e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|
|
|
þ |
|
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the fiscal year ended December 30, 2006
OR
|
|
|
o |
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 001-32320
BUILD-A-BEAR WORKSHOP, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
Delaware
|
|
43-1883836 |
(State or Other Jurisdiction of
|
|
(I.R.S. Employer Identification No.) |
Incorporation or Organization) |
|
|
|
|
|
1954 Innerbelt Business Center Drive |
|
|
St. Louis, Missouri
|
|
63114 |
(Address of Principal Executive Offices)
|
|
(Zip Code) |
(314) 423-8000
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered |
|
|
|
Common Stock, par value $0.01 per share
|
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
There is no non-voting common equity. The aggregate market value of the common stock held by
nonaffiliates (based upon the closing price of $21.51 for the shares on the New York Stock Exchange
on June 30, 2006) was approximately $321,605,000, as of July 1, 2006.
As of March 9, 2007, there were 20,572,126 issued and outstanding shares of the registrants common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its May 10, 2007 Annual Meeting are
incorporated herein by reference.
BUILD-A-BEAR WORKSHOP, INC.
INDEX TO FORM 10-K
2
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain statements that are, or may be considered to
be, forward-looking statements for the purpose of federal securities laws, including, but not
limited to, statements that reflect our current views with respect to future events and financial
performance. We generally identify these statements by words or phrases such as may, might,
should, expect, plan, anticipate, believe, estimate, intend, predict, future,
potential or continue, the negative or any derivative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks, uncertainties and
assumptions about us, may include, among other things, projections or statements regarding:
|
|
our future financial performance; |
|
|
|
our anticipated operating and growth strategies; |
|
|
|
our anticipated rate of store openings; |
|
|
|
our franchisees anticipated rate of international store openings; |
|
|
|
our anticipated store opening costs; and |
|
|
|
our future capital expenditures. |
These statements are only predictions based on our current expectations and projections about
future events. Because these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity, performance or achievements
expressed or implied by these forward-looking statements, including those factors discussed under
the caption entitled Risk Factors as well as other places in this annual report on Form 10-K.
We operate in a competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for management to predict all the risk factors, nor can it
assess the impact of all the risk factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, you should not place undue
reliance on forward-looking statements, which speak only as of the date of this annual report on
Form 10-K, as a prediction of actual results.
You should read this annual report on Form 10-K completely and with the understanding that our
actual results may be materially different from what we expect. Except as required by law, we
undertake no duty to update these forward-looking statements, even though our situation may change
in the future. We qualify all of our forward-looking statements by these cautionary statements.
3
PART I
ITEM 1. BUSINESS
Overview
Build-A-Bear Workshop, Inc. is the leading, and only international, company providing a make
your own stuffed animal interactive retail-entertainment experience. As of December 30, 2006, we
operated 271 company-owned retail stores in the United States, Canada, the United
Kingdom, and Ireland. Of those stores, 232 are Build-A-Bear
Workshop®
stores located in the United States and Canada
and 38 are located in the United Kingdom and Ireland. We operated one stand-alone Friends 2B Made store and
eight Friends 2B Made stores adjacent to or within Build-A-Bear Workshop stores in the United
States. Franchisees operated 34 Build-A-Bear Workshop stores in international locations. Our
core concept is based on our guests making, personalizing and customizing their stuffed animals,
and capitalizes on what we believe is the relatively untapped demand for experience-based shopping
as well as the widespread appeal of stuffed animals.
We offer an extensive and coordinated selection of merchandise, including over 30 different
styles of animals to be stuffed and a wide variety of clothing, shoes and accessories for the
stuffed animals. Our concept appeals to a broad range of age groups and demographics, including
children, teens, parents and grandparents. We believe that our stores, which are primarily located
in malls, are destination locations and draw guests from a large geographic reach. Our stores
average approximately 2,800 square feet in size and have a highly visual and colorful appearance,
including custom-designed fixtures featuring teddy bears and other themes relating to the
Build-A-Bear Workshop experience.
We also market our products and build our brand through a nationwide multi-media marketing
program that targets our core demographic guests, principally parents and children. The program
incorporates consistent messaging across a variety of media, and is designed to increase our brand
awareness and store traffic and attract more first-time and repeat guests.
Since opening our first store in St. Louis, Missouri in October 1997, we have sold over 47
million stuffed animals. We have grown our store base from 150 stores at the end of fiscal 2003 to
271 as of December 30, 2006 and increased our revenues from $301.7 million in fiscal 2004 to $437.1
million in fiscal 2006, for a compound annual revenue growth rate of 20.4%, and increased net
income from $18.5 million in fiscal 2004 to $29.6 million in fiscal 2006, for a compound annual net
income growth rate of 26.5%.
Description of Operations
Guests who visit Build-A-Bear Workshop stores enter a teddy bear-themed environment consisting
of eight stuffed animal-making stations: Choose Me, Hear Me, Stuff Me, Stitch Me, Fluff Me, Dress
Me, Name Me, and Take Me Home. To attract our target guests, we have designed our stores to provide
a theme park destination in the mall that is open and inviting with an entryway that spans the
majority of our storefront and highly visual and colorful teddy bear themes and displays. The
duration of a guests experience can vary greatly depending on his or her preferences. While most
guests choose to participate in the animal-making stations described above, a process which we
believe averages 45 minutes to complete, guests can also visit a Build-A-Bear Workshop store and
purchase items such as clothing, accessories, our Bear Bucks gift certificates or pre-made animals
in only a few minutes.
We offer an extensive and coordinated selection of merchandise including approximately 30 to
35 varieties of animals to be stuffed, as well as a wide variety of other clothing and accessory
items for the animals. We enhance the authentic nature of a number of our products with strategic
product licensing relationships with brands that are in demand with our guests such as officially
sanctioned NFL, NBA and MLBTM team apparel, SKECHERS® shoes or Limited Too clothing.
There are approximately 450 SKUs in our store at any one time and we intend for each item to be
highly productive.
Given the unique experience we believe we offer our guests, we historically have not had
seasonal or advertised sales events or markdowns. We selectively use coupons and frequent shopper
discounts for our most loyal guests, as well as gift-with-purchase promotions.
Growth Strategy
Our growth strategy is to develop and expand the reach of the Build-A-Bear Workshop brand by
investing in value-adding marketing programs as well as infrastructure and technology and to offer
an authentic and unique merchandise assortment. We expect to grow our business by opening
additional stores in the United States, Canada, the United Kingdom and Ireland, by adding
additional international stores through existing and new franchise agreements, and through the
development of third party licensed products that promote Build-A-Bear Workshop as a lifestyle
brand and build overall brand awareness.
4
We have increased our company-owned store locations throughout the United States and Canada
from 108 at the end of fiscal 2002 to 233 as of December 30, 2006. In April 2006, we acquired
Amsbra Limited, our former franchise in the United Kingdom, as well as The Bear Factory Limited, a
stuffed animal retailer in the United Kingdom. As of December 30, 2006, we operated 38 stores in
the United Kingdom and Ireland all under the Build-A-Bear Workshop brand. We expect to open 37 new
stores in North America and 7 to 10 new stores in the UK and Ireland in fiscal 2007 in new and
existing markets. We believe there is a market potential for at least 350 Build-A-Bear Workshop
stores in the North America and 70 to 75 in the UK and Ireland. In addition, we also currently
operate Build-A-Bear Workshop stores in non-traditional retail locations including five Major
League Baseball® ballparks and one store located in the St. Louis Zoo. We expect to open our first
store in a Science Center at the St. Louis Science Center in 2007.
We believe that there is continued opportunity to grow our Build-A-Bear Workshop concept and
brand outside of North America, the United Kingdom and Ireland primarily through franchise
agreements. Our franchisees have retail and/or real estate experience and are currently operating
34 Build-A-Bear Workshop stores in several foreign countries under master franchise agreements on a
country-by-country basis. We expect our franchisees to open approximately 20 to 25 new stores in
fiscal 2007 under existing and anticipated franchise agreements. We believe there is a market
potential for approximately 300 franchised stores outside North America, the United Kingdom and
Ireland. We may open additional company-owned stores outside of the United States, Canada, the
United Kingdom, and Ireland.
We believe there are also growth opportunities in other experiential retail entertainment
concepts. We believe that consumer demand for additional experiential retail concepts is relatively
untapped and that our expertise in product development and providing a consistent shopping
experience can be applied to other experiential retail brands and concepts. We expect to be able to
leverage our extensive guest database to market these new brands and concepts.
In fiscal 2003, we began testing in certain markets our initial brand expansion initiative,
our proprietary Friends 2B Made® line of make-your-own dolls and related products. We believe this
concept brings to dolls what Build-A-Bear Workshop has brought to teddy bears an opportunity to
participate in the creation and customization of the doll. The target customer for Friends 2B Made
is a girl age five to twelve. We opened four additional Friends 2B Made locations in 2006 to bring
the total number of Friends 2B Made locations to nine as of December 30, 2006. All but one of these
locations is in or adjacent to a Build-A-Bear Workshop store and are not considered a separate
store. We continue to evaluate the doll market adjusting our merchandise assortments and adding
additional product lines as well as determine the optimal real estate strategy as we determine the
long term potential of this concept.
In addition, we are consistently evaluating additional retail opportunities and expect to
continue our expansion into other concepts and product lines in the future. For example, in 2006,
the first Build-A-DinoTM store opened in partnership with T-RexTM Café, our
first store within a third-party restaurant concept. In 2007, we plan to add the Build-A-
DinoTM concept to Build-A-Bear Workshop stores in two highly trafficked tourist
locations, Myrtle Beach in South Carolina and Manhattan in New York. Also in 2007, in partnership
with Retail Entertainment Concepts L.L.C, in which we have a minority interest, we will open the
first RidemakerzTM store, a new concept focused on boys and cars.
Product Development
Through our in-house design and product development team, we have developed a coordinated,
creative and broad merchandise assortment, including a variety of animals, clothing, shoes and
accessories. We believe our merchandise is an integral part of our concept and that the proprietary
design of many of the products we offer is a critical element of our success, while the authentic
and fashionable nature of our products greatly enhances our brands appeal to our guests. Our
product development team regularly monitors current fashion and culture trends in order to create
products that we believe are most appealing to our guests, often reflecting similar styling to the
clothes our guests wear themselves. We test our products on an on going basis to ensure guest
demand supports order quantities. Through our focused vendor relationships, we are able to source
our merchandise in a manner that is cost-effective, maximizes our speed to market and facilitates
rapid reorder of our best-selling items.
The skins for our animals are produced from high quality man-made materials, and the stuffing
is made of a high-grade polyester fiber. We believe all of our products meet Consumer Product
Safety Commission requirements for toys and American Society for Testing and Materials
specifications for toy safety in all material respects. We routinely have samples of all items sold
in our stores tested at independent laboratories for compliance with these requirements. Packaging
and labels are developed for each product to communicate age grading and any special warnings which
may be recommended by the Consumer Product Safety Commission.
Marketing
We believe that the strength of the Build-A-Bear Workshop brand is a competitive advantage and
an integral part of our strategy. Unlike other mall based retailers that frequently use markdowns
or sale events to drive sales, at Build-A-Bear Workshop we use marketing to raise brand awareness
and drive traffic to our stores. Our goal is to continue to build the awareness of our brand and
the recognition of our name as a destination retailer that provides experience-based shopping
across a broad range of age groups and demographics.
5
Since February 2004, we have utilized an integrated marketing program that utilizes national
television advertising, direct mail and other components. Our advertising expenditures were $22.7
million (7.5% of total revenues) in fiscal 2004, $27.2 million (7.5% of total revenues) in fiscal
2005 and $31.0 million (7.1% of total revenues) in fiscal 2006, reflecting the rollout and
continuation of our marketing initiatives.
We employ several different marketing programs to drive traffic to our stores and grow
awareness of our brand. We can benefit from advertising campaigns that run in all four quarters of
the year. We use television advertising that targets both children and adults to promote and raise
awareness of our Build-A-Bear Workshop brand as well as advertising specific new product
introductions. We also advertise on radio and use online advertising to communicate our
interactive product and experience. We leverage our database of over 18 million unique households
in our direct mail and e-mail programs. Our website, www.buildabear.com, offers e-commerce,
information and entertaining games to over 1 million visitors per month. We also incorporate store
events, tourism marketing, mobile marketing and public relations into our marketing plans. We
integrate the timing and the messaging of the advertising and marketing programs across the various
media to maximize our reach to both new and existing guests and drive traffic into our stores.
In July 2006, we introduced our Stuff Fur Stuff® club customer loyalty program in the United
States that allows us to track electronically the rewards earned by customers. The program had
previously been tested in select markets and replaces our former Buy Stuff program, which was a
manual punch card system with limited tracking capability. The reward earned by the new program
did not change. After a guest enrolls in the Stuff Fur Stuff® club,
they receive one point for every dollar or partial dollar spent and after reaching 100 points and
they receive a reward certificate that offers a discount on their future purchase. Since the national
roll-out, over 2.8 million members have enrolled.
Following the acquisition of our United Kingdom and Irish operations, we introduced our
initial marketing initiatives in those countries including a direct mail and e-mail program, print
advertising, store events, tourism marketing and public relations. We expect to continue to expand
our marketing initiatives in the UK and Ireland in 2007 in order to grow our brand awareness and
grow our store business.
Licensing and Strategic Relationships
We have developed licensing and strategic relationships with some of the leading retail and
cultural organizations in the United States and Canada. We believe that our guest base and our
position in our industry category makes us an attractive partner and our customer research and
insight allows us to focus on strategic relationships with other companies that we believe are
appealing to our guests. We plan to continue to add strategic relationships on a selective basis
with companies who share our vision for our brand and provide us with attractive brand-awareness,
marketing and merchandising opportunities. These relationships for specific products are generally
reflected in contractual arrangements for limited terms that are terminable by either party upon
specified notice.
Product and Merchandise Licensing. We have key strategic relationships with select companies,
including World Wildlife Fund, SKECHERS®, Sanrio, the NBA, the WNBA, MLBTM, Limited Too,
Disney, NFL, the NHL® and First Book and, in Canada, World Wildlife Fund Canada, in which we use
their brands on our products sold in our stores. These strategic relationships allow both parties
to generate awareness around their brands. We have relationships with groups that pursue socially
responsible causes, as well as companies that have strong consumer brands, in order to respond to
our guests interests. We have also offered selected character-oriented products including Sesame
Workshops Elmo and Big Bird, Disneys Mickey Mouse and Minnie Mouse and Mumble, the feature
character in Warner Bros. animated film, Happy Feet.
Promotional Arrangements. We have also developed promotional arrangements with selected
organizations. Our arrangements with Major League Baseball® teams, including the Chicago Cubs, St.
Louis Cardinals, New York Mets and San Francisco Giants, have featured stuffed animal giveaways
at each clubs ballpark on a day in which our brand is highly promoted within the stadium. In May
2006, we partnered with McDonalds to feature limited edition, collectible mini Build-A-Bear
Workshop animals in Happy Meals. We also have had arrangements featuring product sampling, cross
promotions and shared media with companies such as Lego, JC Penney, Hilton Hotels, Mastercard and
Macys as well as targeted promotions with key media brands like National Geographic Kids and Radio
Disney.
