes and without consideration (other than nominal consideration). ISOs and Restricted Stock Awards, however, will be subject to any and all additional transfer restrictions under the Code. 1.9.3 FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. The exercise and transfer restrictions in Section 1.9.1 will not apply to: (a) transfers to the Corporation, (b) the designation of a beneficiary to receive benefits if the Participant dies or, if the Participant has died, transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (c) transfers pursuant to a QDRO if approved or ratified by the Committee, (d) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by the Participant's legal representative, or (e) the authorization by the Committee of "cashless exercise" procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. 6 2. OPTIONS 2.1 GRANTS. One or more Options may be granted under this Section to any Eligible Person. Each Option granted will be designated in the applicable Award Agreement, by the Committee as either an Incentive Stock Option, subject to Section 2.3, or a Non-Qualified Stock Option. 2.2 OPTION PRICE. 2.2.1 PRICING LIMITS. The purchase price per share of the Common Stock covered by each Option will be determined by the Committee at the time of the Award, but in the case of Incentive Stock Options will not be less than 100% (110% in the case of a Participant described in Section 2.4) of the Fair Market Value of the Common Stock on the date of grant and in all cases will not be less than the par value thereof. 2.2.2 PAYMENT PROVISIONS. The purchase price of any shares purchased on exercise of an Option granted under this Section will be paid in full at the time of each purchase in one or a combination of the following methods: (a) in cash or by electronic funds transfer; (b) by certified or cashier's check payable to the order of the Corporation; (c) if authorized by the Committee or specified in the applicable Award Agreement, by a promissory note of the Participant consistent with the requirements of Section 1.8; (d) by notice and third party payment in such manner as may be authorized by the Committee; or (e) by the delivery of shares of Common Stock of the Corporation already owned by the Participant, but the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by delivering such shares, and any shares delivered that were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option will be valued at their Fair Market Value on the date of exercise. Without limiting the generality of the foregoing, the Committee may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Corporation the amount of sale proceeds necessary to pay the exercise price and, unless otherwise prohibited by the Committee or applicable law, any applicable tax withholding under Section 6.5. The Corporation will not be obligated to deliver certificates for the 7 shares unless and until it receives full payment of the exercise price therefor and any related withholding obligations have been satisfied. 2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS. 2.3.1 $100,000 LIMIT. To the extent that the aggregate "FAIR MARKET VALUE" of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company or any parent corporation, such options will be treated as Nonqualified Stock Options. For this purpose, the "FAIR MARKET VALUE" of the stock subject to options will be determined as of the date the options were awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options will be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. 2.3.2 OPTION PERIOD. Subject to Section 1.6, each Option and all rights thereunder will expire no later than 10 years after the Award Date. 2.3.3 OTHER CODE LIMITS. Incentive Stock Options may only be granted to Eligible Employees of the Corporation or a Subsidiary that satisfies the other eligibility requirements of the Code. There will be imposed in any Award Agreement relating to Incentive Stock Options such other terms and conditions as from time to time are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. 2.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to any person who, at the time the Option is granted, owns (or is deemed to own under Section 424(d) of the Code) shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 8 2.5 OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. Subject to Section 1.4 and Section 6.6 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Person any adjustment in the exercise or purchase price, the vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Section by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result among other changes in an exercise or purchase price that is higher or lower than the exercise or purchase price of the original or prior Award, provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. 2.6 EFFECTS OF TERMINATION OF EMPLOYMENT; TERMINATION OF SUBSIDIARY STATUS; DISCRETIONARY PROVISIONS. 2.6.1 OPTIONS - RESIGNATION OR DISMISSAL. If the Participant's employment by (or other service specified in the Award Agreement to) the Company terminates for any reason (the date of such termination being referred to as the "SEVERANCE DATE") other than Retirement, Total Disability or death, or "FOR CAUSE" (as determined in the discretion of the Committee), the Participant will have, unless otherwise provided in the Award Agreement and subject to earlier termination pursuant to or as contemplated by Section 1.6 or 6.2, three months after the Severance Date to exercise any Option to the extent it has become exercisable on the Severance Date. In the case of a termination "for cause", the Option will terminate on the Severance Date. In other cases, the Option, to the extent not exercisable on the Severance Date, will terminate. 2.6.2 OPTIONS - DEATH OR DISABILITY. If the Participant's employment by (or specified service to) the Company terminates as a result of Total Disability or death, the Participant, Participant's Personal Representative or the Participant's Beneficiary, as the case may be, will have, unless otherwise provided in the Award Agreement and subject to earlier termination pursuant to or as contemplated by Section 1.6 or 6.2, until 12 months after the Severance Date to exercise any Option to the extent it will have become exercisable by the Severance Date. Any Option to the extent not exercisable on the Severance Date will terminate. 9 2.6.3 OPTIONS - RETIREMENT. If the Participant's employment by (or specified service to) the Company terminates as a result of Retirement, the Participant, Participant's Personal Representative or the Participant's Beneficiary, as the case may be, will have, unless otherwise provided in the Award Agreement and subject to earlier termination pursuant to or as contemplated by Section 1.6 or 6.2, until 12 months after the Severance Date to exercise any Nonqualified Stock Option (three months after the Severance Date in the case of an Incentive Stock Option) to the extent it will have become exercisable by the Severance Date. The Option, to the extent not exercisable on the Severance Date, will terminate. 2.6.4 CERTAIN SARS. Any SAR granted concurrently or in tandem with an Option will have the same post-termination provisions and exercisability periods as the Option to which it relates, unless the Committee otherwise provides. 2.6.5 OTHER AWARDS. The Committee will establish in respect of each other Award granted hereunder the Participant's rights and benefits (if any) if the Participant's employment is terminated and in so doing may make distinctions based upon the cause of termination and the nature of the Award. 2.6.6 COMMITTEE DISCRETION. Notwithstanding the foregoing provisions of this Section 2.6, in the event of, or in anticipation of, a termination of employment with the Company for any reason, other than discharge for cause, the Committee may increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, or, subject to the provisions of Section 1.6, extend the exercisability period upon such terms as the Committee determines and expressly sets forth in or by amendment to the Award Agreement. 2.7 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options and Stock Appreciation Rights may be granted to Eligible Persons under this Plan in substitution for employee stock options granted by other entities to persons who are or who will become Eligible Persons in respect of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the employing entity. 10 3. STOCK APPRECIATION RIGHTS (INCLUDING LIMITED STOCK APPRECIATION RIGHTS) 3.1 GRANTS. The Committee may grant to any Eligible Person Stock Appreciation Rights either concurrently with the grant of another Award or in respect of an outstanding Award, in whole or in part, or independently of any other Award. Any Stock Appreciation Right granted in connection with an Incentive Stock Option will contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder, unless the holder otherwise agrees. 3.2 EXERCISE OF STOCK APPRECIATION RIGHTS. 3.2.1 EXERCISABILITY. Unless the Award Agreement or the Committee otherwise provides, a Stock Appreciation Right related to another Award will be exercisable at such time or times, and to the extent, that the related Award will be exercisable. 3.2.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock Appreciation Right is exercised, only the actual number of delivered shares of Common Stock will be charged against the maximum amount of Common Stock that may be delivered pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant will, however, be reduced by the number of underlying shares as to which the exercise related, unless the Award Agreement otherwise provides. 3.2.3 STAND-ALONE SARS. A Stock Appreciation Right granted independently of any other Award will be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.2.4 PROPORTIONATE REDUCTION If an SAR extends to less than all the shares covered by the related Award and if a portion of the related Award is thereafter exercised, the number of shares subject to the unexercised SAR shall be reduced only if and to the extent that the remaining number of shares covered by such related Award is less than the remaining number of shares subject to such SAR. 3.3 PAYMENT. 11 3.3.1 AMOUNT. Unless the Committee otherwise provides, upon exercise of a Stock Appreciation Right and the attendant surrender of an exercisable portion of any related Award, the Participant will be entitled to receive subject to Section 6.5 payment of an amount determined by multiplying (a) the difference obtained by subtracting the exercise price per share of Common Stock under the related Award (if applicable) or the initial share value specified in the Award from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (b) the number of shares with respect to which the Stock Appreciation Right has been exercised. 3.3.2 FORM OF PAYMENT. The Committee, in its sole discretion, will determine the form in which payment will be made of the amount determined under Section 3.3.1 above, either solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, but the Committee will have determined that such exercise and payment are consistent with applicable law. If the Committee permits the Participant to elect to receive cash or shares (or a combination thereof) on such exercise, any such election will be subject to such conditions as the Committee may impose. 3.4 LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant to any Eligible Person Stock Appreciation Rights exercisable only upon or in respect of a change in control or any other specified event ("LIMITED SARS") and such Limited SARs may relate to or operate in tandem or combination with or substitution for Options, other SARs or other Awards (or any combination thereof), and may be payable in cash or shares based on the spread between the base price of the SAR and a price based upon or equal to the Fair Market Value of the Shares during a specified period or at a specified time within a specified period before, after or including the date of such event. 4. RESTRICTED STOCK AWARDS 4.1 GRANTS. The Committee may grant one or more Restricted Stock Awards to any Eligible Person. Each Restricted Stock Award Agreement will specify the number of shares of Common Stock to be issued to the Participant, the 12 date of such issuance, the consideration for such shares (but not less than the minimum lawful consideration under applicable state law) by the Participant, the extent (if any) to which and the time (if ever) at which the Participant will be entitled to dividends, voting and other rights in respect of the shares prior to vesting, and the restrictions (which may be based on performance criteria, passage of time or other factors or any combination thereof) imposed on such shares and the conditions of release or lapse of such restrictions. Such restrictions will not lapse earlier than six months after the Award Date, except to the extent the Committee may otherwise provide. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions ("RESTRICTED SHARES") will bear a legend making appropriate reference to the restrictions imposed hereunder and will be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares have lapsed and the shares have vested in accordance with the provisions of the Award and Section 1.7. Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 RESTRICTIONS. 4.2.1 PRE-VESTING RESTRAINTS. Except as provided in Sections 4.1 and 1.9, restricted shares comprising any Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until the restrictions on such shares have lapsed and the shares have become vested. 4.2.2 DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the applicable Award Agreement, a Participant receiving a Restricted Stock Award will be entitled to cash dividend and voting rights for all shares issued even though they are not vested, but such rights will terminate immediately as to any Restricted Shares which cease to be eligible for vesting. 4.2.3 CASH PAYMENTS. If the Participant has been paid or received cash (including any dividends) in connection with the Restricted Stock Award, the Award Agreement will specify whether and to what extent such cash will be returned (with or without an earnings factor) as to any restricted shares that cease to be eligible for vesting. 4.3 RETURN TO THE CORPORATION. Unless the Committee otherwise expressly provides, Restricted Shares that remain subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that 13 have not been satisfied by the time specified in the applicable Award Agreement will not vest and will be returned to the Corporation in such manner and on such terms as the Committee provides. 5. PERFORMANCE SHARE AWARDS AND STOCK BONUSES 5.1 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may grant Performance Share Awards to Eligible Employees based upon such factors as the Committee deems relevant in light of the specific type and terms of the award. An Award Agreement will specify the maximum number of shares of Common Stock (if any) subject to the Performance Share Award, the consideration (but not less than the minimum lawful consideration) to be paid for any such shares as may be issuable to the Participant, the duration of the Award and the conditions upon which delivery of any shares or cash to the Participant will be based. The amount of cash or shares or other property that may be deliverable pursuant to such Award will be based upon the degree of attainment over a specified period of not more than 10 years (a "PERFORMANCE CYCLE") as may be established by the Committee of such measure(s) of the performance of the Company (or any part thereof) or the Participant as may be established by the Committee. The Committee may provide for full or partial credit, prior to completion of such performance cycle or the attainment of the performance achievement specified in the Award, in the event of the Participant's death, Retirement, or Total Disability, a Change in Control Event or in such other circumstances as the Committee (consistent with Section 6.10.3(b), if applicable) may determine. 5.2 SPECIAL PERFORMANCE-BASED SHARE AWARDS. Options or SAR's granted with an exercise price not less than Fair Market Value at the applicable date of grant for Section 162(m) purposes to Eligible Employees which otherwise satisfy the conditions to deductibility under Section 162(m)of the Code are deemed "Qualifying Awards". Without limiting the generality of the foregoing, and in addition to Qualifying Awards granted under other provisions of this Plan, other performance-based awards within the meaning of Section 162(m) of the Code ("PERFORMANCE-BASED AWARDS"), whether in the form of restricted stock, performance stock, phantom stock or other rights, the vesting of which depends on the performance of the Company on a consolidated, segment, subsidiary, or division basis, with reference to revenue growths, net earnings (before or after taxes or before or after taxes, interest, depreciation, and/or amortization), cash flow, return on equity or on assets or on net investment, or cost containment or reduction, or any combination thereof (the "BUSINESS CRITERIA") relative to preestablished performance goals, may be granted under this Plan. To the extent so defined, these terms are used as applied under generally accepted accounting principles and in the Company's financial reporting. The applicable business criterion or criteria and the specific performance goals must be approved by the Committee in advance of applicable deadlines under the Code and while the performance relating to such goals remains substantially uncertain. The applicable performance measurement period may be not less than one (except as provided in Section 1.6) nor more than 10 years. 14 Other types of performance and non-performance awards may also be granted under the other provisions of this Plan. The following provisions relate to all Performance-Based Awards (other than Qualifying Awards) granted under this Plan; 5.2.1 ELIGIBLE CLASS. The eligible class of persons for Awards under this Section is executive officers of the Corporation. 5.2.2 MAXIMUM AWARD. Subject to Section 1.4.2, in no event will grants in any calendar year to any one individual under this Section 5.2 relate to more than two hundred fifty thousand (250,000) shares or, (if payable solely in cash) a cash amount of more than one million dollars ($1,000,000). 5.2.3 COMMITTEE CERTIFICATION. To the extent required by Section 162(m) before any Performance-Based Award under this Section 5.2 is paid, the Committee must certify that the material terms of the Performance- Based Award were satisfied. 