Third Party Licensing. We have entered into a series of licensing arrangements with leading
manufacturers to develop a collection of lifestyle Build-A-Bear Workshop branded products including
childrens furniture, fruit snacks, video and DVD games, a direct-to-home book club, stationary
products, infant developmental toys and school fundraising products. We believe that each of these
initiatives has the potential to enhance our brand, raise brand awareness, and drive increased
revenues and profitability. We select companies for licensing relationships that we believe are
leaders in their respective sectors and that understand and share our strategic vision for offering
guests exciting and interactive merchandise. We have policies and practices in place intended to
ensure that the products manufactured under the Build-A-Bear Workshop brand adhere to our quality,
value and usability standards. We have entered into licensing arrangements for our branded products
with leading manufacturers including Pulaski Furniture, ConAgra Foods, Scholastic At Home, Game
Factory, Extra Large Technology, Snap TV, Creative Designs International and Kids Preferred.
6
Industry and Guest Demographics
While Build-A-Bear Workshop offers consumers an interactive and personalized experience, our
tangible product is stuffed animals, including our flagship product, the teddy bear, a widely
adored stuffed animal for over 100 years. According to data published by the International Council
of Toy Industries, worldwide sales of retail plush toys was approximately $4.4 billion and retail
sales of dolls was approximately $6.6 billion in 2000, which combined represent about 20% of the
$55 billion worldwide toy industry (excluding video games). In addition, a study conducted for the
Toy Industry Association reported U.S. sales of retail plush toys were $1.3 billion and retail
sales of dolls were $2.7 billion in 2006, for a combined total of over $4.0 billion. In 2006,
Playthings Magazine ranked us as the 12th largest toy retailer in the United States for 2005 based
on sales.
Our guests are diverse, spanning broad age ranges and socio-economic categories. Major guest
segments include families with children, primarily ages three to twelve, grandparents, aunts and
uncles, teen girls who occasionally bring along their boyfriends and child-centric organizations
looking for interactive entertainment options such as
scouting organizations and schools. Based on information compiled from our guest database for
2006, the average age of the recipient of our stuffed animals at the time of purchase is ten years
old and children aged one to fourteen are the recipients of approximately 80% of our stuffed
animals.
According to the United States Census Bureau, in 2004 there were over 60 million children age
14 and under in the United States. While the size of this population group is projected to remain
relatively stable over the next decade, the economic influence of this age group is expected to
increase. Based on a recent third-party publication, we believe that childrens spending has
doubled every ten years for the past three decades, tripling in the 1990s. Direct spending by
children aged four to twelve was estimated at $2.2 billion in 1968, $4.2 billion in 1984 and $17.1
billion in 1994 and 2002 estimates placed spending by this demographic at $40 billion. By 2006,
children are expected to directly spend more than $50 billion as well as influence hundreds of
billions of dollars in additional family spending.
Employees and Training
We are committed to providing a great experience for our diverse team of associates as well as
our guests. We have a distinctive culture that we believe encourages contribution and
collaboration. We take great pride in our culture and feel it is critical in encouraging
creativity, communication, and strong store performance. All store managers receive comprehensive
training through our Bear University® program, which is designed to promote a friendly and
personable environment in our stores and a consistent experience across our stores. We extensively
train our associates on the bear-making process and the guest experience. In fiscal 2006, we hired
less than 3% of applicants for store manager positions. We focus on employing and retaining people
who are friendly and focused on guest service. Our above average employee retention rates, based on
2006 industry data, contribute to the consistency and quality of the guest experience. Our store
teams are evaluated and compensated not only on sales results but also the results from our regular
guest satisfaction surveys. Each store has a recognition fund so that exceptional guest service can
be immediately recognized and rewarded. We are committed to providing compensation structures that
recognize individual accomplishments as well as overall team success.
As of December 30, 2006, we employed approximately 1,200 full-time and 5,700 part-time
employees. We divide our store base into four geographic regions, with the United Kingdom and
Ireland representing one of those regions. The regions are supervised by our Chief Workshop Bear
and four Regional Workshop Directors. Bearitory Leaders are responsible for each of our 28
bearitories consisting of between six and twelve stores. Each of our stores generally has a
full-time Chief Workshop Manager and two full-time Assistant Workshop Managers in addition to
hourly Bear Builder associates, most of whom work part-time. The number of part-time employees
fluctuates depending on our seasonal needs. In addition to the approximately 6,500 employees at our
store locations, we employ approximately 300 associates in general administrative functions at our
World Bearquarters in St. Louis, Missouri, approximately 50 associates at our Bearhouse
distribution center in Groveport, Ohio, and approximately 25 associates in our U.K. Bearquarters in
Windsor, England. We are committed to innovation and invention and generally have confidentiality
agreements with our employees and consultants. Store managers and Bearquarters associates pass
specific profile assessments. None of our employees are represented by a labor union, and we
believe our relationship with our employees is good.
International Franchises
In 2003, we began to expand the Build-A-Bear Workshop brand outside of the United States,
opening our own stores in Canada and our first franchised location in the United Kingdom. As of
December 30, 2006, there were 34 Build-A-Bear Workshop franchised stores located in the following
countries:
|
|
|
|
|
Japan |
|
|
7 |
|
Australia |
|
|
6 |
|
Denmark |
|
|
5 |
|
Taiwan |
|
|
3 |
|
Other |
|
|
13 |
|
7
On April 2, 2006 we acquired Amsbra Limited, our former franchisee in the United Kingdom, and
The Bear Factory Limited, a stuffed animal retailer in the United Kingdom. Amsbra previously
operated all of the franchised Build-A-Bear Workshop stores located in the United Kingdom. Upon
completion of this acquisition, all of the franchised locations in the United Kingdom became
company owned-stores.
All of our non-U.S., Canadian, United Kingdom and Irish stores are currently operated by third
party franchisees under separate master franchise agreements covering each country. Master
franchise rights are typically granted to a franchisee for an entire country or group of countries
for a specified term. The terms of these master franchise agreements vary by country but typically
provide that we receive an initial, one-time franchise fee and continuing royalties based on a
percentage of sales made by the franchisees stores. The terms of these agreements range up to ten
years with a franchisee option to renew for an additional term if certain conditions are met. All
such franchised stores have similar signage, store layout and merchandise characteristics to our
stores in the United States and Canada. Our goal is to have well-capitalized franchisees with
expertise in retail operations and real estate in their respective country. We work in conjunction
with our franchisees in the development of their business and store growth plans. We approve all
franchisees orders for merchandise and have oversight of their operational and business practices
in an effort to ensure they are in compliance with our standards. We expect our current and
anticipated franchisees to open approximately 20 to 25 new stores in fiscal 2007 in both existing
and new countries.
Sourcing and Inventory Management
We do not own or operate any manufacturing facilities. Our animal skins, stuffing, clothing
and accessories are produced by factories located primarily in China. We purchased approximately
83% of our inventory in fiscal 2006, approximately 86% in fiscal 2005 and approximately 85% in
fiscal 2004 from three vendors. After specifying the details and requirements for our products, our
vendors contract orders with multiple manufacturing facilities in Asia that are approved by us in
accordance with our quality control and labor standards. Our supplier factories are compliant with
the International Council of Toy Industries (ICTI) CARE certification. The CARE (Caring,
Awareness, Responsible, Ethical) Process is the ICTI program to promote ethical manufacturing, in
the form of fair labor treatment, as well as employee health and safety, in the toy industry supply
chain worldwide. Its initial focus is in China, where 70 percent of the worlds toy volume is
manufactured. In order to obtain this certification each factory completed a rigorous evaluation
performed by an accredited ICTI agent. Our suppliers can be used interchangeably as each has a
sourcing network for multiple product categories and can expand its factory network as needed. Our
relationships with our vendors generally are on a purchase order basis and do not provide a
contractual obligation to provide adequate supply, quality or acceptable pricing on a long-term
basis.
The average time from the beginning of production to arrival of the products into our stores
is approximately 90 to 120 days. Our weekly tracking and reporting tools give us the capabilities
to adjust to shifts in demand and help us to negotiate prices with our vendors. Through a regular
analysis of selling trends, we periodically update our product assortment by increasing productive
styles and eliminating less productive SKUs. Our distribution centers provide further logistical
efficiencies for delivering merchandise to our stores.
Distribution and Logistics
Through September 2006, a third-party provider warehoused and distributed a large portion of
our merchandise at a distribution center in St. Louis, Missouri. In September 2006, we completed
the construction of a new 350,000-square-foot distribution center near Columbus, Ohio which
replaced the third-party warehouse as well as a smaller distribution center previously used in Los
Angeles, California. We continue to have a third-party distribution center in Toronto, Canada under
an agreement that may be terminated with 120-day notice or when no work has been performed for 180
days. In the United Kingdom, we contract with a third-party distribution center in Middlesex,
England under a renewable monthly agreement. Store shipments from our third-party distribution
centers are scheduled throughout the week in order to smooth workflow and stores that are part of
the same shipping route are grouped together to reduce freight costs. All items in our assortment
are eligible for distribution, depending on allocation and fulfillment requirements, and we
typically distribute merchandise and supplies to each store once a week on a regular schedule,
which allows us to consolidate shipments in order to reduce distribution and shipping costs.
Transportation from the warehouses to the stores is managed by several third-party logistics
providers. In the United States and Canada, merchandise is ground-shipped to one of 74 third-party
pool points, which then deliver merchandise to the stores on a pre-arranged schedule. Back-up
supplies, such as Cub Condo carrying cases and stuffing for the animals, are often stored in
limited amounts at these local pool points. In the United Kingdom and Ireland, merchandise is shipped directly from the warehouse to the store.
Management Information Systems and Technology
Management information systems are a key component of our business strategy and we are
committed to utilizing technology to enhance our competitive position. Our information and
operational systems utilize a broad range of both purchased and internally developed applications
which support our guest relationships, marketing, financial, retail operations, real estate,
merchandising, and
8
inventory management processes. Our employees can securely access these systems
over a company-wide network. Sales, daily deposit and guest information are automatically collected
from the stores point-of-sale terminals and kiosks on a near real time basis. We have developed
proprietary software including domestic and international versions of our Name Me kiosk,
Find-A-Bear® identification, and our patented party scheduling systems. Data from these systems
are used to support key decisions in all areas of our business, including merchandising, allocation
and operations.
In the United States and Canada, we completed the installation of the initial module of our
human resources software in April 2006, our General Ledger and Accounts Payable financial software
in July 2006, our merchandise planning system in August 2006 as well as installing a warehouse
management system as part of our new company-owned distribution center. Additional modules of the
human resources and financial systems will be added in fiscal 2007. These new systems are intended
to improve our operational efficiency, purchasing and inventory control. Also in 2007, the General Ledger and Accounts Payable financial
software will be installed in the United Kingdom.
We regularly evaluate strategic information technology initiatives focused on competitive
differentiation, support of corporate strategy and reinforcement of our internal support systems.
Our critical systems are reviewed on a regular basis to evaluate disaster recovery plans and the
security of our systems.
Competition
We view our Build-A-Bear Workshop experience as a distinctive combination of entertainment and
retail. Because we are mall-based, we see our competition as those mall-based retailers that
compete for prime mall locations, including various apparel, footwear and specialty retailers. We
also compete with toy retailers, such as Wal-Mart, Toys R Us, Target, Kmart and Sears and other
discount chains, as well as with a number of companies that sell teddy bears in the United States,
including, but not limited to, Ty, Fisher Price, Mattel, Ganz, Russ Berrie, Applause, Boyds,
Hasbro, Commonwealth, Gund and Vermont Teddy Bear. Since we sell a product that integrates
merchandise and experience, we also view our competition as any company that competes for our
guests time and entertainment dollars, such as movie theaters, amusement parks and arcades, and
other mall-based entertainment venues.
We are aware of several small companies that operate make your own teddy bear and stuffed
animal stores or kiosks in retail locations, but we believe none offer the breadth and depth of the
Build-A-Bear Workshop experience or operates as a national retail company.
Intellectual Property and Trademarks
As of December 30, 2006, we had obtained over 200 U.S. trademark registrations, including
Build-A-Bear Workshop® for stuffed animals and accessories for the animals, retail store services
and other goods and services, over 35 issued U.S. patents with expirations ranging from 2013
through 2024 and over 160 copyright registrations. In addition, we have over 80 U.S. trademark and
two U.S. patent applications pending. We also license three patents from third-parties, including a
patent for the pre-stitching system used for closing up our stuffed animals after they have been
stuffed (U.S. Patent No. 6,109,196). Pursuant to an exclusive patent license agreement with Tonyco,
Inc. dated March 12, 2001, we were granted an exclusive license for use of the patent in retail
stores similar to ours. While we have the right to sublicense the patent, the licensor has agreed
not to grant rights to any of our
competitors. In the event that we or the licensor has reason to believe that a third party is
infringing upon the patent, the licensor is generally required to bear the expenses required to
maintain and defend the patent. The term of the agreement is for the full life of the patent and
any improvements thereon. The term will expire in 2019 unless we terminate the agreement, upon
notice to the licensor, in the event that the patent lapses due to the licensors non-payment of
maintenance taxes and fees for the patent. We paid the licensor $760,000 for the license. All
payments due under the license have been made and no ongoing payments are required by us.
We believe our copyrights, service marks, trademarks, trade secrets, patents and similar
intellectual property are critical to our success, and we intend, directly or indirectly, to
maintain and protect these marks and, where applicable, license the intellectual property and the
registrations for the intellectual property. We rely on trademark, copyright and other intellectual
property law to protect our proprietary rights to the extent available in any relevant
jurisdiction. We also depend on trade secret protection through confidentiality and license
agreements with our employees, subsidiaries, licensees, licensors and others. We may not have
agreements containing adequate protective provisions in every case, and the contractual provisions
that are in place may not provide us with adequate protection in all circumstances. Any
infringement or misappropriation of our intellectual property rights or breach of our
confidentiality or license agreements could result in significant litigation costs, and any failure
to adequately protect our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of one or more competitive advantages and decreased
revenues. In addition, intellectual property litigation or claims could force us to do one or more
of the following: cease selling or using any of our products that incorporate the challenged
intellectual property, which would adversely affect our revenue; obtain a license from the holder
of the intellectual property right alleged to have been infringed, which license may not be
available on reasonable terms, if at all; and redesign or, in the case of trademark claims, rename
our products to avoid infringing the intellectual property rights of third parties, which may not
be possible and time-consuming if it is possible to do so.
9
Despite our efforts to protect our intellectual property rights, intellectual property laws
afford us only limited protection. A third party could copy or otherwise obtain information from us
without authorization. Accordingly, we may not be able to prevent misappropriation of our
intellectual property or to deter others from developing similar products or services. Further,
monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and
may continue to be necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation of this type could result in
substantial costs and diversion of resources, may result in counterclaims or other claims against
us and could significantly harm our results of operations. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the laws of the United
States.