5.2.4 TERMS AND CONDITIONS OF AWARDS. The Committee will have discretion to determine the restrictions or other limitations of the individual Awards under this Section 5.2 (including the authority to reduce Awards, payouts or vesting or to pay no Awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise). 5.2.5 STOCK PAYOUT FEATURES. In lieu of cash payment of an Award, the Committee may require or allow all or a portion of the Award to be paid in the form of stock, Restricted Shares, an Option, or another Award. 5.2.6 ADJUSTMENTS FOR MATERIAL CHANGES. Performance goals or other features of an Award under this Section 5.2 may provide that they (a) shall be adjusted to reflect a change in corporate capitalization, a corporate transaction (such as a reorganization, combination, separation, or merger) or a complete or partial corporate liquidation, or (b) shall be calculated either without regard for or to reflect any change in accounting policies or practices affecting the Company and/or the business criteria or performance goals or targets, or (c) shall be adjusted for any other circumstance or event, or (d) any combination of (a) through (c), but only to the extent in each case that such adjustment or determination in respect of Performance-Based Awards would be consistent with the requirements of Section 162(m) to qualify as performance-based compensation. 5.3 GRANTS OF STOCK BONUSES. The Committee may grant a Stock Bonus to any Eligible Person to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Committee. The number of shares so awarded will be determined by the Committee. The Award may be granted independently or in lieu of a cash bonus. 5.4 DEFERRED PAYMENTS. The Committee may authorize for the benefit of any Eligible Person the deferral of any payment of cash or shares that may become due or of cash otherwise payable under this Plan, and provide for accredited benefits thereon based upon such deferment, at the election or at the request of such Participant, subject to the other terms of this Plan. 15 Such deferral will be subject to such further conditions, restrictions or requirements as the Committee may impose, subject to any then vested rights of Participants. 5.5 CASH BONUS AWARDS. 5.5.1 PERFORMANCE GOALS. The Committee may establish a program of annual incentive awards that are payable in cash to Eligible Persons based upon the extent to which performance goals are met during the performance period. The performance goals may depend upon the performance of the Company on a consolidated, subsidiary division basis with reference to revenues, net earnings (before or after interest, taxes, depreciation, or amortization), cash flow, return on equity or on assets or net investment, cost containment or reduction, or achievement of strategic goals (or any combination of such factors). In addition, the award may depend upon the Eligible Employee's individual performance. 5.5.2 PAYMENT IN RESTRICTED STOCK. In lieu of cash payment of an Award, the Committee may require or allow all or a portion of the Award to be paid in the form of stock, Restricted Stock, an Option or other Award. 6. OTHER PROVISIONS 6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES. 6.1.1 EMPLOYMENT STATUS. Status as an Eligible Person will not be construed as a commitment that any Award will be made under this Plan to an Eligible Person or to Eligible Persons generally. 6.1.2 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in any other documents related to this Plan or to any Award) will confer upon any Eligible Person or other Participant any right to continue in the employ or other service of the Company or constitute any contract or agreement of employment or other service, nor will interfere in any way with the right of the Company to otherwise change such person's compensation or other benefits or to terminate the employment of such person, with or without cause, but nothing contained in this Plan or any related document will adversely affect 16 any independent contractual right of such person without the Participant's consent. 6.1.3 PLAN NOT FUNDED. Awards payable under this Plan will be payable in shares or from the general assets of the Corporation, and (except as provided in Section 1.4.3) no special or separate reserve, fund or deposit will be made to assure payment of such Awards. No Participant, Beneficiary or other person will have any right, title or interest in any fund or in any specific asset (including shares of Common Stock, except as expressly otherwise provided) of the Company by reason of any Award hereunder. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan will create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive payment pursuant to any Award hereunder, such right will be no greater than the right of any unsecured general creditor of the Company. 6.2 ADJUSTMENTS; ACCELERATION. 6.2.1 ADJUSTMENTS. The following provisions will apply if any extraordinary dividend or other extraordinary distribution occurs in respect of the Common Stock (whether in the form of cash, Common Stock, other securities, or other property), or any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, reorganization, merger, combination, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Corporation, or any similar, unusual or extraordinary corporate transaction (or event in respect of the Common Stock) or a sale of substantially all the assets of the Corporation as an entirety occurs. The Committee will, in such manner and to such extent (if any) as it deems appropriate and equitable (a) proportionately adjust any or all of (i) the number and type of shares of Common Stock (or other securities) that thereafter may be made the subject of Awards (including the specific maxima and numbers of shares set forth elsewhere in this Plan), (ii) the number, amount and type of shares of Common Stock (or other securities or property) subject to any or all outstanding Awards,(iii) the grant, purchase, or exercise price 17 of any or all outstanding Awards, (iv) the securities, cash or other property deliverable upon exercise of any outstanding Awards, or (v) the performance standards appropriate to any outstanding Awards, or (b) in the case of an extraordinary dividend or other distribution, recapitalization, reclassification, merger, reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a cash payment or for the substitution or exchange of any or all outstanding Awards or the cash, securities or property deliverable to the holder of any or all outstanding Awards based upon the distribution or consideration payable to holders of the Common Stock of the Corporation upon or in respect of such event. In each case, with respect to Awards of Incentive Stock Options, no such adjustment will be made that would cause the Plan to violate Section 424(a) of the Code or any successor provisions without the written consent of holders materially adversely affected thereby. In any of such events, the Committee may take such action sufficiently prior to such event if necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is available to stockholders generally. 6.2.2 ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Unless prior to a Change in Control Event the Committee determines that, upon its occurrence, benefits under any or all Awards will not accelerate or determines that only certain or limited benefits under any or all Awards will be accelerated and the extent to which they will be accelerated, and/or establishes a different time in respect of such Event for such acceleration, then upon the occurrence of a Change in Control Event (a) each Option and Stock Appreciation Right will become immediately exercisable, (b) Restricted Stock will immediately vest free of restrictions, and (c) each Performance Share Award will become payable to the Participant. However, in the case of a transaction intended to be accounted for as a pooling of interests transaction, the Committee shall have no discretion with respect to the foregoing acceleration of Awards. 18 The Committee may override the limitations on acceleration in this Section 6.2.2 by express provision in the Award Agreement and may accord any Eligible Person a right to refuse any acceleration, whether pursuant to the Award Agreement or otherwise, in such circumstances as the Committee may approve. Any acceleration of Awards will comply with applicable legal requirements. 6.2.3 POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option or other right to acquire Common Stock under this Plan (other than under Section 8) has been fully accelerated as required or permitted by Section 6.2.2 but is not exercised prior to (a) a dissolution of the Corporation, or (b) an event described in Section 6.2.1 that the Corporation does not survive, or (c) the consummation of an event described in Section 6.1 involving a Change of Control approved by the Board, such Option or right will terminate, subject to any provision that has been expressly made by the Committee through a plan of reorganization approved by the Board or otherwise for the survival, substitution, assumption, exchange or other settlement of such Option or right. 