We also conduct business in foreign countries to the extent our merchandise is manufactured or
sold outside the United States and we have opened stores outside the United States in the past
three years, either directly or indirectly through franchisees. We filed, obtained or plan to file
for registration of marks in foreign countries to the degree necessary to protect these marks,
although our efforts may not be successful and further there may be restrictions on the use of
these marks in some jurisdictions.
Segments and Geographic Areas
We conduct our operations through three reportable segments consisting of retail,
international franchising, and licensing and entertainment. The retail segment includes the
operating activities of company-owned stores in the United States, Canada, the United Kingdom and
Ireland, and other retail delivery operations, including our web-store and non-traditional store
locations such as tourist venues and ballpark stores. The international franchising segment
includes the licensing activities of our franchise agreements with locations in Europe, Asia, and
Australia. The licensing and entertainment segment has been established to market the naming and
branding rights of our intellectual properties for third party use. See the financial statements
included elsewhere in this annual report on Form 10-K for further discussion and financial
information related to our segments.
Our reportable segments are primarily determined by the types of products and services that
they offer. Each reportable segment may operate in many geographic areas. See the financial
statements included elsewhere in this annual report on Form 10-K for further discussion and
financial information related to geographic areas in which we operate.
Availability of Information
We make certain filings with the SEC, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments and exhibits to those
reports, available free of charge in the Investor Relations section of our corporate website,
http://ir.buildabear.com, as soon as reasonably practicable after they are filed with the SEC. The
filings are also available through the SEC at the SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330. Also, these filings are available on the
internet at http://www.sec.gov. Our annual reports to shareholders, press releases and recent
analyst presentations are also available on our website in the Investor Relations section or by
writing to the Investor Relations department at World Bearquarters, 1954 Innerbelt Business Center
Dr., St. Louis, MO 63114.
ITEM 1A. RISK FACTORS
We operate in a changing environment that involves numerous known and unknown risks and
uncertainties that could materially affect our operations. The risks, uncertainties and other
factors set forth below may cause our actual results, performances or achievements to be materially
different from those expressed or implied by our forward-looking statements. If any of these risks
or events occur, our business, financial condition or results of operations may be adversely
affected.
Risks Related to Our Business
If we are unable to generate interest in and demand for our interactive retail experience,
including being able to identify and respond to consumer preferences in a timely manner, our
financial condition and profitability could be adversely affected.
We believe that our success depends in large part upon our ability to continue to attract
guests with our interactive shopping experience and our ability to anticipate, gauge and respond in
a timely manner to changing consumer preferences and fashion trends. We cannot assure you that our
past success will be sustained or there will continue to be a demand for our make-your-own stuffed
animal interactive experience, or for our stuffed animals, animal apparel and accessories. A
decline in demand for our interactive shopping experience, our animals, animal apparel or
accessories, or a misjudgment of consumer preferences or fashion trends, could have a negative
impact on our business, financial condition and results of operations. Furthermore, we may be
unable to attract guests to and generate demand for our new Friends 2B Made interactive shopping
experience. If our Friends 2B Made concept fails to be successful and we determine not to continue
it, we may incur charges as a result and it may have an adverse impact on the Build-A-Bear Workshop
brand. In addition, if we miscalculate the market for our merchandise or the purchasing preferences
of our guests, we may be required to sell a significant amount of our inventory at discounted
prices or even below costs, thereby adversely affecting our financial condition and profitability.
10
Our future growth and profitability could be adversely affected if our marketing initiatives are
not effective in generating sufficient levels of brand awareness and guest traffic.
In February 2004, after development and testing in selected markets, we introduced nationwide
a multi-media marketing program targeting our core demographic guests, principally parents and
children, which contributed to an increase in our comparable store sales in fiscal 2004. We
continue to update and evaluate our marketing initiatives, focusing on brand awareness and rapidly
changing consumer preferences. Our future growth and profitability will depend in large part upon
the effectiveness and efficiency of this marketing program and future marketing efforts that we
undertake, including our ability to:
|
|
create greater awareness of our brand, interactive shopping experience and products; |
|
|
|
identify the most effective and efficient level of spending in each market; |
|
|
|
determine the appropriate creative message and media mix for marketing expenditures; |
|
|
|
effectively manage marketing costs (including creative and media) in order to
maintain acceptable operating margins and return on marketing investment; |
|
|
|
select the right geographic areas in which to market; and |
|
|
|
convert consumer awareness into actual store visits and product purchases. |
Our planned marketing expenditures may not result in increased total or comparable store sales
or generate sufficient levels of product and brand name awareness. We may not be able to manage our
marketing expenditures on a cost-effective basis.
If we are not able to generate and maintain comparable store sales growth and continue to have
negative comparable store performance, our results of operations could be adversely affected.
Our comparable store sales for fiscal 2006 declined by 6.5%, following a 0.2% decline in
fiscal 2005, an 18.1% increase in fiscal 2004. The decrease in
2006 was primarily the result of a changing customer preferences, a decline in customer traffic,
and the more difficult macro economic conditions generally impacting customers. In 2005, ongoing
programs in advertising were successful in maintaining our comparable store sales levels. The
increase in 2004 was principally as a result of the nationwide multi-media marketing program we
initiated in February 2004, an improved economy, and the positive impact of being featured
in one segment of a nationally syndicated television show in the first quarter of fiscal 2004.
We believe the principal factors that will
affect comparable store results are the following:
|
|
the continuing appeal of our concept; |
|
|
|
the effectiveness of our marketing efforts to attract new and repeat guests; |
|
|
|
consumer confidence and general economic conditions; |
|
|
|
our ability to anticipate and to respond, in a timely manner, to consumer trends and offer popular characters; |
|
|
|
the continued introduction and expansion of our merchandise offerings; |
|
|
|
the impact of new stores that we open in existing markets; |
|
|
|
mall traffic; |
|
|
|
competition; |
|
|
|
the timing and frequency of national media appearances and other public relations events; and |
|
|
|
weather conditions. |
As a result of these and other factors, we may not be able to generate or maintain comparable
stores sales growth in the future. If we are unable to do so, our results of operations could be
significantly harmed.
A decrease in the customer traffic generated by the shopping malls in which we are located, which
we depend upon to attract guests to our stores, could adversely affect our financial condition and
profitability.
While we invest heavily in integrated marketing efforts and believe we are more of a
destination location than traditional retailers, we rely to a great extent on customer traffic in
the malls in which our stores are located. In order to generate guest traffic, we generally attempt
to locate our stores in prominent locations within high traffic shopping malls. We rely on the
ability of the malls anchor tenants, generally large department stores, and on the continuing
popularity of malls as shopping destinations. We cannot control the development of new shopping
malls, the addition or loss of anchors and co-tenants, the availability or cost of appropriate
locations within existing or new shopping malls or the desirability, safety or success of shopping
malls. In addition, customer mall traffic may be reduced due to a loss of consumer confidence
because of terrorism or war. If we are unable to generate sufficient guest traffic, our sales and
results of operations would be harmed. A significant decrease in shopping mall traffic could have a
material adverse effect on our financial condition and profitability.
11
A decline in general economic conditions could lead to reduced consumer demand for our products and
have an adverse effect on our liquidity and profitability.
Since purchases of our merchandise are dependent upon discretionary spending by our guests,
our financial performance is sensitive to changes in overall economic conditions that affect
consumer spending. Consumer spending habits are affected by, among other things, prevailing
economic conditions, levels of employment, salaries and wage rates, consumer confidence and
consumer perception of economic conditions. A general or perceived
slowdown in the United States, Canadian or U.K. economies or uncertainty as to the economic outlook
could reduce discretionary spending or cause a shift in consumer discretionary spending to other
products. Any of these factors would likely cause us to delay or slow our expansion plans, result
in lower net sales and could also result in excess inventories, which could, in turn, lead to
increased merchandise markdowns and related costs associated with higher levels of inventory and
adversely affect our liquidity and profitability.
Our market share may be adversely impacted at any time by a significant number of competitors.
We operate in a highly competitive environment characterized by low barriers to entry. We
compete against a diverse group of competitors. Because we are mall-based, we see our competition
as those mall-based retailers that compete for prime mall locations, including various apparel,
footwear and specialty retailers. We also compete with toy retailers, such as Wal-Mart, Toys R
Us, Target, Kmart and Sears and other discount chains, as well as with a number of manufacturers
that sell plush toys in the United States and Canada, including, but not limited to, Ty, Fisher
Price, Mattel, Russ Berrie, Applause, Boyds, Hasbro, Commonwealth, Gund and Vermont Teddy Bear.
Since we offer our guests an experience as well as merchandise, we also view our competition as any
company that competes for our guests time and entertainment dollars, such as movie theaters,
restaurants, amusement parks and arcades. In addition, there are several small companies that
operate make your own teddy bear and stuffed animal experiences in retail stores and kiosks.
Although we believe that currently none of these companies offers the breadth and depth of the
Build-A-Bear Workshop products and experience, we cannot assure you that they will not compete
directly with us in the future.
Many of our competitors have longer operating histories, significantly greater financial,
marketing and other resources, and greater name recognition. We cannot assure you that we will be
able to compete successfully with them in the future, particularly in geographic locations that
represent new markets for us. If we fail to compete successfully, our market share and results of
operations could be materially and adversely affected.
Our merchandise is manufactured by foreign manufacturers; therefore the availability and costs of
our products may be negatively affected by risks associated with international manufacturing and
trade.
We purchase our merchandise from domestic vendors who contract with manufacturers in foreign
countries, primarily in China. Any event causing a disruption of imports, including the imposition
of import restrictions or labor strikes or lock-outs, could adversely affect our business. For
example, in fiscal 2002, we experienced disruption to our import of merchandise as well as
increased shipping costs associated with a dock-worker labor dispute. The flow of merchandise from
our vendors could also be adversely affected by financial or political instability in any of the
countries in which the goods we purchase are manufactured, especially China, if the instability
affects the production or export of merchandise from those countries. Trade restrictions in the
form of tariffs or quotas, or both, applicable to the products we sell could also affect the
importation of those products and could increase the cost and reduce the supply of products
available to us. In addition, decreases in the value of the U.S. dollar against foreign currencies,
particularly the Chinese renminbi, could increase the cost of products we purchase from overseas
vendors.
Our distribution vendors may perform poorly, and we may be unable to realize the anticipated
benefits from our company-owned distribution center.
The efficient operation of our stores is dependent on our ability to distribute merchandise to
locations throughout the United States and Canada in a timely manner. We have in the past relied
on third parties to manage all of the warehousing and distribution aspects of our business and
continue to rely on them for a portion of our U.K. and Canadian distributions and all of our
distributions elsewhere. In 2006, we completed construction of a 350,000-square-foot distribution
center in Groveport, Ohio. Although we have added key personnel with experience in the management
of warehouses and distribution centers, we do not have extensive experience in this area, and we
may not be able to manage these functions as well as our current third party providers, which could
disrupt our business. Even if we are able to manage this aspect of our business effectively, we
may not realize all of the cost efficiencies and other benefits we currently expect from owning and
operating the Groveport distribution center, which would adversely affect our results of
operations.
We rely on a few vendors to supply substantially all of our merchandise, and any disruption in
their ability to
deliver merchandise could harm our ability to source products and supply inventory to our stores.
We do not own or operate any manufacturing facilities. We purchased approximately 83% of our
merchandise in fiscal 2006, 86% of our merchandise in fiscal 2005, and approximately 85% in fiscal
2004, from three vendors. These vendors in turn contract for our orders with multiple manufacturing
facilities for the production of merchandise. Our relationships with our vendors generally are on a
12
purchase order basis and do not provide a contractual obligation to provide adequate supply,
quality or acceptable pricing on a long-term basis. Our vendors could discontinue sourcing
merchandise for us at any time. If any of our significant vendors were to discontinue their
relationship with us, or if the factories with which they contract were to suffer a disruption in
their production, we may be unable to replace the vendors in a timely manner, which could result in
short-term disruption to our inventory flow as we transition our orders to new vendors or factories
which could, in turn, disrupt our store operations and have an adverse effect on our business,
financial condition and results of operations.
If we are unable to renew or replace our store leases or enter into leases for new stores on
favorable terms, or if we violate any of the terms of our current leases, our growth and
profitability could be harmed.
We lease all of our store locations. The majority of our store leases contain provisions for
base rent plus percentage rent based on sales in excess of an agreed upon minimum annual sales
level. A number of our leases include a termination provision which applies if we do not meet
certain sales levels during a specified period, typically in the third to fourth year of the lease.
In addition, most of our leases will expire within the next ten years and generally do not contain
options to renew. Furthermore, some of these leases contain various restrictions relating to change
of control of our company. Our leases also subject us to risks relating to compliance with changing
mall rules and the exercise of discretion by our landlords on various matters within the malls. In
addition, the lease for our store in the DOWNTOWN DISNEY® District at the DISNEYLAND® Resort in
Anaheim, California provides that the landlord may terminate the lease at any time, subject to the
payment of an early termination fee. As a result, we cannot assure you that the landlord will not
exercise its right to terminate this lease.
Our growth strategy requires us to open a significant number of new stores in the United States,
Canada, the United Kingdom, and Ireland each year. If we are not able to open new stores or to
effectively manage this growth, it could adversely affect our ability to grow and could
significantly harm our profitability.
Our growth will largely depend on our ability to open and operate new stores successfully in
the United States, Canada, the United Kingdom, and Ireland. We opened 35, 30 and 21 stores in
fiscal 2006, 2005, and 2004, respectively. We plan to open approximately 37 new stores in the
United States and Canada in fiscal 2007 and 7 to 10 new stores in the United Kingdom and Ireland
and anticipate further store openings in subsequent years. Our ability to identify and open new
stores in desirable locations and operate such new stores profitably is a key factor in our ability
to grow successfully. We cannot assure you as to when or whether desirable locations will become
available, the number of Build-A-Bear Workshop stores that we can or will ultimately open, or
whether any such new stores can be profitably operated. We have not always succeeded in identifying
desirable locations or in operating our stores successfully in those locations. For example, as of
December 30, 2006, we have closed two stores since our inception (not including four stores that we
closed in connection with our 2006 acquisition of Amsbra and The Bear Factory). We cannot assure
you that we will not have other stores in the future that we may decide to close. In addition, our
ability to open new stores and manage our growth will be limited to some extent by market
saturation of our stores. Our ability to open new stores and to manage our growth also depends on
our ability to:
|
|
negotiate acceptable lease terms, including desired tenant improvement allowances; |
|
|
|
finance the preopening costs, capital expenditures and working capital requirements of the stores; |
|
|
|
manage inventory to meet the needs of new and existing stores on a timely basis; |
|
|
|
hire, train and retain qualified store personnel; |
|
|
|
develop cooperative relationships with our landlords; and |
|
|
|
successfully integrate new stores into our existing operations. |
In July 2005, we opened our flagship store in New York City. This store is much larger than
our typical mall-based stores and includes additional facilities, such as a restaurant, that we do
not operate in our typical mall-based stores. Because we have little experience with this type of
store, we may be unable to generate revenues from this
store at a level that justifies keeping the store open. Closing this store could not only have an
adverse impact on our profitability, as the costs of opening this store were much larger than those
for a typical store, but, as our flagship store, it could also have an adverse impact on the
Build-A-Bear Workshop brand and consumer perception of our brand.
Increased demands on our operational, managerial and administrative resources as a result of
our growth strategy could cause us to operate our business less effectively, which in turn could
cause deterioration in our profitability.
We may not be able to operate successfully if we lose key personnel, are unable to hire qualified
additional personnel, or experience turnover of our management team.
The success of our business depends upon our senior management closely supervising all aspects
of our business, in particular the operation of our stores and the design, procurement and
allocation of our merchandise. Also, because guest service is a defining feature of the
Build-A-Bear Workshop corporate culture, we must be able to hire and train qualified managers and
Bear Builder associates to succeed. The loss of certain key employees, including Maxine Clark, our
founder and Chief Executive Bear, or other members of our senior management, our inability to
attract and retain other qualified key employees or a labor shortage that reduces
13
the pool of
qualified store associates could have a material adverse effect on our business, financial
condition and results of operations. We generally do not maintain key person insurance with
respect to our executives, management or other personnel, except for limited coverage of our Chief
Executive Bear, which we do not believe would be sufficient to completely protect us against losses
we may suffer if her services were to become unavailable to us in the future.
We may not realize some of the expected benefits of the acquisition of Amsbra and The Bear Factory,
including making these operations profitable in light of the substantial costs of these operations.
In April 2006, we acquired The Bear Factory Limited, a stuffed animal retailer in the U.K.
owned by The Hamleys Group Limited and Amsbra Limited, our former U.K. franchisee. Both The Bear
Factory and Amsbra had losses in 2006, 2005 and prior fiscal years. Although we believe that we
can make these operations profitable as part of our larger company through marketing, product and
store execution practices, we may be unable to do so. In particular, we may be unable to
successfully leverage our purchasing power and know-how, and may be unable to raise sales levels
sufficiently to generate profitable operations. In addition, other than Canada, we have not
directly operated non-U.S. businesses, and we will face business, regulatory and cultural
differences from our domestic business, such as economic conditions in the U.K., changes in foreign
government policies and regulations in the U.K. and potential restrictions on the right to convert
and repatriate currency, as well as other risks that we may not anticipate. We also face
difficulties becoming profitable in the U.K. because we have less brand awareness than in the U.S.,
face higher labor and rent costs, and have different holiday schedules.
If we are not able to franchise new stores outside of the United States, Canada and the U.K., if we
are unable to effectively manage our international franchises or if the laws relating to our
international franchises change, our growth and profitability could be adversely affected and we
could be exposed to additional liability.
In 2003, we began to expand the Build-A-Bear Workshop brand outside of the United States,
opening our own stores in Canada and our first franchised location in the United Kingdom. We intend
to continue expanding outside of the United States and Canada through franchising in several
countries over the next several years. As of December 30, 2006, there were 34 Build-A-Bear
Workshop franchised stores located outside of the United States, Canada and the U.K. We have
limited experience in franchising and we may not be successful in maintaining and implementing our
international franchising strategy. In addition, we cannot assure you that our franchisees will be
successful in identifying and securing desirable locations or in operating their stores. These
markets frequently have different demographic characteristics, competitive conditions, consumer
tastes and discretionary spending patterns than our existing United States, Canadian and U.K.
markets, which may cause these stores to be less successful than those in our existing markets.
Additionally, our franchisees may experience merchandising and distribution challenges that are
different from those we currently encounter in our existing markets. The operations and results of
our franchisees could be negatively impacted by the economic or political factors in the countries
in which they operate. These challenges, as well as others, could have a material adverse effect on
our business, financial condition and results of operations.
The success of our franchising strategy will depend upon our ability to attract qualified
franchisees with sufficient financial resources to develop and grow the franchise operation and
upon the ability of those franchisees to develop and operate their franchised stores. Franchisees
may not operate stores in a manner consistent with our standards and requirements, may not hire and
train qualified managers and other store personnel and may not operate their stores profitably. As
a result, our franchising strategy may not be profitable to us. Moreover, our image and reputation
may suffer. For example, our initial franchisees in South Korea , the Netherlands and France
performed below expectations and we transferred those agreements to other parties. Furthermore,
even if our international franchising strategy is successful, the interests of franchisees might
sometimes conflict with our interests. For example, whereas franchisees are concerned with their
individual business strategies and objectives, we are responsible for ensuring the success of the
Build-A-Bear Workshop brand and all of our stores.
The laws of the various foreign countries in which our franchisees operate govern our
relationships with our franchisees. These laws, and any new laws that may be enacted, may
detrimentally affect the rights and obligations between us and our franchisees and could expose us
to additional liability.
We may suffer negative publicity or be sued if the manufacturers of our merchandise violate labor
laws or engage in practices that our guests believe are unethical, or if our products are recalled
or cause injuries.
We rely on our sourcing personnel to select manufacturers with legal and ethical labor
practices, but we cannot control the business and labor practices of our manufacturers. If one of
these manufacturers violates labor laws or other applicable regulations or is accused of violating
these laws and regulations, or if such a manufacturer engages in labor or other practices that
diverge from those typically acceptable in the United States, we could in turn experience negative
publicity or be sued.
Many of our products are used by small children and infants who may be injured from usage. We
may decide or be required to recall products or be subject to claims or lawsuits resulting from
injuries. For example, in January 2003 we voluntarily recalled a product due to a possible safety
issue, for which a vendor reimbursed us for certain related expenses. Negative publicity in the
event of any recall or if any children are injured from our products could have a material adverse
effect on sales of our products and our
14
business, and related recalls or lawsuits with respect to
such injuries could have a material adverse effect on our financial position. Although we currently
have liability insurance, we cannot assure you that it would cover product recalls and we face the
risk that claims or liabilities will exceed our insurance coverage. Furthermore, we may not be able
to maintain adequate liability insurance in the future.
Portions of our business are subject to privacy and security risks. If we improperly obtain, or are
unable to protect, information from our guests, we could be subject to liability and damage to our
reputation.
In addition to serving as an online sales portal, our website, www.buildabear.com, features
childrens games, e-cards and printable party invitations and thank-you notes, and provides an
opportunity for children under the age of 13 to sign up, with the consent of their parent or
guardian, to receive our online newsletter. We currently obtain and retain personal information
about our website users. In addition, we obtain personal information about our guests as part of
their registration in our Find-A-Bear® identification system. Federal, state and foreign
governments have enacted or may enact laws or regulations regarding the collection and use of
personal information, with particular emphasis on the collection of information regarding minors.
Such regulations include or may include requirements that companies establish procedures to:
|
|
give adequate notice regarding information collection and disclosure practices; |
|
|
|
allow consumers to have personal information deleted from a companys database; |
|
|
|
provide consumers with access to their personal information and the ability to rectify inaccurate information; |
|
|
|
obtain express parental consent prior to collecting and using personal information from children; and |
|
|
|
comply with the Federal Childrens Online Privacy Protection Act. |
Such regulation may also include enforcement and redress provisions. While we have implemented
programs and procedures designed to protect the privacy of people, including children, from whom we
collect information, and our website is designed to be fully compliant with the Federal Childrens
Online Privacy Protection Act, there can be no assurance that such programs will conform to all
applicable laws or regulations.
We have a stringent privacy policy covering the information we collect from our guests and
have established security features to protect our guest database and website. However, our security
measures may not prevent security breaches. We may need to expend significant resources to protect
against security breaches or to address problems caused by breaches. If third persons were able to
penetrate our network security and gain access to, or otherwise misappropriate, our guests
personal information, it could harm our reputation and, therefore, our business and we could be
subject to liability. Such liability could include claims for misuse of personal information or
unauthorized use of credit cards. These claims could result in litigation, our involvement in
which, regardless of the outcome, could require us to expend significant financial resources. In
addition, because our guest database primarily includes personal information of young children and
young children frequently interact with our website, we are potentially vulnerable to charges from
parents, childrens organizations, governmental entities, and the media of engaging in
inappropriate collection, distribution or other use of data collected from children. Such charges
could adversely impact guest relationships and ultimately cause a decrease in net sales and also
expose us to litigation and possible liability.
We may fail to protect our intellectual property and may have infringement, misappropriation or
other disputes or litigation with third parties, which could be costly, distract our management and
personnel and which could result in the diminution in value of our trademarks and other important
intellectual property.
Other parties have asserted in the past, and may assert in the future, trademark, patent,
copyright or other intellectual property rights that are important to our business. We cannot
assure you that others will not seek to block the use of or seek monetary damages or other remedies
for the prior use of our brand names or other intellectual property or the sale of our products or
services as a violation of their trademark, patent or other proprietary rights. Defending any
claims, even claims without merit, could be time-consuming, result in costly settlements,
litigation or restrictions on our business and damage our reputation.
In addition, there may be prior registrations or use of intellectual property in the U.S. or
foreign countries for similar or competing marks or other proprietary rights of which we are not
aware. In all such countries it may be possible for any third party owner of a national trademark
registration or other proprietary right to enjoin or limit our expansion into those countries or to
seek damages for our use of such intellectual property in such countries. In the event a claim
against us were successful and we could not obtain a license to the relevant intellectual property
or redesign or rename our products or operations to avoid infringement, our business, financial
condition or results of operations could be harmed. Securing registrations does not fully insulate
us against intellectual property claims, as another party may have rights superior to our
registration or our registration may be vulnerable to attack on various grounds.
Our profitability could be adversely affected by high petroleum products prices.
The profitability of our business depends to a certain degree upon the price of petroleum
products, both as a component of the transportation costs for delivery of inventory from our
vendors to our stores and as a raw material used in the production of our animal
15
skins. Petroleum
prices have recently risen to historic or near historic highs. For example, our results in fiscal
2006 were impacted by fuel surcharges due to higher petroleum products prices. We are unable to
predict what the price of crude oil and the resulting petroleum products will be in the future. We
may be unable to pass along to our customers the increased costs that would result from higher
petroleum prices. Therefore, any such increase could have an adverse impact on our business and
profitability.
Risks Related to Owning Our Common Stock
Fluctuations in our quarterly results of operations could cause the price of our common stock to
substantially decline.
Retailers generally are subject to fluctuations in quarterly results. Our operating results
for one period may not be indicative of results for other periods, and may fluctuate significantly
due to a variety of factors, including:
|
|
the timing of new store openings and related expenses; |
|
|
|
the profitability of our stores; |
|
|
|
increases or decreases in comparable store sales; |
|
|
|
the timing and frequency of our marketing initiatives; |
|
|
|
changes in general economic conditions and consumer spending patterns; |
|
|
|
changes in consumer preferences; |
|
|
|
the continued introduction and expansion of merchandise offerings; |
|
|
|
the effectiveness of our inventory management; |
|
|
|
actions of competitors or mall anchors and co-tenants; |
|
|
|
seasonal shopping patterns, including whether the Easter holiday occurs in the first or
second quarter and other vacation schedules; |
|
|
|
the timing and frequency of national media appearances and other public relations events; and |
|
|
|
weather conditions. |
If our future quarterly results fluctuate significantly or fail to meet the expectations of
the investment community, then the market price of our common stock could decline substantially.
The market price of our common stock may be materially adversely affected by market volatility
which could result in costly and time-consuming securities litigation.
The market price of our common stock could be subject to significant fluctuations. Among the
factors that could affect our stock price are:
|
|
actual or anticipated variations in comparable store sales or operating results; |
|
|
|
changes in financial estimates by the investment community; |
|
|
|
actual or anticipated changes in economic, political or market conditions, such
as recessions or international currency fluctuations; |
|
|
|
changes in the retailing environment; |
|
|
|
changes in the market valuations of other specialty retail companies; |
|
|
|
announcements by us or our competitors of significant acquisitions, strategic
partnerships, divestitures, joint ventures or other strategic initiatives; and |
|
|
|
losses of key members of management. |
In addition, we cannot assure you that an active trading market for our common stock will
continue which could affect our stock price and the liquidity of any investment in our common
stock.
The stock markets in general have experienced substantial volatility that has often been
unrelated to the operating performance of individual companies. These broad market fluctuations may
adversely affect the trading price of our common stock.
In the past, following periods of volatility in the market price of a companys securities,
stockholders have often instituted class action securities litigation against those companies. Such
litigation, if instituted, could result in substantial costs and a diversion of management
attention and resources, which would significantly harm our profitability and reputation.
Our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or
frustrate attempts to replace or remove our current management by our stockholders, even if such
replacement or removal may be in our stockholders best interests.
Our basic corporate documents and Delaware law contain provisions that might enable our
management to resist a takeover. These provisions:
16
|
|
restrict various types of business combinations with significant stockholders; |
|
|
|
provide for a classified board of directors; |
|
|
|
limit the right of stockholders to remove directors or change the size of the board of directors; |
|
|
|
limit the right of stockholders to fill vacancies on the board of directors; |
|
|
|
limit the right of stockholders to act by written consent and to call a special meeting of stockholders or propose other actions; |
|
|
|
require a higher percentage of stockholders than would otherwise be required to amend, alter, change or repeal our bylaws and
certain provisions of our certificate of incorporation; and |
|
|
|
authorize the issuance of preferred stock with any voting rights, dividend rights, conversion privileges, redemption rights and
liquidation rights and other rights, preferences, privileges, powers, qualifications, limitations or restrictions as may be
specified by our board of directors. |
These provisions may:
|
|
discourage, delay or prevent a change in the control of our company or a change in our management,
even if such change may be in the best interests of our stockholders; |
|
|
|
adversely affect the voting power of holders of common stock; and |
|
|
|
limit the price that investors might be willing to pay in the future for shares of our common stock. |
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Stores
As of December 30, 2006, we operated 233 retail stores located primarily in major malls
throughout the United States and Canada and 38 stores located in the United Kingdom and Ireland.
Our mall-based stores generally range in size from 2,000 to 4,000 square feet and average
approximately 2,800 square feet, while our tourist location stores currently range up to 6,000
square feet and our flagship store in New York City is approximately 20,000 square feet. Our stores
are designed to be open and inviting for guests of all ages with an entryway that spans the
majority of our storefront with wide aisles to accommodate families or groups. Our typical store
has an oversized sentry bear at the front entry and features two stuffing machines, five NameMe
computer stations, display units and flooring to enhance the guest traffic flow through the store.
We select malls and make site selections within the mall based upon demographic analysis, market
research, site visits and mall dynamics as well as a forecasting model that projects a potential
locations first year sales. We have identified a significant number of target sites that meet our
criteria for new stores in malls and tourist locations. We seek to locate our mall-based stores
near major customer entrances to or in the center of malls and adjacent to other children, teen and
family retailers. After we approve a site, it typically takes approximately 25 weeks to finalize
the lease, design the layout, build out the site, hire and train associates, and stock the store
for opening.