6.2.4 GOLDEN PARACHUTE LIMITATIONS. Unless otherwise specified in an Award Agreement, no Award be accelerated under this Plan to an extent or in a manner that would not be fully deductible by the Company for federal income tax purposes because of Section 280G of the Code, nor will any payment hereunder be accelerated if any portion of such accelerated payment would not be deductible by the Company because of Section 280G of the Code. If a holder would be entitled to benefits or payments hereunder and under any other plan or program that would constitute "parachute payments" as defined in Section 280G of the Code, then the holder may by written notice to the Company designate the order in which such parachute payments will be reduced or modified so that the Company is not denied federal income tax deductions for any "parachute payments" because of Section 280G of the Code. 6.3 EFFECT OF TERMINATION OF EMPLOYMENT. The Committee will establish in respect of each Award granted to an Eligible Person the effect of a termination of employment on the rights and benefits thereunder and in so doing may make distinctions based upon the cause of termination. 6.4 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Awards under this Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under Awards granted hereunder are subject to compliance with all applicable federal and 19 state laws, rules and regulations (including but not limited to state and federal securities law, federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan will be subject to such restrictions, and to any restrictions the Committee may require to preserve a pooling of interests under generally accepted accounting principles, and the person acquiring such securities will, if requested by the Corporation, provide such assurances and representations to the Corporation as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. 6.5 TAX WITHHOLDING. 6.5.1 PROVISION FOR TAX WITHHOLDING OFFSET. Upon any exercise, vesting, or payment of any Award or upon the disposition of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, the Company shall have the right at its option to (i) require the Participant (or Personal Representative or Beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes which the Company may be required to withhold with respect to such Award event or payment or (ii) deduct from any amount payable in cash the amount of any taxes which the Company may be required to withhold with respect to such cash payment. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may in its sole discretion (subject to Section 6.4) grant (either at the time of the Award or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then Fair Market Value, to satisfy such withholding obligation. 6.5.2 TAX LOANS. If so provided in the Award Agreement, the Company may, to the extent permitted by law, authorize a loan to an Eligible Person in the amount of any taxes that the Company may be required to withhold with respect to shares of Common Stock received (or disposed of, as the case may be) pursuant to a transaction described in Section 6.5.1. Such a loan will be for a term, at a rate of interest and pursuant to such other terms and conditions as the Company, under applicable law may establish and such loan need not comply with the provisions of Section 1.8. 6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION. 6.6.1 BOARD AUTHORIZATION. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan, in whole or in part. No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee will retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. 20 6.6.2 STOCKHOLDER APPROVAL. To the extent then required under Sections 422 and 424 of the Code or any other applicable law, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval. 6.6.3 AMENDMENTS TO AWARDS. Without limiting any other express authority of the Committee under but subject to the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Eligible Persons that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner materially adverse to the Participant, the Participant's rights and benefits under an Award. 6.6.4 LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment, suspension or termination of this Plan or change of or affecting any outstanding Award will, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Corporation under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 will not be deemed to constitute changes or amendments for purposes of this Section 6.6. 6.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized by the Committee or this Plan, a Participant will not be entitled to any privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by the Participant. No adjustment will be made for dividends or other rights as a stockholder for which a record date is prior to such date of delivery. 6.8 EFFECTIVE DATE OF THE PLAN. This Plan is effective as of August 1, 1997, and was restated in its entirety as of September 12, 1997. The Plan was approved by the Company's stockholders on August 1, 1997 and the restatement was approved by the Company's stockholders on September 12, 1997. 6.9 TERM OF THE PLAN. No Award will be granted under this Plan more than ten years after July 31, 2007 (the "TERMINATION DATE"). Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the termination date may extend beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, will continue 21 during any suspension of this Plan and in respect of Awards outstanding on the termination date. 22 6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY. 6.10.1 CHOICE OF LAW. This Plan, the Awards, all documents evidencing wards and all other related documents will be overned by, and construed in accordance with the aws of the state of California. 6.10.2 SEVERABILITY. If a court of competent jurisdiction holds any provision invalid and unenforceable, the remaining provisions of this Plan will continue in effect. 6.10.3 PLAN CONSTRUCTION. (a) RULE 16b-3. It is the intent of the Corporation that the Awards hereunder satisfy and be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, satisfies the applicable requirements of Rule 16b-3 so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act in respect of those transactions and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible will be interpreted as to avoid such conflict. If the conflict remains irreconcilable, the Committee may disregard the provision if it concludes that to do so furthers the interest of the Corporation, is fair to the affected Participant, and is consistent with the purposes of this Plan as to such persons in the circumstances. (b) SECTION 162(m). It is the further intent of the Company that Options or SARs with an exercise or base price not less than Fair Market Value on the date of grant and performance awards under Section 5.2 of this Plan that are granted to or held by a person subject to Section 162(m) of the Code will qualify as performance-based compensation under Section 162(m) of the Code, and this Plan will be interpreted consistent with such intent. 6.11 CAPTIONS. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. 23 Such headings will not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof. 6.12 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan and any Award hereunder, if an entity ceases to be a Subsidiary a termination of employment and service will be deemed to have occurred with respect to each Eligible Person in respect of such Subsidiary who does not continue as an Eligible Person in respect of another entity within the Company. 6.13 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan will limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 7. DEFINITIONS "AWARD" means an award of any Option, Stock Appreciation Right, Restricted Stock, Stock Bonus, performance share award, dividend equivalent or deferred payment right or other right or security that would constitute a "derivative security" under Rule 16a-1(c) of the Exchange Act, or any combination thereof, whether alternative or cumulative, authorized by and granted under this Plan. "AWARD AGREEMENT" means any writing setting forth the terms of an Award that has been authorized by the Committee. "AWARD DATE" means the date upon which the Committee took the action granting an Award or such later date as the Committee designates as the Award Date at the time of the Award or, in the case of Awards under Section 8, the applicable dates set forth therein. "AWARD PERIOD" means the period beginning on an Award Date and ending on the expiration date of such Award. "BENEFICIARY" means the person, persons, trust or trusts designated by a Participant or, in the absence of a designation, entitled by will or the laws of descent and distribution, to receive the benefits specified in the Award Agreement and under this Plan if the Participant dies, and means the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. "BOARD" means the Board of Directors of the Corporation. 