We lease all of our store locations. Due to our attraction as a family-oriented entertainment
destination concept with average net sales per gross square foot that, in fiscal 2006, generally
exceeded the average for the malls in which we operated, we have received numerous requests from
mall owners and developers to locate a Build-A-Bear Workshop store in their malls. We believe that
we generally have negotiated favorable exclusivity provisions in our leases.
Most of our leases have an initial term of ten years. A number of our leases provide a lease
termination or kick out option to either party in a pre-determined year or years, typically the
third or fourth year of the lease, if we do not meet certain agreed upon minimum sales levels. In
addition, our leases typically require us to pay personal property taxes, our pro rata share of
real property taxes of the shopping mall, our own utilities, repairs and maintenance in our store,
a pro rata share of the malls common area maintenance and, in some instances, merchant association
fees and media fund contributions. Most of our leases also require the payment of a fixed minimum
rent as well as percentage rent based on sales in excess of agreed upon minimum annual sales
levels.
17
Following is a list of our 271 company-owned stores in the United States, Canada, the United
Kingdom and Ireland as of December 30, 2006:
|
|
|
|
|
Number of |
State |
|
Stores |
Alabama |
|
2 |
Arizona |
|
4 |
Arkansas |
|
3 |
California |
|
23 |
Colorado |
|
6 |
Connecticut |
|
5 |
Delaware |
|
1 |
Florida |
|
12 |
Georgia |
|
7 |
Hawaii |
|
1 |
Idaho |
|
1 |
Illinois |
|
7 |
Indiana |
|
6 |
Iowa |
|
3 |
Kansas |
|
2 |
Kentucky |
|
3 |
Louisiana |
|
3 |
Maine |
|
1 |
Maryland |
|
4 |
Massachusetts |
|
9 |
Michigan |
|
4 |
Minnesota |
|
2 |
Mississippi |
|
1 |
Missouri |
|
6 |
Nebraska |
|
1 |
Nevada |
|
3 |
New Hampshire |
|
2 |
New Jersey |
|
12 |
New Mexico |
|
1 |
New York |
|
12 |
North Carolina |
|
7 |
Ohio |
|
10 |
Oklahoma |
|
2 |
Oregon |
|
3 |
Pennsylvania |
|
8 |
Rhode Island |
|
1 |
South Carolina |
|
3 |
Tennessee |
|
6 |
Texas |
|
16 |
Utah |
|
3 |
Virginia |
|
6 |
Washington |
|
4 |
West Virginia |
|
1 |
Wisconsin |
|
3 |
Canadian Province |
|
|
Alberta |
|
2 |
British Columbia |
|
2 |
Manitoba |
|
1 |
Nova Scotia |
|
1 |
Ontario |
|
7 |
United Kingdom |
|
|
England |
|
32 |
Scotland |
|
4 |
Wales |
|
1 |
Ireland |
|
1 |
18
Non-Store Properties
In addition to leasing all of our store locations, we lease approximately 52,000 square feet
for our web fulfillment site and corporate headquarters, or World Bearquarters, in St. Louis,
Missouri. Our World Bearquarters houses our corporate staff, our call center and our on-site
training facilities. The lease commenced on January 1, 2005 with a four-year term, and may be
extended for two additional five-year terms. In 2007, our web fulfillment site will be
moving to our company-owned warehouse and distribution center.
In the United Kingdom, we lease approximately 2,000 square feet for our regional headquarters,
or U.K. Bearquarters, in Windsor, England. The lease commenced on August 2003. The lease can be
terminated at any time by either party giving notice of termination six months prior to
cancellation.
In September 2006, we completed construction of a company-owned warehouse and distribution
center, or Bearhouse, in Groveport, Ohio. The facility is approximately 350,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved in ordinary routine litigation common to companies engaged
in our line of business. We are involved in several court actions seeking to enforce our
intellectual property rights or to determine the validity and scope of the proprietary rights of
others. As of the date of this annual report on Form 10-K, we are not involved in any pending legal
proceedings that we believe would be likely to have a material adverse effect on our financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth quarter of fiscal
2006.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol BBW. Our
common stock commenced trading on the NYSE on October 28, 2004. The following table sets forth the
high and low closing sale prices of our common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
Fiscal 2005 |
|
|
High |
|
Low |
|
High |
|
Low |
First Quarter |
|
$ |
32.35 |
|
|
$ |
26.89 |
|
|
$ |
36.90 |
|
|
$ |
29.44 |
|
Second Quarter |
|
$ |
32.30 |
|
|
$ |
21.31 |
|
|
$ |
31.08 |
|
|
$ |
20.31 |
|
Third Quarter |
|
$ |
24.12 |
|
|
$ |
19.79 |
|
|
$ |
24.49 |
|
|
$ |
19.86 |
|
Fourth Quarter |
|
$ |
32.00 |
|
|
$ |
22.00 |
|
|
$ |
31.97 |
|
|
$ |
21.44 |
|
As
of March 9, 2007, there were approximately 930 holders of record
of the Companys common stock.
19
PERFORMANCE GRAPH
The following performance graph compares the 14-month cumulative total stockholder return of
the Companys common Stock, with the cumulative total return on the Russell 2000® Index and an
SEC-defined peer group of companies identified as SIC Code 5600-5699 (the Peer Group). The Peer
Group consists of companies whose primary business is the operation of apparel and accessory retail
stores. Build-A-Bear Workshop is not strictly a merchandise retailer and there is a strong
interactive, entertainment component to the Companys business which differentiates it from
retailers in the Peer Group. However, in the absence of any other readily identifiable peer group,
we believe the use of the Peer Group is appropriate.
The performance graph starts with the Companys initial public offering on October 28, 2004
and ends on December 29, 2006, the last trading day prior to December 30, 2006, the end of the
Companys fiscal 2006. The graph assumes that $100 was invested on October 28, 2004 in each of the
Companys common stock, the Russell 2000® Index and the Peer Group, and that all dividends were
reinvested.
These indices are included only for comparative purposes as required by Securities and
Exchange Commission rules and do not necessarily reflect managements opinion that such indices are
an appropriate measure of the relative performance of the Common Stock. They are not intended to
forecast the possible future performance of the Common Stock.
Stock Repurchase Program
On February 20, 2007, we announced a $25 million share repurchase program of our outstanding
common stock over the next twelve months. The program was authorized by our board of directors.
Purchases may be made in the open market or in privately negotiated transactions, with the level
and timing of activity depending on market conditions, other investment opportunities, and other
factors. Purchases may be increased, decreased or discontinued at any time without notice. As of
March 9, 2007, approximately 160,000 shares at an average price of $26.48 per share have been
repurchased under this program. Future repurchases will be reported in our quarterly and annual reports under Item 5 on a monthly basis.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the fourth quarter of fiscal 2006.
Dividend Policy
We paid a special $10.0 million cash dividend to our stockholders in August 2004. We
anticipate that we will retain any future earnings to support operations and to finance the growth
and development of our business, and we do not expect, at this time, to pay cash dividends in the
future. Any future determination relating to our dividend policy will be made at the discretion of
our board of directors and will depend on a number of factors, including future earnings, capital
requirements, financial conditions, future prospects and other factors that the board of directors
may deem relevant. Additionally, under our credit agreement, we are prohibited from declaring
dividends without the prior consent of our lender, subject to certain exceptions, as described in
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources.
20
ITEM 6. SELECTED FINANCIAL DATA
Throughout this annual report on Form 10-K, we refer to our fiscal years ended December 30,
2006, December 31, 2005, January 1, 2005, January 3, 2004, and December 28, 2002 as fiscal years
2006, 2005, 2004, 2003, and 2002, respectively. Our fiscal year consists of 52 or 53 weeks, and
ends on the Saturday nearest December 31 in each year. Fiscal years 2006, 2005, 2004, and 2002
included 52 weeks and fiscal year 2003 included 53 weeks. All of our fiscal quarters presented in
this annual report on Form 10-K included 13 weeks. When we refer to our fiscal quarters, or any
three month period ending as of a specified date, we are referring to the 13-week period prior to
that date.
The following table sets forth, for the periods and dates indicated, our selected consolidated
financial and
operating data. The balance sheet data as of December 30, 2006 and December 31, 2005 and the
statement of operations and other financial data for our fiscal years ended December 30, 2006,
December 31, 2005, and January 1, 2005 are derived from our audited financial statements included
elsewhere in this annual report on Form 10-K. The balance sheet data as of January 1, 2005, January
3, 2004, and December 28, 2002 and the statement of operations and other financial data for our
fiscal years ended January 3, 2004 and December 28, 2002 are derived from our audited financial
statements that are not included in this annual report on Form 10-K. You should read our selected
consolidated financial and operating data in conjunction with our consolidated financial statements
and related notes and with Managements Discussion and Analysis of Financial Condition and Results
of Operations appearing elsewhere in this annual report on Form 10-K.
See the notes to our consolidated financial statements for an explanation of the method used
to determine the numbers of shares used in computing basic and diluted net earnings per common
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Dollars in thousands, except share, per share and per gross square foot data) |
|
|
|
|
Statement of operations
data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
437,072 |
|
|
$ |
361,809 |
|
|
$ |
301,662 |
|
|
$ |
213,672 |
|
|
$ |
169,138 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sold |
|
|
227,509 |
|
|
|
180,373 |
|
|
|
150,903 |
|
|
|
115,845 |
|
|
|
90,215 |
|
Selling, general and
administrative |
|
|
158,712 |
|
|
|
133,921 |
|
|
|
115,939 |
|
|
|
81,533 |
|
|
|
66,068 |
|
Store preopening |
|
|
3,958 |
|
|
|
4,812 |
|
|
|
2,186 |
|
|
|
3,859 |
|
|
|
3,949 |
|
Interest expense
(income), net |
|
|
(1,530 |
) |
|
|
(1,710 |
) |
|
|
(299 |
) |
|
|
(58 |
) |
|
|
(88 |
) |
|
|
|
Total costs and
expenses |
|
|
388,649 |
|
|
|
317,396 |
|
|
|
268,729 |
|
|
|
201,179 |
|
|
|
160,144 |
|
|
|
|
Income before income taxes |
|
|
48,423 |
|
|
|
44,413 |
|
|
|
32,933 |
|
|
|
12,493 |
|
|
|
8,994 |
|
Income tax expense |
|
|
18,933 |
|
|
|
17,099 |
|
|
|
12,934 |
|
|
|
4,875 |
|
|
|
3,557 |
|
|
|
|
Net income |
|
|
29,490 |
|
|
|
27,314 |
|
|
|
19,999 |
|
|
|
7,618 |
|
|
|
5,437 |
|
Cumulative dividends and accretion
of redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
1,262 |
|
|
|
1,970 |
|
|
|
1,971 |
|
Cumulative dividends on
nonredeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
263 |
|
|
|
455 |
|
|
|
455 |
|
|
|
|
Net income available
to common and participating
preferred stockholders |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
18,474 |
|
|
$ |
5,193 |
|
|
$ |
3,011 |
|
|
|
|
Net income allocated
to common stockholders |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
8,519 |
|
|
$ |
116 |
|
|
$ |
67 |
|
|
|
|
Net income allocated to participating
preferred stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,955 |
|
|
$ |
5,077 |
|
|
$ |
2,944 |
|
|
|
|
Earnings per common
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.46 |
|
|
$ |
1.38 |
|
|
$ |
2.30 |
|
|
$ |
0.53 |
|
|
$ |
0.31 |
|
Diluted |
|
$ |
1.44 |
|
|
$ |
1.35 |
|
|
$ |
1.07 |
|
|
$ |
0.43 |
|
|
$ |
0.29 |
|
Shares used
in computing common per share amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
20,169,814 |
|
|
|
19,735,067 |
|
|
|
3,702,365 |
|
|
|
217,519 |
|
|
|
217,519 |
|
Diluted |
|
|
20,468,256 |
|
|
|
20,229,978 |
|
|
|
18,616,435 |
|
|
|
17,546,348 |
|
|
|
12,055,458 |
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Dollars in thousands, except share, per share and per gross square foot data) |
|
|
|
|
Other financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin ($) (1) |
|
$ |
205,063 |
|
|
$ |
178,528 |
|
|
$ |
149,566 |
|
|
$ |
97,582 |
|
|
$ |
78,908 |
|
Gross margin (%) (1) |
|
|
47.4 |
% |
|
|
49.7 |
% |
|
|
49.8 |
% |
|
|
45.7 |
% |
|
|
46.7 |
% |
Capital expenditures (2) |
|
$ |
52,577 |
|
|
$ |
31,083 |
|
|
$ |
16,494 |
|
|
$ |
24,917 |
|
|
$ |
24,017 |
|
Depreciation and
amortization |
|
|
22,394 |
|
|
|
17,592 |
|
|
|
14,948 |
|
|
|
12,840 |
|
|
|
8,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by
operating activities |
|
$ |
53,035 |
|
|
$ |
54,642 |
|
|
$ |
48,527 |
|
|
$ |
31,770 |
|
|
$ |
23,963 |
|
Cash flows used in
investing activities |
|
|
(93,772 |
) |
|
|
(37,077 |
) |
|
|
(17,732 |
) |
|
|
(27,035 |
) |
|
|
(25,531 |
) |
Cash flows provided by (used in)
financing activities |
|
|
3,537 |
|
|
|
6,058 |
|
|
|
15,931 |
|
|
|
|
|
|
|
(121 |
) |
Cash dividends declared
per common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.55 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store data (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
233 |
|
|
|
200 |
|
|
|
170 |
|
|
|
150 |
|
|
|
108 |
|
United Kingdom and Ireland |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stores |
|
|
271 |
|
|
|
200 |
|
|
|
170 |
|
|
|
150 |
|
|
|
108 |
|
Square footage at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
712,299 |
|
|
|
615,194 |
|
|
|
514,341 |
|
|
|
461,982 |
|
|
|
344,503 |
|
United Kingdom and Ireland (4) |
|
|
56,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total square footage |
|
|
769,000 |
|
|
|
615,194 |
|
|
|
514,341 |
|
|
|
461,982 |
|
|
|
344,503 |
|
Average net retail sales per
store (5) (6) |
|
$ |
1,761 |
|
|
$ |
1,864 |
|
|
$ |
1,857 |
|
|
$ |
1,605 |
|
|
$ |
1,904 |
|
Net retail sales per gross square
foot (6) (7) |
|
$ |
573 |
|
|
$ |
615 |
|
|
$ |
602 |
|
|
$ |
502 |
|
|
$ |
582 |
|
Comparable store sales
change (%) (8) |
|
|
(6.5 |
)% |
|
|
(0.2 |
)% |
|
|
18.1 |
% |
|
|
(15.9 |
)% |
|
|
(9.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
53,109 |
|
|
$ |
90,950 |
|
|
$ |
67,327 |
|
|
$ |
20,601 |
|
|
$ |
15,866 |
|
Working capital |
|
|
27,952 |
|
|
|
66,646 |
|
|
|
48,000 |
|
|
|
10,463 |
|
|
|
7,376 |
|
Total assets |
|
|
299,770 |
|
|
|
246,108 |
|
|
|
189,237 |
|
|
|
128,210 |
|
|
|
105,893 |
|
Redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,890 |
|
|
|
35,920 |
|
Total stockholders equity |
|
|
164,263 |
|
|
|
130,357 |
|
|
|
95,510 |
|
|
|
19,845 |
|
|
|
14,192 |
|
|
|
|
(1) |
|
Gross margin represents net retail sales less cost of merchandise sold. Gross margin
percentage represents gross margin divided by net retail sales. |
|
(2) |
|
Capital expenditures consist of leasehold improvements, furniture and fixtures and
computer equipment and software purchases. |
|
(3) |
|
Excludes our webstore and seasonal and event-based locations. |
|
(4) |
|
Square footage in the United Kingdom and Ireland is estimated selling square footage. |
|
(5) |
|
Average net retail sales per store represents net retail sales from stores open
throughout the entire period divided by the total number of such stores. |
|
(6) |
|
When we refer to average net retail sales per store and net retail sales per gross
square foot for any period, we include in those calculations only those stores that
have been open for that entire period. |
|
(7) |
|
Net retail sales per gross square foot represents net retail sales from stores open
throughout the entire period divided by the total gross square footage of such
stores. |
|
(8) |
|
Comparable store sales percentage changes are based on net retail sales and stores
are considered comparable beginning in their thirteenth full month of operation. |
22
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially 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 annual report on Form 10-K. The following section is qualified in
its entirety by the more detailed information, including our financial statements and the notes
thereto, which appears elsewhere in this annual report on Form 10-K.
Overview
We are the leading, and only international, company providing a make your own stuffed animal
interactive entertainment experience under the Build-A-Bear Workshop brand, in which our guests
stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. Our
concept, which we developed for mall-based retailing, capitalizes on what we believe is the
relatively untapped demand for experience-based shopping as well as the widespread appeal of
stuffed animals. The Build-A-Bear Workshop experience appeals to a broad range of age groups and
demographics, including children, teens, their parents and grandparents. As of December 30, 2006,
we operated 233 stores in the United States and Canada, 38 stores in the United Kingdom and
Ireland, and had 34 franchised stores operating in international locations under the Build-A-Bear
Workshop brand. In addition to our stores, we market our products and build our brand through our
website, which simulates our interactive shopping experience, as well as our non-traditional store
locations in Major League Baseball® ballparks, a location in a zoo, and our presence at event-based
locations through our mobile store.
On April 2, 2006, we acquired all of the outstanding shares of The Bear Factory Limited, a
stuffed animal retailer in the United Kingdom, and Amsbra Limited, our former U.K. franchisee. The
results of this acquisitions operations have been included in the consolidated financial
statements since that date. In conjunction with those transactions, we obtained 40 retail
locations in the United Kingdom and Ireland. Four of those locations closed during 2006. Of those
four locations, two closed due to overlapping store locations in the Amsbra and Bear Factory
portfolios, and the other two locations are concessions within department stores, which is a format
that we have chosen not to continue at this point in the United Kingdom. We converted and
rebranded 25 Bear Factory stores to Build-A-Bear Workshop stores in time for the 2006 holiday
season, resulting in a unified company brand throughout the U.K. and Ireland. During the store
conversion and rebranding process, stores were temporarily closed on average for 22 days while many
of the costs to operate the stores continue. Therefore, the acquisition was dilutive to earnings
during fiscal 2006. The Company hopes to improve sales performance and adopt best practices in the
areas of merchandising, marketing, purchasing and store operations, across the acquired store base,
and to realize earnings accretion from the acquisition in fiscal 2007.
We operate in three segments that share the same infrastructure, including management,
systems, merchandising and marketing, and generate revenues as follows:
|
|
Company-owned retail stores located in the United States, Canada, the
United Kingdom and Ireland, a webstore and seasonal, event-based
locations; |
|
|
|
International stores operated under franchise agreements; and |
|
|
|
License arrangements with third parties which manufacture and sell to
other retailers merchandise carrying the Build-A-Bear Workshop brand. |
Selected financial data attributable to each segment for fiscal 2006, 2005, and 2004 are set
forth in note 18 to our consolidated financial statements included elsewhere in this annual report
on Form 10-K.
For a discussion of the key trends and uncertainties that have affected our revenues, income
and liquidity, see the Revenues, Costs and Expenses and Expansion and Growth Potential
subsections of this Overview.
We believe that we have developed an appealing retail store concept that, for stores open for
the entire year, averaged $1.8 million in fiscal 2006 and $1.9 million in both fiscal 2005 and
fiscal 2004 in net retail sales per store. For a discussion of the changes in comparable store
sales in fiscal years 2006, 2005 and 2004, see Revenues. Store contribution, which consists of
income before income tax expense, interest, store depreciation and amortization, store preopening
expense and general and administrative expense, excluding franchise fees, income from licensing
activities and contribution from our webstore and seasonal event-based locations, as a percentage
of net retail sales, excluding revenue from our webstore and seasonal and event-based locations,
was 24.7% for 2006 and 26.8% for fiscal 2005, and total company net income as a percentage of total
revenues was 6.8% for fiscal 2006, and 7.5% for fiscal 2005. See Non-GAAP Financial Measures
for a reconciliation of store contribution to net income. The store contribution of our
23
average
store, coupled with the fact that we have opened 198 stores in the United States and Canada since
the beginning of fiscal 2001 have been the primary reasons for our net income increasing during
each of the last five fiscal years. Additionally, as we have added stores and grown our sales
volume, the quantities of merchandise and supplies we purchase have increased which has created
economies of scale for our vendors allowing us to obtain reduced costs for these items and increase
our profitability.
The increase in total store contribution has been partially offset by the increase in our
central office general and administrative expenses required to support an expanding store base and
international franchise operations. These expenses have grown at a slower rate, in percentage
terms, than our number of stores and net retail sales.
We expect to grow our business primarily through the continued opening of new stores. Further,
we expect to increase our net retail sales, including comparable store sales, as a result of the
continuation of national television and online advertising which we added to our marketing mix in
fiscal 2004. We also plan to increase our revenues through increasing the number of international
franchised stores, as well as the addition of new licensees and sales of licensed products for
which we receive license revenue.
We expect to realize leverage on our national advertising programs as we expand and open
stores in new markets. We have been running national advertising since 2004 and believe that our
brand awareness is higher and our entry into new markets is stronger as a result of the advertising
and we expect to leverage these programs on an ongoing basis. We expect to improve our store
productivity as a result of comparable store sales improvement and thereby improve our store
contribution as a percentage of net retail sales by better leveraging our store level operating
expenses, primarily those which are fixed such as occupancy, over increased net retail sales per
store. As we grow our total revenues, we also expect to decrease our general and administrative
expenses as a percentage of revenues by leveraging these expenses, primarily those which are
largely fixed such as management payroll and occupancy, over an increased revenue amount. This
decrease will be partially offset by some increases in general and administrative expenses,
including marketing such as direct mail to support more stores and our growing international
franchise business.
Following is a description and discussion of the major components of our statement of
operations:
Revenues
Net retail sales: Net retail sales are revenues from retail sales (including our webstore and
seasonal and event-based locations), are net of discounts, exclude sales tax, include shipping and handling
costs billed to customers, and are recognized at the time of sale. Revenues from gift cards are
recognized at the time of redemption. Our guests use cash, checks and third party credit cards to
make purchases. We classify stores as new or comparable stores and do
not include our webstore or seasonal, event-based locations in our store count or in our comparable
store calculations. Stores enter the comparable store calculation in their thirteenth full month of
operation. We opened four additional Friends 2B Made locations in 2006 to bring the total number of
Friends 2B Made locations to nine as of December 30, 2006. All
but one of these locations are within or
adjacent to a Build-A-Bear Workshop store and share common store management, employees and
infrastructure. Other than our stand-alone store in Ontario, California, these locations are
considered expansions of the existing Build-A-Bear Workshop store and are not considered an
addition to our total store count. The net retail sales of these expanded Build-A-Bear Workshop
stores are excluded from comparable store sales calculations until the thirteenth full month of
operation after the date of the expansion.
We have an automated frequent shopper program in the United States, the Stuff Fur Stuff® club,
whereby guests enroll in the program and receive one point for every dollar or partial dollar spent
and after reaching 100 points receive a $10 discount on a future purchase. This program was
automated in July 2006 and replaced our former Buy Stuff Program, which was a manual punch card
system with limited tracking capability. The reward earned under the new program did not change.
An estimate of the obligation related to the program, based on historical redemption rates, is
recorded as deferred revenue and a reduction of net retail sales at the time of purchase. The
deferred revenue obligation is reduced, and a corresponding amount is recognized in net retail
sales, in the amount of and at the time of redemption of the $10 discount. We account for changes
in the deferred revenue account at the total company level only. This is due to the fact that the
frequent buyer discount can be earned or redeemed at any of our store locations. Therefore, when
we refer to net retail sales by location, such as comparable stores or new stores, these amounts do
not include any changes in the deferred revenue amount. See Critical Accounting Policies for
additional details on the accounting for the deferred revenue program.
24
We use net retail sales per gross square foot and comparable store sales as performance
measures for our business. The following table details net retail sales per gross square foot by
age of store for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
Fiscal |
|
|
2006 |
|
2005 |
|
2004 |
Net retail sales per gross square foot (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Store Age > 5 years (66 stores in 2006, 34 stores in 2005, 13 stores in 2004) |
|
$ |
577 |
|
|
$ |
623 |
|
|
$ |
691 |
|
Store Age 3-5 years (80 stores in 2006, 69 stores in 2005, 55 stores in 2004) |
|
$ |
556 |
|
|
$ |
593 |
|
|
$ |
576 |
|
Store Age < 3 years (54 stores in 2006, 66 stores in 2005, 79 stores in 2004) |
|
$ |
592 |
|
|
$ |
637 |
|
|
$ |
608 |
|
All comparable stores |
|
$ |
573 |
|
|
$ |
615 |
|
|
$ |
602 |
|
|
|
|
(1) |
|
Net retail sales per gross square foot represents net retail sales from stores open
throughout the entire period divided by the total gross square footage of such stores. As such,
stores in the UK
are excluded from the calculation. Calculated on an annual basis only. |
|
(2) |
|
Excludes our webstore and seasonal and event-based locations. |
The percentage increase (or decrease) in comparable store sales for the periods presented
below is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
Fiscal |
|
|
2006 |
|
2005 |
|
2004 |
Comparable store sales change (%) (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Store Age > 5 years (66 stores in 2006, 34 stores in 2005, 13 stores in 2004) |
|
|
(5.2 |
)% |
|
|
4.0 |
% |
|
|
24.0 |
% |
Store Age 3-5 years (80 stores in 2006, 69 stores in 2005, 55 stores in 2004) |
|
|
(6.3 |
)% |
|
|
(0.2 |
)% |
|
|
19.7 |
% |
Store Age < 3 years (54 stores in 2006, 66 stores in 2005, 79 stores in 2004) |
|
|
(9.4 |
)% |
|
|
(3.3 |
)% |
|
|
15.1 |
% |
Total comparable store sales change |
|
|
(6.5 |
)% |
|
|
(0.2 |
)% |
|
|
18.1 |
% |
|
|
|
(1) |
|
Comparable store sales percentage changes are based on net retail sales and stores are
considered
comparable beginning in their thirteenth full month of operation. |
|
(2) |
|
Excludes our webstore and seasonal and event-based locations. |
Our net retail sales per gross square foot are among the highest for specialty retailers.
Historically, as a group our younger stores have performed at the highest sales per square foot
level, above the chain-wide average, despite experiencing comparable store sales pressures. Often
our stores open with strong sales performance in their first year of operation and show comparable
store sales declines in years two and three. Our older stores consistently perform the best on a
comparable store sales basis and younger stores consistently generate the highest sales per square
foot. New stores typically pay for themselves in their first year of operation.
Comparable store sales decreased by 6.5% in fiscal 2006 following a decrease of 0.2% in fiscal
2005. We believe these changes can be attributed primarily to the following factors:
|
|
Changing customer preferences in 2006 contributed to the decline in
comparable store sales. Our repeat customers, many of whom have built
a sizable collection of Build-A-Bear Workshop stuffed animals, have
become more product discriminating. Additionally, in the fourth
quarter of 2006, inventory shortfalls on products, specifically our
special holiday animal Mumble, impacted store performance. Demand was
greater than we had anticipated and coupled with our customers
changing preferences contributed to a fourth quarter negative
comparable store sales decrease of 10.4%. |
|
|
|
In 2006, we saw improvement in our average transaction value per
guest. However, there was a decline in customer traffic during fiscal
2006 compared to 2005. |
|
|
|
Due to the discretionary nature of our products, we believe that
during much of 2006 comparable store sales were impacted by the more
difficult macro economic conditions generally impacting customers. |
Comparable store sales decreased by 0.2% in fiscal 2005 following an increase of 18.1% in
fiscal 2004. We believe these changes can be attributed primarily to the following factors:
|
|
Our ongoing programs in advertising. During the fourth quarter of
fiscal 2003, we tested in a limited number of markets the use of
television and online advertising and determined that it was
successful in attracting a higher number of new and repeat guests. In
the first quarter of fiscal 2004, we implemented this marketing
strategy on a national basis and quickly began achieving
|
25
|
|
comparable
store sales increases. We continued this marketing approach throughout
fiscal 2005. This approach was successful in maintaining our
comparable store sales levels, but did not produce the increases that
were achieved in fiscal 2004 when the change in the marketing program
was an incremental addition to the prior year. |
|
|
|
Following an improved economy in 2004, with higher levels of consumer
confidence and a better retail climate, the economy showed mixed
results in 2005 with varying levels of consumer confidence, record
levels of crude oil prices and significant weather activity,
particularly during the hurricane season. |
Franchise fees: We receive an initial, one-time franchise fee for each master franchise
agreement which is amortized to revenue over the life of the respective franchise agreement, which
extend for periods up to 10 years.
Master franchise rights are typically granted to a franchisee for an entire country or countries.
Continuing franchise fees are based on a percentage of sales made by the franchisees stores and
are recognized as revenue at the time of those sales.
As of December 30, 2006, we had 34 stores, including 15 opened in fiscal 2006, operating under
franchise arrangements in the following countries:
|
|
|
|
|
Japan |
|
|
7 |
|
Australia |
|
|
6 |
|
Denmark |
|
|
5 |
|
Taiwan |
|
|
3 |
|
Other |
|
|
13 |
|
On April 2, 2006, we acquired all of the outstanding shares Amsbra Limited, our former U.K.
franchisee. Amsbra operated all 11 of the franchised Build-A-Bear Workshop stores located in the
United Kingdom. Upon completion of the acquisition, all of the franchised locations in the United
Kingdom became company-owned stores.