24 "CHANGE IN CONTROL EVENT" means any of the following: (a) Approval by the stockholders of the Corporation of the dissolution or liquidation of the Corporation; (b) Approval by the stockholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries or other affiliates, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by stockholders of the Corporation immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Corporation's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization), but including in such determination any securities of the other parties to such reorganization held by affiliates of the Corporation); (c) Approval by the stockholders of the Corporation of the sale of substantially all of the Corporation's business and/or assets to a person or entity that is not a Subsidiary or other affiliate; or; (d) Any "PERSON" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder), other than a Current Affiliate, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 50% of the combined voting power of the Corporation's then outstanding securities entitled to then vote generally in the election of directors of the Corporation; provided, however, that a Change of Control will not be deemed to have occurred if a Current Affiliate transfers to an organization described under Section 501 of the Code beneficial ownership of more than 50% of the combined voting power of the Corporation's then outstanding securities entitled to then vote generally in the election of directors of the Corporation; or (e) During any period not longer than two consecutive years, individuals who at the beginning of such period constituted the Board cease to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's stockholders, of each new Board member was approved by a vote of at least three-fourths 25 of the Board members then still in office who were Board members at the beginning of such period (including for these purposes, new members whose election or nomination was so approved). "CURRENT AFFILIATE" means Fred Kayne or any of his affiliates (within the meaning of the Exchange Act), successors, heirs, descendants or members of his immediate family. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMISSION" means the Securities and Exchange Commission. "COMMITTEE" means the Board or a committee appointed by the Board to administer this Plan, which committee will be comprised only of two or more directors or such greater number of directors as may be required under applicable law, each of whom, in respect of any decision involving a Participant affected by the decision who may be subject to Section 162(m) of the Code, will be Disinterested. In acting on any transaction with or for the benefit of a Section 16 Person, all acting members of the Committee shall be Non-Employee Directors within the meaning of Rule 16b-3 under the Exchange Act. "COMMON STOCK" means the Common Stock of the Corporation and such other securities or property as may become the subject of Awards, or become subject to Awards, pursuant to an adjustment made under Section 6.2 of this Plan. "COMPANY" means, collectively, the Corporation and its Subsidiaries. "CORPORATION" means Big Dog Sportswear, a Delaware corporation, and its successors. "DISINTERESTED" means a disinterested director or an "outside director" within the meaning of any mandatory legal or regulatory requirements, including Section 162(m) of the Code. "ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or key employee of the Company. "ELIGIBLE PERSON" means an Eligible Employee, or any Other Eligible Person, as determined by the Committee. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time. 26 "FAIR MARKET VALUE" on any date means (a) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (b) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (c) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD or a similar organization; or (d) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the value as established by the Committee at such time for purposes of this Plan. "INCENTIVE STOCK OPTION" means an Option that is designated and intended as an incentive stock option within the meaning of Section 422 of the Code, the award of that contains such provisions (including but not limited to the receipt of stockholder approval of this Plan, if the award is made prior to such approval) and is made under such circumstances and to such persons as may be necessary to comply with that section. "NONQUALIFIED STOCK OPTION" means an Option that is designated as a Nonqualified Stock Option and will include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. Any Option granted hereunder that is not designated as an incentive stock option will be deemed to be designated a nonqualified stock option under this Plan and not an incentive stock option under the Code. "NON-EMPLOYEE DIRECTOR" means a member of the Board of Directors of the Corporation who is not an officer or employee of the Company. For purposes of this Plan, the Chairman of the Board will be deemed an officer of the Company. "NON-EMPLOYEE DIRECTOR PARTICIPANT" means a Non-Employee Director who holds an outstanding Award under the provisions of Section 8. 27 "OPTION" means an option to purchase Common Stock granted under this Plan. The Committee will designate any Option granted to an Eligible Person as a Nonqualified Stock Option or an Incentive Stock Option. "OTHER ELIGIBLE PERSON" means any Non-Employee Director or any individual consultant or advisor who or (to the extent provided in the next sentence) agent who renders or has rendered BONA FIDE services (other than services in connection with the offering or sale of securities of the Company in a capital raising transaction) to the Company, and who is selected to participate in this Plan by the Committee. If the Corporation's officers and directors are or become subject to Section 16 of the Exchange Act, a Non-Employee Director will not thereafter be selected as an Other Eligible Person. A non-employee providing BONA FIDE services to the Company (other than as an eligible advisor or consultant) may also be selected as an Other Eligible Person if such agent's participation in this Plan would not adversely affect (a) the Corporation's eligibility to use Form S-8 to register under the Securities Act of 1933, as amended, the offering of shares issuable under this Plan by the Company or (b) the Corporation's compliance with any other applicable laws. "PARTICIPANT" means an Eligible Person who has been granted an Award under this Plan and a Non-Employee Director who has been received an Award under Section 8 of this Plan. "PERFORMANCE SHARE AWARD" means an Award of a right to receive shares of Common Stock under Section 5.1, or to receive shares of Common Stock or other compensation (including cash) under Section 5.2, the issuance or payment of that is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. "PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability or incompetence of a Participant, has acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Plan by virtue of having become the legal representative of the Participant. "PLAN" means this 1997 Performance Award Plan, as amended from time to time. "QDRO" means a qualified domestic relations order. "RESTRICTED SHARES" or "RESTRICTED STOCK" means shares of Common Stock awarded to a Participant under this Plan, subject to payment of such consideration, if any, and such conditions on vesting (which may include, among others, the passage of time, specified performance objectives or other factors) and 28 such transfer and other restrictions as are established in or pursuant to this Plan and the related Award Agreement, for so long as such shares remain unvested under the terms of the applicable Award Agreement. "RETIREMENT" means retirement with the consent of the Company or, from active service as an employee or officer of the Company on or after attaining age 55 with ten or more years of service or age 65. "RULE 16b-3" means Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act, as amended from time to time, but subject to any applicable transition rules. "SECTION 16 PERSON" means a person subject to Section 16(a) of the Exchange Act. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "STOCK APPRECIATION RIGHT" OR "SAR" means a right authorized under this Plan to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, the aggregate amount or value of which is determined by reference to a change in the Fair Market Value of the Common Stock. "STOCK BONUS" means an Award of shares of Common Stock granted under this Plan for no consideration other than past services and without restriction other than such transfer or other restrictions as the Committee may deem advisable to assure compliance with law. "SUBSIDIARY" means any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. "TOTAL DISABILITY" means a disability where Participant is unable to effectively engage in the material activities required for Participant's position with the Company by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a period of 90 consecutive days or for shorter periods aggregating 180 days in any consecutive 12 month period. 29 8. NON-EMPLOYEE DIRECTOR OPTIONS 8.1 PARTICIPATION. Awards under this Section 8 will be made only to Non-Employee Directors and will be evidenced by Award Agreements substantially in the form of EXHIBIT A. 8.2 ANNUAL OPTION GRANTS. 8.2.1 TIME OF INITIAL AWARD. After approval of this Plan by the stockholders of the Corporation, if any person who is not then an officer or employee of the Company will become a director of the Corporation, such person will automatically be granted (without any action by the Board or Committee) a Non-qualified Stock Option (the Award Date of which will be the date such person takes office) to purchase 10,000 shares of Common Stock. 