Licensing revenue: Licensing revenue is based on a percentage of sales made by licensees to
third parties and is recognized at the time the product is shipped by the licensee or at the point
of sale. We have entered into a number of licensing arrangements whereby third parties manufacture
and sell to other retailers merchandise carrying the Build-A-Bear Workshop trademark.
Costs and Expenses
Cost of merchandise sold and gross margin: Cost of merchandise sold includes the cost of the
merchandise, royalties paid to licensors of third party branded merchandise, store occupancy cost,
including store depreciation, freight costs from the manufacturer to the store, cost of warehousing
and distribution, packaging, damages and shortages, and shipping and handling costs incurred in
shipment to customers. Gross margin is defined as net retail sales less the cost of merchandise
sold.
We have been able to reduce the unit costs of our merchandise and packaging through economies
of scale realized as our sales volume has grown. The increase in sales volume has also allowed us
to reduce our freight, cost of warehousing and distribution costs as a percentage of net retail
sales as a result of the cost efficiencies of shipping higher volumes of merchandise. We expect to
maintain these efficiencies in the future.
Selling, general and administrative expense: These expenses include store payroll and
benefits, advertising, credit card fees, and store supplies, as well as central office general and
administrative expenses, including management payroll, benefits, stock-based compensation, travel,
information systems, accounting, insurance, legal and public relations. These expenses also include
depreciation and amortization of central office leasehold improvements, furniture, fixtures and
equipment as well as the amortization of intellectual property costs.
Central office general and administrative expenses have grown over time in order to support
the increased number of stores in operation and we believe will continue to grow as we add stores,
but we expect this increase to be at a lower rate than the percentage increase in total revenues.
Advertising increased significantly with the introduction in fiscal 2004 of our national television
and online advertising campaign. We maintained the level of advertising expense as a percentage of
net retail sales in fiscal 2006 as compared to fiscal 2005 and fiscal 2004, and anticipate
continuing this level of advertising expenditures in the future. Other store expenses such as
credit card fees and supplies historically have increased or decreased proportionately with net
retail sales.
We granted options during fiscal 2004 at an exercise price of $8.78 per share, which had been
determined to be the fair value of our common stock at the time based on an independent appraisal.
Subsequent to such grants, we determined that the fair value of the underlying common stock should
have been deemed to be approximately $15.00 per share. As a result of this determination, this
option issuance generated stock-based compensation of $1.9 million to be recognized over the
vesting period of the 302,234 underlying options issued. These options became fully vested upon the
completion of our initial public offering on October 28, 2004. Accordingly, all
unrecognized compensation expense related to this grant was recognized at that time and is
reflected in the consolidated statement of operations for fiscal 2004 as a component of selling,
general and administrative expense.
26
On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). The provisions of SFAS 123R require
that all share-based payments to employees be recognized in the financial statements based on the
fair value of the instruments issued. SFAS 123R requires the recognition of compensation expense
related to instruments issued following adoption as well as to the non-vested portion of
instruments issued prior to adoption of the standard. After the adoption of SFAS 123R, we
anticipate that our share-based employee compensation will primarily consist of the granting of
non-vested stock which vests over a pre-determined period of time assuming continued employment. In
the past, our share-based employee compensation consisted primarily of stock option awards which
vested over a pre-determined period of time assuming continued employment. In 2006 we recorded
stock-based compensation of approximately $2.1 million ($1.4 million net of taxes) in fiscal 2006
following the adoption of SFAS 123R. Of this amount, $0.2 million ($0.2 after tax) is attributable
to the Companys adoption of SFAS 123R. This incremental expense from the adoption of SFAS 123R did
not reduce basic or diluted earnings per share based upon the insignificance of the expense. The
additional stock-based compensation expense not related to the adoption of SFAS 123R was related to
the vesting of restricted stock awards. In 2005, we recorded stock based compensation of
approximately $0.8 million ($0.5 million net of tax).
Store preopening: Preopening costs are expensed as incurred and include store set-up, certain
labor and hiring costs, and rental charges incurred prior to a stores opening.
Expansion and Growth Potential
Company-Owned Stores:
The number of Build-A-Bear Workshop stores in the United States, Canada, United Kingdom, and
Ireland for the last three fiscal years can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
Fiscal |
|
|
2006 |
|
2005 |
|
2004 |
Beginning of period |
|
|
200 |
|
|
|
170 |
|
|
|
150 |
|
U.K. Acquisition |
|
|
40 |
|
|
|
|
|
|
|
|
|
Opened |
|
|
35 |
|
|
|
30 |
|
|
|
21 |
|
Closed |
|
|
(4 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
271 |
|
|
|
200 |
|
|
|
170 |
|
On April 2, 2006 the Company acquired all of the outstanding shares of The Bear Factory
Limited (Bear Factory), a stuffed animal retailer in the United Kingdom, and Amsbra Limited
(Amsbra), the Companys former U.K. franchisee (collectively, the U.K. Acquisition). In
conjunction with those transactions, we obtained 40 retail locations in the United Kingdom and
Ireland. Four of those locations closed during 2006. Of those four locations, two closed due to
overlapping store locations in the Amsbra and Bear Factory portfolios, and the other two locations
are concessions within department stores, which is a format that we have chosen not to continue at
this point in the United Kingdom. We opened two new store locations in the United Kingdom in
fiscal 2006.
In fiscal 2007, we anticipate opening 37 Build-A-Bear Workshop stores in the United States and
Canada and 7 to 10 stores in the United Kingdom and Ireland. We believe there is a market potential
for at least 350 Build-A-Bear Workshop stores in the United States and Canada and 70 to 75 stores
in the United Kingdom and Ireland. In fiscal 2003, we began testing in certain markets our initial
brand expansion initiative, our proprietary Friends 2B Made line of make-your-own dolls and
related products. In fiscal 2004, we opened two Friends 2B Made locations within or adjacent to
existing Build-A-Bear Workshop stores. In fiscal 2005, we opened three additional locations in or
adjacent to new or existing Build-A-Bear Workshop stores. In fiscal 2006, we opened three
additional locations in or adjacent to new or existing Build-A-Bear Workshop stores and one stand
alone Friends 2B Made store in Ontario, California. Other than the one stand alone store, the
Friends 2B Made stores are not included in the number of store openings in fiscal 2006, 2005 or
2004 as noted above but rather are considered expansions of Build-A-Bear
Workshop stores. The Friends 2B Made merchandise is also offered from a separate display fixture
in select Build-A-Bear Workshop stores.
In 2004 we began offering merchandise in seasonal, event-based locations such as Major League
Baseball® ballparks, as well as at temporary locations such as at the NBA All-Star Jam Session. We
expect to expand our future presence at select seasonal, event-based locations contingent on their
availability. As of the end of December 30, 2006 we had a total of five ballpark locations. We
also opened up our first store in a zoo during fiscal 2006.
27
International Franchise Revenue:
Our first franchisee location was opened in November 2003. The number of international,
franchised stores opened and closed for the periods presented below can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
Fiscal |
|
|
2006 |
|
2005 |
|
2004 |
Beginning of period |
|
|
30 |
|
|
|
12 |
|
|
|
1 |
|
U.K. Acquisition |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
Opened |
|
|
15 |
|
|
|
18 |
|
|
|
12 |
|
Closed |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
34 |
|
|
|
30 |
|
|
|
12 |
|
As of December 30, 2006, we had 13 master franchise agreements, which typically grant
franchise rights for a particular country or countries, covering 15 countries. We anticipate
signing additional master franchise agreements in the future. We expect our current and future
franchisees to open 20 to 25 stores in fiscal 2007. We believe there is a market potential for
approximately 300 franchised stores outside of the United States, Canada, the United Kingdom, and
Ireland.
In April 2006, we acquired Amsbra Limited, our former franchisee in the United Kingdom. Amsbra
owned all 11 franchised Build-A-Bear Workshop stores in the United Kingdom. Upon completion of the
transaction, all of the franchised locations in the United Kingdom became company-owned stores.
Licensing Revenue:
In fiscal 2004, we began entering into license agreements pursuant to which we receive
royalties on Build-A-Bear Workshop brand products. These agreements generated revenue of
approximately $1.0 million in 2006, $0.9 million in fiscal 2005, and $0.3 million in 2004. We
anticipate entering into additional license agreements in the future.
Results of Operations
The following table sets forth, for the periods indicated, selected statement of operation
data expressed as a percentage of total revenues, except where otherwise indicated. Percentages
will not total due to cost of merchandise sold being expressed as a percentage of net retail sales
and rounding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006 |
|
Fiscal
2005 |
|
Fiscal
2004 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net retail sales |
|
|
99.0 |
% |
|
|
99.2 |
% |
|
|
99.6 |
% |
Franchise fees |
|
|
0.8 |
|
|
|
0.5 |
|
|
|
0.3 |
|
Licensing revenues |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sold (1) |
|
|
52.6 |
|
|
|
50.3 |
|
|
|
50.2 |
|
Selling, general and administrative |
|
|
36.3 |
|
|
|
37.0 |
|
|
|
38.4 |
|
Store preopening |
|
|
0.9 |
|
|
|
1.3 |
|
|
|
0.7 |
|
Interest expense (income), net |
|
|
(0.4 |
) |
|
|
(0.5 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
88.9 |
|
|
|
87.7 |
|
|
|
89.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
11.1 |
|
|
|
12.3 |
|
|
|
10.9 |
|
Income tax expense |
|
|
4.3 |
|
|
|
4.7 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6.8 |
% |
|
|
7.5 |
% |
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (%)(2) |
|
|
47.4 |
% |
|
|
49.7 |
% |
|
|
49.8 |
% |
|
|
|
(1) |
|
Cost of merchandise sold is expressed as a percentage of net retail sales. |
|
(2) |
|
Gross margin represents net retail sales less cost of merchandise sold.
Gross margin percentage represents gross margin divided by net retail
sales. |
28
Fiscal Year Ended December 30, 2006 (52 weeks) Compared to Fiscal Year Ended December 31, 2005 (52 weeks)
Total revenues. Net retail sales increased to $432.6 million for fiscal 2006 from $358.9
million for fiscal 2005, an increase of $73.7 million, or 20.5%. Sales from new stores contributed
a $55.0 million increase in net retail sales. Sales from our acquisition of Amsbra and The Bear
Factory contributed $32.7 million and sales from non-store locations and non-comparable stores
resulted in a $3.0 million increase in net retail sales. Included in net retail sales in fiscal
2006 is an adjustment to deferred revenue of $3.6 million, effective at the beginning of fiscal
2006, related to the most recent assessment of redemption rates on our customer loyalty program.
Offsetting these increases, comparable store sales decreased $22.2 million, or 6.5%.
Revenue from international franchise fees increased to $3.5 million for fiscal 2006 from $2.0
million for fiscal 2005, an increase of $1.5 million. This increase was primarily due to the
addition of new franchisees and new franchised stores in fiscal 2006. Licensing revenue was $1.0
million in fiscal 2006 compared to $0.9 million in fiscal 2005.
Gross margin. Gross margin increased to $205.1 million for fiscal 2006 from $178.5 million for
fiscal 2005, an increase of $26.6 million, or 14.9%. As a percentage of net retail sales, gross
margin decreased to 47.4% for fiscal 2006 from 49.7% for fiscal 2005, a decrease of 2.3%. This
decrease was anticipated and resulted primarily from higher occupancy costs as a percentage of net
retail sales in the U.K. Higher occupancy costs in the U.S. and Canada as a percentage of net
retail sales resulting from the decline in comparable store sales, and higher shipping and
transportation costs primarily related to the transition to our company-owned distribution center,
also contributed to the decline in gross margin as a percentage of
net retail sales. Improved merchandise margins partially offset the
decrease in gross margin percentage.
Selling, general and administrative. Selling, general and administrative expenses were $158.7
million for fiscal 2006 as compared to $133.9 million for fiscal 2005, an increase of $24.8
million, or 18.5%. As a percentage of total revenues, selling, general and administrative expenses
decreased to 36.3% for fiscal 2006 as compared to 37.0% for fiscal 2005, a decrease of 0.7%. The
dollar increase was primarily due to 71 more stores, which includes the acquired U.K. stores, in
operation at December 30, 2006 as compared to December 31, 2005 with the increased salaries at the
stores and central office to support the larger store base. Selling, general and administrative
expense as a percentage of total revenues was lower primarily due to a reduction in the percentage
of advertising expense as compared to total revenues, the leveraging of store payroll over a larger
revenue base, and a decline in the central office management payroll resulting primarily from a
reduction in performance-based bonus expense. These decreases were partially offset by increased
stock-based compensation expense.
Store preopening. Store preopening expense was $4.0 million for fiscal 2006 as compared to
$4.8 million for fiscal 2005. These amounts include preopening rent expense of $0.6 million in
fiscal 2006 and $1.5 million in fiscal 2005. The decrease was primarily due to preopening costs of
$1.8 million related to our flagship store and café in New York City. Offsetting the impact of the
flagship store, five more new stores were opened in fiscal 2006 than in fiscal 2005 (35 in fiscal
2006, including two U.K. stores, as compared to 30 in fiscal 2005). Preopening expenses include
expenses for stores that have opened as well as some expenses incurred for stores that will be
opened at a later date.
Interest expense (income), net. Interest income, net of interest expense, was $1.5 million for
fiscal 2006 as compared to $1.7 million for fiscal 2005. This decrease was the result of lower cash
balances throughout fiscal 2006 due to capital expenditures for our distribution center and cash
used for the acquisition of Amsbra and The Bear Factory.
Provision for income taxes. The provision for income taxes was $18.9 million for fiscal 2006
as compared to $17.1 million for fiscal 2005. The effective tax rate was 39.1% for fiscal 2006 and
38.5% for fiscal 2005. The increase in the effective tax rate was principally due to the impact of
the U.K. acquisition and the inability to record a benefit for net operating losses generated by
the U.K. operations in the current year.
Fiscal Year Ended December 31, 2005 (52 weeks) Compared to Fiscal Year Ended January 1, 2005 (52 weeks)
Total revenues. Net retail sales increased to $358.9 million for fiscal 2005 from $300.5
million for fiscal 2004, an increase of $58.4 million, or 19.4%. Sales from new stores contributed
a $54.8 million increase in net retail sales. Sales over the Internet increased by $2.4 million, or
38.8%, and sales from non-store locations and non-comparable stores resulted in a $0.7 million
increase in net retail sales. Comparable store sales decreased $0.5 million, or 0.2%. Revenue
deferrals under our frequent shopper program decreased to $1.6 million in fiscal 2005 compared to
$2.6 million in fiscal 2004 and resulted in a $1.0 million increase in net retail sales.
Revenue from international franchise fees increased to $2.0 million for fiscal 2005 from $0.8
million for fiscal 2004, an increase of $1.2 million. This increase was primarily due to the
addition of new franchisees and new franchised stores in fiscal 2005. Licensing revenue was $0.9
million in fiscal 2005 compared to $0.3 million in fiscal 2004.