8.2.2 SUBSEQUENT ANNUAL AWARDS. Subject to Section 8.2.3, at the close of trading on the day of the annual stockholders meeting in each year during the term of the Plan commencing 1998, there will be granted automatically (without any action by the Committee or the Board) a Nonqualified Stock Option (the Award Date of which will be such date) to each Non-Employee Director then continuing in office to purchase 5,000 shares of Common Stock. 8.2.3 MAXIMUM NUMBER OF OPTIONS/SHARES. Annual grants that would otherwise exceed the maximum number of shares under Section 1.4.1 will be prorated within such limitation. A Non-Employee Director will not receive more than one Nonqualified Stock Option under this Section 8.2 in any calendar year. 8.3 OPTION PRICE. The purchase price per share of the Common Stock covered by each Option granted pursuant to Section 8.2 will be 100% of the Fair Market Value of the Common Stock on the Award Date. The exercise price of any Option granted under this Section will be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, but any such shares used in payment must be owned by the Participant at least six months prior to the date of exercise. 8.4 OPTION PERIOD AND EXERCISABILITY. Each Option granted under this Section 8 and all rights or obligations thereunder will expire on the day before the tenth anniversary of the Award Date and will be subject to earlier termination as provided below. Each Option granted under Section 8.2 will become exercisable at the rate 30 of 20% per annum commencing on the first anniversary of the Award Date and each of the next four anniversaries thereof. 8.5 TERMINATION OF DIRECTORSHIP. If a Non-Employee Director's services as a member of the Board of Directors terminate by reason of death, Disability or Retirement, an Option granted pursuant to this Section 8 held by such Participant will immediately become and will remain exercisable for two years after the date of such termination or until the expiration of the stated term of such Option, whichever first occurs. If a Non-Employee Director's services as a member of the Board of Directors terminate for any other reason, any portion of an Option granted pursuant to this Section that is not then exercisable will terminate and any portion of such Option that is then exercisable may be exercised for six months after the date of such termination or until the expiration of the stated term whichever first occurs. 8.6 ADJUSTMENTS; ACCELERATIONS; TERMINATIONS. Options granted under this Section 8 will be subject to adjustments, accelerations and terminations as provided in Section 6.2, but only to the extent that in the case of a Change in Control Event such effect and any Board or Committee action in respect thereof is effected pursuant to the terms of a reorganization agreement approved by stockholders of the Corporation, or is otherwise consistent with the effect on Options held by persons other than executive officers or directors of the Corporation (or, if there are none, consistent in respect of the underlying shares with the effect on stockholders generally). 31 8.7 ACCELERATION UPON A CHANGE IN CONTROL EVENT. Upon the occurrence of a Change in Control Event and acceleration under Section 6.2.2, each Option granted under Section 8.2 hereof will become immediately exercisable in full. To the extent that any Option granted under this Section 8 is not exercised prior to (a) a dissolution of the Corporation or (b) a merger or other corporate event that the Corporation does not survive, and no provision is (or consistent with the provisions of this Plan can be) made for the assumption, conversion, substitution or exchange of the Option, the Option will terminate upon the occurrence of such event. 32 EXHIBIT A BIG DOG HOLDINGS, INC. ELIGIBLE DIRECTOR NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT dated as of _____________, ____, is between BIG DOG HOLDINGS, INC. , a Delaware corporation (the "CORPORATION"), and ________________ (the "DIRECTOR"). The Corporation and the Director agree to the terms and conditions set forth herein as required by the terms of the Plan. BACKGROUND A. The Corporation has adopted and the stockholders of the Corporation have approved the 1997 Performance Award Plan (the "PLAN"). B. Pursuant to the Plan, the Corporation has granted an option (the "OPTION") to the Director upon the terms and conditions evidenced hereby, as required by the Plan, which Option is not intended as and will not be deemed to be an incentive stock option within the meaning of Section 422 of the Code. 1. OPTION GRANT. This Agreement evidences the grant to the Director, as of ___________, ____ (the "OPTION DATE"), of an Option to purchase an aggregate of _____ shares of Common Stock, par value $____ per share, under Section 8 of the Plan, subject to the terms and conditions and to adjustment as set forth herein or in pursuant to the Plan. 2. EXERCISE PRICE. The Option entitles the Director to purchase (subject to the terms of Sections 3 through 5 below) all or any part of the Option shares at a price per share of $_______, which represents the Fair Market Value of the shares on the Option Date. Exhibit A-1 3. OPTION EXERCISABILITY AND TERM. Subject to adjustment pursuant to the Plan, the Option will first become and remain exercisable as to ___________ (20%) of the shares on the first anniversary of the date of grant and as to an additional _________ shares (20%) on each of the next four anniversaries of that date, in each case subject to adjustments and acceleration under Section 8.6 of the Plan. The Option will terminate on ____________, ____,* unless earlier terminated in accordance with the terms of the Plan. 4. SERVICE AND EFFECT OF TERMINATION OF SERVICE. The Director agrees to serve as a director in accordance with the provisions of the Corporation's Certificate of Incorporation, bylaws and applicable law. If the Director's services as a member of the Board terminate, this Option will terminate at the times and to the extent set forth in the Plan. 5. GENERAL TERMS. The Option and this Agreement are subject to, and the Corporation and the Director agree to be bound by, the provisions of the Plan that apply to the Option. Such provisions are incorporated herein by this reference. The Director has received a copy of the Plan and has read its applicable provisions. Capitalized terms not otherwise defined herein have the meaning set forth in the Plan. _______________ * Insert day before tenth anniversary of date of grant Exhibit A-2 The parties have signed this Agreement as of the date on page 1. BIG DOG HOLDINGS, INC. (a Delaware corporation) By __________________________ Title ______________________ Optionee Director _____________________________ (Signature) _____________________________ (Print Name) _____________________________ (Address) _____________________________ (City, State, Zip Code) _____________________________ [social security number] In consideration of the execution of the foregoing Stock Option Agreement by Big Dog Holdings, Inc., I, ____________________________, the spouse of the Director named therein, agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: ______________, ____. ___________________________ Signature of Spouse Exhibit A-3 ADDENDUM TO BIG DOG HOLDINGS, INC. 1997 PERFORMANCE AWARD PLAN The following Addendum amends the Big Dog Holdings, Inc. 1997 Performance Award Plan (the "Plan"). All terms used herein shall have the meaning provided in the Plan. Until the date (the "Sunset Date") on which the offer and grant of Options and the issuance of Common Stock subject to Options under the plan is exempt from California qualification requirements under Federal law or Section 25100(o) of the California Corporate Securities Law and the Rules of the California Commissioner of Corporations thereunder, the following amendments shall continue to apply, to the extent required under California law, in respect of all Options granted under the plan prior to the Sunset Date (the "Initial Options"). 1. EFFECTIVE TIME OF AMENDMENT. This addendum amendment shall be effective from August 1, 1997 until the Sunset Date. 2. TERM. Section 1.6 is deleted and Section 2.3.2 is amended to provide: OPTION PERIOD. Each Option and all rights thereunder will expire no later than 120 months after the Award Date. 3. TRANSFERABILITY. Section 1.9.2 and clauses (a), (c) and (d) of Section 1.9.3 are deleted. 4. PRICING LIMITS. Section 2.2.1 is amended by changing the phrase "not less than the par value thereof" to "not less than 85% of the fair value (as determined consistent with the requirements of Section 25102(o) of the California Corporate Securities Law of 1968, as amended (the "California Exemption")) as of the Award Date, except that the purchase price shall be 110% of the fair value in the case of any person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. 5. EFFECT OF TERMINATION OF EMPLOYMENT. Section 2.6 is amended to eliminate the discretion of the Committee (other than under 2.6.6) and the Board in respect of Options granted to persons other than persons ("Associated Persons") who are officers, directors or consultants of the Corporation or any of its affiliates. 6. EXERCISE. Section 2.8 is added to provide: RIGHT TO EXERCISE. Subject to Section 2.6, Options shall become exercisable at the rate of at least 20% per year over five years from the Award Date, subject to reasonable conditions such as continued employment. However, in the case of an Option granted to an Associated Person, the Option may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Committee. 7. INFORMATION. Section 2.9 is added to provide: INFORMATION TO PARTICIPANTS. To the extent required by the California Exemption, Participants will receive financial statements of the Company at least annually. 8. ELIGIBLE PERSONS. Eligible Persons shall be limited to persons eligible under the California Exemption and SEC Rule 701. 9. REPURCHASE RIGHTS. Any provision in the Option Agreement for the repurchase of the option or the underlying Common Stock from a person who is not an Associated Person shall comply with the provisions of Section 260.140.41 of the Rules of the California Commissioner of Corporations. EX-10.10A 6 EXHIBIT 10.10A - FORM OF STOCK OPTION AGMT EXHIBIT 10.10A BIG DOG HOLDINGS, INC. ELIGIBLE EMPLOYEE NON-QUALIFIED STOCK OPTION AGREEMENT This AGREEMENT dated as of __________, 1997, is between BIG DOG HOLDINGS, INC., a Delaware corporation (the "CORPORATION"), and the individual named on the signature page hereof (the "PARTICIPANT"). The Corporation and the Participant agree to the terms and conditions set forth herein as required by the terms of the Plan (as defined below). A. The Corporation has adopted and the stockholders of the Corporation have approved the 1997 Performance Award Plan, as supplemented by an Addendum ( the "ADDENDUM") each dated as of August 1, 1997 (together with the Addendum, the "PLAN"). All capitalized terms not defined herein shall have the meaning provided in the Plan. B. Pursuant to the Plan, the Corporation has granted an option (the "OPTION") to the Participant on the terms and conditions evidenced by this Agreement, contemplated by the Plan, which Option is not intended as and shall not be deemed to be an incentive stock option within the meaning of Section 422 of the Code. In consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties agree as follows: 1. OPTION GRANT. This Agreement evidences the grant to the Participant, as of August 1, 1997 (the "AWARD DATE"), of an Option to purchase an aggregate of ____________________________ shares of Common Stock under Section 2 of the Plan (the "OPTION SHARES"), subject to the terms and conditions of, and to adjustments as set forth in or pursuant to, the Plan and to the terms and conditions hereof. 2. EXERCISE PRICE. The Option entitles the Participant to purchase (subject to the vesting requirements and other terms of Sections 3 through 13 below) all or any part of the Option Shares at a price per share of Twelve Dollars ($12.00), which represents the Fair Market Value of the shares on the Award Date as determined by the Board in accordance with the Plan. 3. OPTION EXERCISABILITY AND TERM. 3.1. Subject to adjustment pursuant to the Plan, the Option will first become and, subject to Section 5, remain exercisable as to 20% of the shares on August 1, 1 1998 and as to an additional 20% of the shares on each of the next four anniversaries of that date, in each case subject to adjustments, acceleration and termination under the Plan. 3.2. The Option expires on July 31, 2004 (the "EXPIRATION DATE"), unless earlier terminated in accordance with the terms of the Plan or this Agreement. 3.3 To the extent the Participant does not in any year purchase all or any part of the shares to which the Participant is entitled, the Participant has the right cumulatively thereafter to purchase any shares not so purchased and such right shall continue until the Option terminates or expires. 3.4 Fractional share interests shall be disregarded, but may be cumulated. 3.5 No fewer than 100 shares may be purchased at any one time, unless the number purchased is the total number at the time available for purchase under the Option. 3.6 Participant acknowledges that the vesting schedule requires continued service through each applicable vesting date as a condition to the vesting of the applicable rights and benefits under this Agreement. Partial service, even if substantial, during any vesting period will not entitle the Participant to any proportionate vesting or avoid or mitigate a termination of rights and benefits upon or following a termination of employment or service as provided in Section 5 below or under the Plan. 4. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable by the delivery to the Corporation of a written notice stating the number of shares to be purchased pursuant to the Option and accompanied by payment as provided in or pursuant to Section 2.2.2(a), (b), or (e) of the Plan, or in any combination thereof; subject to such further limitations as the Committee may from time to time establish as to any non-cash payment and as to the tax withholding requirements of the Plan. In addition, the Participant or his or her successor in interest shall furnish any written statements required pursuant to Section 6.4 of the Plan. 5. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH; CHANGE IN SUBSIDIARY STATUS. The Option and all other rights hereunder, to the extent not previously exercised, shall terminate and become null and void at such time as the Participant ceases to be employed by the Company except that: (a) if the Participant's employment terminates by reason of disability (as determined by the Committee), the Participant may at any time within a period of six (6) months after the termination of employment exercise the Option, but only to the extent the Option was exercisable at the date of such termination; 2 (b) if the Participant's employment terminates by reason of Retirement, the Participant may at any time within a period of six (6) months after such termination exercise the Option, but only to the extent the Option was exercisable at the date of such termination; (c) if the Participant's employment terminates by reason of resignation, other than pursuant to a dismissal for Cause (as defined below), or by reason of a dismissal without Cause, the Participant may at any time within a period of three (3) months after such termination exercise the Option, but only to the extent the Option was exercisable at the date of such termination; (d) if the Participant dies while in the employ of the Company, or within three (3) months after a termination described in subsection (a) of this Section 5, then the Option may be exercised within a period of six (6) months after the Participant's date of death, but only to the extent the Option was exercisable on the date of Participant's termination of service; PROVIDED, HOWEVER, THAT IN EACH CASE IN NO EVENT MAY THE OPTION BE EXERCISED BY ANYONE UNDER THIS SECTION 5 OR OTHERWISE AFTER THE EXPIRATION DATE. For purposes of clause (c) of this Section 5, the Participant will be considered to have been dismissed for "Cause" if the Company has terminated Participant's employment because of any act which has resulted in the Participant's personal gain at the expense of the Company or because of incompetence, insubordination or refusal to perform assigned duties; negligence, willful misconduct or breach of fiduciary duty; being convicted of (or pleading guilty or no contest to) a crime (other than minor traffic violations or similar offenses); being under the influence of, or using, distributing or possessing, unauthorized or illegal drugs or intoxicating beverages while on duty or on the Company's premises; suspicion of theft, embezzlement, fraud, or dishonesty; willful destruction or defacement of the Company's, a visitor's, or an employee's property; unauthorized disclosure of confidential information; falsifying or altering the Company's records; inappropriate absences from work; or other conduct that the Committee believes may result in a detriment to the business or reputation of the Company. In each case, the existence or non-existence of "Cause" shall be determined in the sole discretion of the Committee. Nothing contained in this Agreement or the Plan constitutes an employment commitment by the Company, affects the Participant's status as an employee-at-will who is subject to termination without cause, confers upon the Participant any right to remain employed by the Company or any subsidiary, interferes in any way with the right of the Company or of any subsidiary at any time to terminate such employment, or affects the Company's right to increase or decrease the Participant's other compensation. 6. TERMINATION OF OPTION UPON CERTAIN EVENTS. The Option to the extent not previously exercised may be terminated in accordance with the provisions of Section 6.2 of the Plan. 3 7. NON-TRANSFERABILITY OF OPTION; CALL RIGHTS; OTHER RESTRICTIONS; INVESTMENT REPRESENTATIONS. 7.1. During the Participant's lifetime, this Option and any other rights hereunder may be exercised only by the Participant or the Participant's duly appointed guardian or legal representative. The Option and such rights shall not be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of in any way (whether by operation of law or otherwise). Nothing in this Section 7 shall prevent a transfer by will or by the applicable laws of descent and distribution. 7.2. Unless and until the issuance of the Option Shares is registered under the Securities Act of 1933, the Option Shares are subject to substantial restrictions on transfer as provided in Appendix A hereto, incorporated herein by this reference. 7.3. The Participant acknowledges that by executing this Agreement he or she makes the investment and other representations set forth in Appendix A hereto, incorporated herein by this reference. 8. NOTICES. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal office, to the attention of the General Counsel and to the Participant at the address given beneath the Participant's signature hereto, or at such other address as either party may hereafter designate in writing to the other. 9. PARTICIPANT NOT A STOCKHOLDER. 9.1. Neither the Participant nor any other person entitled to exercise the Option shall have any of the rights or privileges of a stockholder of the Corporation as to any shares of Common Stock not actually issued and delivered to him or her prior to delivery of the exercise price and satisfaction of all other conditions precedent to the due exercise of the Option and delivery of Option Shares. 9.2 The Participant acknowledges and agrees that neither the Option nor anything contained in this Agreement or the Plan (a) confers upon the Participant any right to vote or to give or withhold consent to any corporate action, to receive any notices of meetings or other action of the board or stockholders, to receive dividends or other distributions, or otherwise to receive rights or benefits in respect of shares issuable on the exercise of the Option or any other rights of a stockholder, (b) creates any equity interest in the Corporation, or (c) imposes on the Corporation, the Board, any committee of the Board or any officer, director or agent of the Corporation any fiduciary duty to the Participant. Participant's rights are solely in contract and limited to claims for contract damages if the Corporation materially breaches this Agreement. 9.3 Neither the Option nor anything contained in this Agreement or the Plan shall be deemed to restrict in any way any rights of the stockholders of the 4 Corporation or the Board during the term of this Agreement to issue additional securities of the Corporation and to determine the consideration therefor, to make distributions to stockholders, to sell or dispose of assets, to reorganize, merge, or dissolve and liquidate the Corporation or to take any other action or make any other change (fundamental or otherwise) affecting the structure, existence, organization, operations, business assets or equity of the Corporation and/or any of its subsidiaries. No adjustments to the Option exercise price or number of shares will be required in connection with any of such actions or events, except as, the Committee shall expressly provide under Section 6.2 of the Plan. 10. EFFECT OF AWARD AGREEMENT. This Agreement shall be binding upon and inure to the benefit of any successor or successors of the Corporation, except to the extent the Committee determines otherwise. 11. LAWS APPLICABLE TO CONSTRUCTION. The Option has been granted, executed and delivered as of the day and year first above written, and the interpretation, performance and enforcement of the Option and this Agreement shall be governed by the laws of the State of California. 12. GENERAL TERMS. The Option, this Agreement and all rights of Participant thereunder are subject to, and the Participant agrees to be bound by, all of the terms and conditions of the provisions of the Plan, incorporated herein by this reference. The Participant acknowledges receipt of a copy of the Plan, which is made a part hereof by this reference, and reading and understanding its applicable provisions. Provisions of the Plan that confer discretionary authority on the Committee do not (and shall not be deemed to) create any rights of the Participant, unless such rights are expressly set forth herein or in the sole discretion of the Committee are conferred by appropriate action of the Committee under the Plan after the date hereof. 13. INFORMATION. The Participant acknowledges that he has received and reviewed a Private Placement Memorandum dated as of August 1, 1997 providing information as to the plan and the Corporation, which include financial statements of the Corporation as of and for periods ended December 31, 1996 and June 30, 1997. 5 The parties have signed this Agreement as of the date in Section 1. BIG DOG HOLDINGS, INC. (a Delaware corporation) By:_____________________________ Title:__________________________ PARTICIPANT ______________________________ (Signature) ______________________________ (Print Name) ______________________________ (Address) ______________________________ (City, State, Zip Code) ______________________________ (Social Security Number) 6 SPOUSAL CONSENT --------------- In consideration of the execution of the foregoing Non-Qualified Stock Option Agreement by Big Dog Holdings, Inc., I, _________________________, the spouse of the Participant named therein, agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: _______________, 1997 ______________________________ Signature of Spouse 7 APPENDIX A BIG DOG HOLDINGS, INC. 1997 PERFORMANCE AWARD PLAN SECURITIES LAW INVESTMENT REPRESENTATIONS 1. RESTRICTIONS ON SHARES. The Participant represents that he/she understand that (i) the offer and grant of an Option to the Participant and the offer and sale of any Option Shares is being made to the Participant without registration of such offer, grant or sale under federal securities laws and without qualification under any state securities laws. Accordingly, the Option Shares will be "restricted securities" under Rule 144 Under the Securities Act since they are being acquired from the Corporation in an offering under Rule 701 and (ii) under such laws and applicable regulations, any Option Shares may be resold without registration under the Securities Act and qualification under state laws only in certain limited circumstances. The Participant represents that he/she is familiar with such Rules 144 and 701, and understands the resale limitations imposed thereby and by the Securities Act and the state securities law. 2. ADDITIONAL RESTRICTIONS. The Participant represents that he/she has read and understands the restrictions and limitations imposed on the Option and the Option Shares under the Plan, including, but not limited to the termination provisions of Section 2.6 and the non-transferability provisions of Section 1.9. 3. SHARE CERTIFICATE LEGEND. The Participant represents that he/she understands and acknowledges that any certificate evidencing the Option Shares if and when issued may, if determined to be appropriate by the General Counsel of the Corporation, bear, in addition to any other legends which may be required at the time by applicable state or federal securities laws, the following legends: "THE SALE, ASSIGNMENT, PLEDGE OR OTHER TRANSFER AND VOTING OF THE SHARES PRESENTED BY THIS CERTIFICATE OR ANY INTEREST THEREIN ARE SUBJECT TO A NON-QUALIFIED STOCK OPTION AGREEMENT DATED AUGUST 1, 1997 (A COPY OF WHICH IS ON FILE AT THE OFFICE OF BIG DOG HOLDINGS, INC.). THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") NOR HAVE THEY BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. NO TRANSFER OF SUCH SECURITIES WILL BE PERMITTED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER, THE TRANSFER IS MADE IN ACCORDANCE WITH RULES 144 OR 701 UNDER THE ACT, OR IN 8 THE OPINION OF COUNSEL TO THE CORPORATION, REGISTRATION UNDER THE ACT IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT AND WITH APPLICABLE STATE SECURITIES LAWS." 9 EX-23.2 7 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-33027 of Big Dog Holdings, Inc. of our report dated January 31, 1997 (August 1, 1997 as to Note 10), appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Los Angeles, California September 15, 1997 EX-99.1 8 EXHIBIT 99.1 - CONSENT OF ROBERT SCHNELL EXHIBIT 99.1 CONSENT The undersigned hereby consents to being named as a future director of Big Dog Holdings, Inc. (the "Company") in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 7, 1997 and in any amendment or prospectus related thereto. Date: September 5, 1997 /s/ ROBERT SCHNELL ----------------------------------------- Robert Schnell
EX-99.2 9 EXHIBIT 99.2 - CONSENT OF STEVEN GOOD EXHIBIT 99.2 CONSENT The undersigned hereby consents to being named as a future director of Big Dog Holdings, Inc. (the "Company") in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 7, 1997 and in any amendment or prospectus related thereto. Date: September 2, 1997 /s/ STEVEN C. GOOD ----------------------------------------- Steven C. Good
EX-99.3 10 EXHIBIT 99.3 EXHIBIT 99.3 CONSENT The undersigned hereby consents to being named as a future director of Big Dog Holdings, Inc. (the "Company") in the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 7, 1997 and in any amendment or prospectus related thereto. Date: September 4, 1997 /s/ DAVID J. WALSH ----------------------------------------- David J. Walsh
EX-99.4 11 EXHIBIT 99.4 EXHIBIT 99.4 CONSENT The undersigned hereby consents to the use of its name and the quotation and summarization of information provided by it in the Big Dog Holdings, Inc. Registration Statement (File Number 333-33027) on form S-1. IN WITNESS WHEREOF, the undersigned has executed this Consent as of the 15th day of September, 1997. NPD Group, Inc. By: /s/_LESLIE E. SINGER__ Name: Leslie E. Singer Title: Director, Corporate Communication -----END PRIVACY-ENHANCED MESSAGE-----