Gross margin. Gross margin increased to $178.5 million for fiscal 2005 from $149.6 million for
fiscal 2004, an increase of $28.9 million, or 19.3%. As a percentage of net retail sales, gross
margin decreased to 49.7% for fiscal 2005 from 49.8% for fiscal
29
2004, a decrease of 0.1%. Higher
shipping costs related to increased fuel surcharges accounted for 0.3% of the decrease in gross
margin. Higher occupancy cost as a percentage of net retail sales, resulting from flat comparable
store sales, accounted for 0.2% of this decrease. These decreases were partially offset by lower
product and supply costs, as a percentage of net retail sales, resulting from purchasing cost
efficiencies related to higher sales volumes, which accounted for a 0.3% increase in gross margin.
Reduced inventory damages and shortages also offset the decrease in gross margin by 0.1%.
Selling, general and administrative. Selling, general and administrative expenses were $133.9
million for fiscal 2005 as compared to $115.9 million for fiscal 2004, an increase of $18.0
million, or 15.5%. As a percentage of total revenues, selling, general and administrative expenses
decreased to 37.0% for fiscal 2005 as compared to 38.4% for fiscal 2004, a decrease of 1.4%. The
dollar increase was primarily due to 30 more stores in operation at December 31, 2005 as compared
to January 1, 2005. Selling, general and administrative expense as a percentage of total revenues
was 1.5% lower due to the leveraging of central office and store payroll costs, primarily as a
result of lower performance-based bonuses in 2005 as compared to 2004. Lower stock-based
compensation also decreased selling, general and administrative expenses by 0.4% as a percentage of
total revenues. These decreases were partially offset by higher legal, accounting and insurance
costs primarily associated with being a public company for the entire period in fiscal 2005 which
resulted in a 0.4% increase as a percentage of total revenues.
Store preopening. Store preopening expense was $4.8 million for fiscal 2005 as compared to
$2.2 million for fiscal 2004. These amounts include preopening rent expense of $1.5 million in
fiscal 2005 and $0.4 million in fiscal 2004. Approximately $2.0 million of this increase, including
approximately $0.9 million of preopening rent expense, was due to the preopening costs related to
our flagship store and café in New York City. Excluding our flagship
store, eight more new stores were opened in fiscal 2005 than in fiscal 2004 (29 in fiscal 2005 as
compared to 21 in fiscal 2004). Preopening expenses include expenses for stores that have opened as
well as some expenses incurred for stores that will be opened at a later date.
Interest expense (income), net. Interest income, net of interest expense, was $1.7 million for
fiscal 2005 as compared to $0.3 million for fiscal 2004. This increase was the result of higher
cash balances throughout fiscal 2005.
Provision for income taxes. The provision for income taxes was $17.1 million for fiscal 2005
as compared to $12.9 million for fiscal 2004. The effective tax rate was 38.5% for fiscal 2005 and
39.3% for fiscal 2004. The decrease in the effective tax rate was principally due to non-deductible
stock compensation charges incurred in fiscal 2004.
Non-GAAP Financial Measures
We use the term store contribution throughout this annual report on Form 10-K. Store
contribution consists of income before income tax expense, interest, store depreciation and
amortization, store preopening expense and general and administrative expense, excluding franchise
fees, income from licensing activities and contribution from our webstore and seasonal and
event-based locations. This term, as we define it, may not be comparable to similarly titled
measures used by other companies and is not a measure of performance presented in accordance with
U.S. generally accepted accounting principles (GAAP).
We use store contribution as a measure of our stores operating performance. Store
contribution should not be considered a substitute for net income, net income per store, cash flows
provided by operating activities, cash flows provided by operating activities per store, or other
income or cash flow data prepared in accordance with GAAP.
We believe store contribution is useful to investors in evaluating our operating performance
because it, along with the number of stores in operation, directly impacts our profitability.
Historically, central office general and administrative expenses and preopening expenses have
increased at a rate less than our total net retail sales increases. Therefore, as we have opened
additional new stores and leveraged our central office general and administrative and preopening
expenses over this larger store base and sales volume, we have been able to increase our net income
each year.
30
The following table sets forth a reconciliation of store contribution to net income for our
company-owned stores located in the United States and Canada (North America), stores located the
U.K. and Ireland (United Kingdom) and for our consolidated store base:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
|
|
North |
|
|
United |
|
|
|
|
|
|
North |
|
|
United |
|
|
|
|
|
|
America |
|
|
Kingdom |
|
|
Total |
|
|
America |
|
|
Kingdom |
|
|
Total |
|
Net income (1) |
|
$ |
30,942 |
|
|
$ |
(1,452 |
) |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
|
|
|
$ |
27,314 |
|
Income tax expense |
|
|
18,933 |
|
|
|
|
|
|
|
18,933 |
|
|
|
17,099 |
|
|
|
|
|
|
|
17,099 |
|
Interest expense (income) |
|
|
(1,530 |
) |
|
|
|
|
|
|
(1,530 |
) |
|
|
(1,710 |
) |
|
|
|
|
|
|
(1,710 |
) |
Store depreciation and amortization (2) |
|
|
15,986 |
|
|
|
1,655 |
|
|
|
17,641 |
|
|
|
13,985 |
|
|
|
|
|
|
|
13,985 |
|
Store preopening expense |
|
|
3,209 |
|
|
|
749 |
|
|
|
3,958 |
|
|
|
4,812 |
|
|
|
|
|
|
|
4,812 |
|
General and administrative expense (3) |
|
|
38,596 |
|
|
|
2,010 |
|
|
|
40,606 |
|
|
|
34,000 |
|
|
|
|
|
|
|
34,000 |
|
Franchising and licensing contribution (4) |
|
|
(2,409 |
) |
|
|
(90 |
) |
|
|
(2,499 |
) |
|
|
(1,107 |
) |
|
|
|
|
|
|
(1,107 |
) |
Non-store activity contribution (5) |
|
|
(3,464 |
) |
|
|
|
|
|
|
(3,464 |
) |
|
|
(1,499 |
) |
|
|
|
|
|
|
(1,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store contribution |
|
$ |
100,263 |
|
|
$ |
2,872 |
|
|
$ |
103,135 |
|
|
$ |
92,894 |
|
|
$ |
|
|
|
$ |
92,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
404,109 |
|
|
$ |
32,717 |
|
|
$ |
436,826 |
|
|
$ |
361,809 |
|
|
$ |
|
|
|
$ |
361,809 |
|
Franchising and licensing revenues |
|
|
(4,410 |
) |
|
|
|
|
|
|
(4,410 |
) |
|
|
(2,907 |
) |
|
|
|
|
|
|
(2,907 |
) |
Revenues from non-store activities (5) |
|
|
(15,191 |
) |
|
|
|
|
|
|
(15,191 |
) |
|
|
(12,131 |
) |
|
|
|
|
|
|
(12,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store location net retail sales |
|
$ |
384,508 |
|
|
$ |
32,717 |
|
|
$ |
417,225 |
|
|
$ |
346,771 |
|
|
$ |
|
|
|
$ |
346,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store contribution as a percentage of store
location net retail sales |
|
|
26.1 |
% |
|
|
8.8 |
% |
|
|
24.7 |
% |
|
|
26.8 |
% |
|
|
0.0 |
% |
|
|
26.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income as a percentage of total
revenues |
|
|
7.7 |
% |
|
|
-4.4 |
% |
|
|
6.8 |
% |
|
|
7.5 |
% |
|
|
0.0 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a change in estimate to deferred revenue related to our customer loyalty program of $2.2 million. |
|
(2) |
|
Store depreciation and amortization includes depreciation and amortization of all capitalized assets in store
locations, including leasehold improvements, furniture and fixtures, and computer hardware and software. |
|
(3) |
|
General and administrative expenses consist of non-store, central office general and administrative functions such as
management payroll and related benefits, travel, information systems, accounting, purchasing and legal costs as well
as the depreciation and amortization of central office leasehold improvements, furniture and fixtures, computer
hardware and software and intellectual property. General and administrative expenses also include a central office
marketing department, primarily payroll and related benefits expense, but exclude advertising expenses, such as direct
mail catalogs and television advertising, which are included in store contribution. |
|
(4) |
|
Franchising and licensing contribution includes franchising and licensing revenues and all expenses attributable to
the franchising and licensing segments other than depreciation, amortization and interest expense/income. Depreciation
and amortization related to franchising and licensing is included in the general and administrative expense caption.
Interest expense/income related to franchising and licensing is included in the interest expense (income) caption. |
|
(5) |
|
Non-store activities include our webstore, seasonal and event-based locations and franchising and licensing activities. |
Seasonality and Quarterly Results
The following is a summary of certain unaudited quarterly results of operations data for each
of the last two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
Fiscal 2005 |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
(Dollars in millions, except per share data) |
Total revenues |
|
$ |
98.6 |
|
|
$ |
93.7 |
|
|
$ |
101.5 |
|
|
$ |
143.3 |
|
|
$ |
86.1 |
|
|
$ |
73.7 |
|
|
$ |
84.0 |
|
|
$ |
118.0 |
|
Gross margin(1) |
|
|
47.9 |
|
|
|
40.8 |
|
|
|
42.4 |
|
|
|
74.0 |
|
|
|
43.3 |
|
|
|
34.5 |
|
|
|
40.0 |
|
|
|
60.8 |
|
Net income |
|
|
8.4 |
|
|
|
3.0 |
|
|
|
2.7 |
|
|
|
15.4 |
|
|
|
8.0 |
|
|
|
3.5 |
|
|
|
5.3 |
|
|
|
10.6 |
|
Net income allocated
to common stockholders |
|
|
8.4 |
|
|
|
3.0 |
|
|
|
2.7 |
|
|
|
15.4 |
|
|
|
8.0 |
|
|
|
3.5 |
|
|
|
5.3 |
|
|
|
10.6 |
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.42 |
|
|
|
0.15 |
|
|
|
0.13 |
|
|
|
0.76 |
|
|
|
0.41 |
|
|
|
0.18 |
|
|
|
0.26 |
|
|
|
0.53 |
|
Diluted |
|
|
0.41 |
|
|
|
0.15 |
|
|
|
0.13 |
|
|
|
0.75 |
|
|
|
0.40 |
|
|
|
0.17 |
|
|
|
0.26 |
|
|
|
0.52 |
|
Number of stores (end of
quarter) |
|
|
202 |
|
|
|
256 |
|
|
|
264 |
|
|
|
271 |
|
|
|
173 |
|
|
|
186 |
|
|
|
193 |
|
|
|
200 |
|
|
|
|
(1) |
|
Gross margin represents net retail sales less cost of merchandise sold. |
31
Our operating results for one period may not be indicative of results for other periods, and
may fluctuate significantly because of a variety of factors, including those discussed under Risk
Factors Fluctuations in our quarterly results of operations could cause the price of our common
stock to substantially decline.
The timing of new store openings may result in fluctuations in quarterly results as a result
of the revenues and expenses associated with each new store location. We typically incur most
preopening costs for a new store in the three months immediately preceding the stores opening. We
expect our growth, operating results and profitability to depend in some degree on our ability to
increase our number of stores.
For accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we
will have a 14-week quarter approximately once every six years. Quarterly fluctuations and
seasonality may cause our operating results to fall below the expectations of securities analysts
and investors, which could cause our stock price to fall.
Liquidity and Capital Resources
Our cash requirements are primarily for the opening of new stores, information systems and
working capital. Historically, we have met these requirements through capital generated from the
sale and issuance of our securities to private investors and through our initial public offering,
cash flow provided by operations and our revolving line of credit. From our inception to December
2001, we raised at various times a total of $44.9 million in capital from several private
investors. In 2004, we raised $25.7 million from the initial public offering of our common stock.
From fiscal 2002 to fiscal 2005, cash flows provided by operating activities have exceeded cash
flows used in investing activities.
Operating Activities. Cash flows provided by operating activities were $53.0 million in fiscal
2006, $54.6 million in fiscal 2005 and $48.5 million in fiscal 2004. Cash flow from operating
activities decreased in fiscal 2006 from fiscal 2005 primarily due to increased cash outflows for
inventories offset by the timing of cash payments on accounts payable and accrued expenses.
Additionally, the adoption of SFAS 123R led to the reclassification of the tax benefit from the
exercise of stock options from operating activities to financing activities. This caused the
impact of this line item on cash flows to decrease by $4.4 million. Cash flow from operating
activities increased in fiscal 2005 from fiscal 2004 primarily due to increases in net income
adjusted for the impact of depreciation and amortization.
Investing Activities. Cash flows used in investing activities were $93.8 million in fiscal
2006, $37.1 million in fiscal 2005 and $17.7 million in fiscal 2004. Cash used in investing
activities during fiscal 2006 relates primarily to the U.K. acquisition for $39.1 million, the
construction of our company-owned distribution center for approximately $22 million, and 35 new
stores. Cash used in investing activities during fiscal 2005 and 2004 relates primarily to 30 new
stores in fiscal 2005 and 21 in fiscal 2004. In fiscal 2005, a loan made to one of our franchisees
used cash of $4.4 million. No loans were made in fiscal 2004.
Financing Activities. Cash flows provided by financing activities were $3.5 million in fiscal
2006, $6.1 million in fiscal 2005, and $15.9 million in fiscal 2004. In fiscal 2006, exercises of
employee stock options and employee stock purchases and related tax benefits provided cash of $3.4
million, as compared to $4.4 million in fiscal 2005 and $0.1 million in fiscal 2004. The collection
of a note receivable from an officer of the Company provided cash of $1.6 million in fiscal 2005. A
similar note collection in fiscal 2004 provided cash of $0.1 million. In fiscal 2004, we completed
our initial public offering which resulted in cash inflows, net of offering costs, of $25.7
million. The financing cash inflows from the initial public offering were partially offset by the
payment of a special cash dividend in August 2004 of $10.0 million.
Capital Resources. As of December 30, 2006, we had a cash balance of $53.1 million. We also
have a line of credit, which we can use to finance capital expenditures and seasonal working
capital needs throughout the year. The credit agreement is with U.S. Bank, National Association and
was amended effective June 30, 2006 to include a seasonal overline from July 1 to December 31 each
year during which the line availability increases from $15 million to $30 million. Borrowings
under the credit agreement are not collateralized, but availability under the credit agreement can
be limited by the vendor based on our level of accounts receivable, inventory, and property and
equipment. The credit agreement expires on September 30, 2007 and contains various restrictions on
indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans,
transactions with affiliates, and investments. It also prohibits us from declaring dividends
without the banks prior consent, unless such payment of dividends would not violate any terms of
the loan agreement. Borrowings bear interest at our option of prime minus 1.0% or LIBOR plus 1.5%.
Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed
charge cover ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to
earnings before interest, depreciation and amortization ratio. As of December 30, 2006, we were in
compliance with these covenants. There were no borrowings under our line of credit as of December
30, 2006. There was a standby letter of credit of approximately $1.1 million outstanding under the
credit agreement as of December 30, 2006. Accordingly, there was approximately $28.9 million
available for borrowing under the line of credit as of December 30, 2006.
32
Most of our retail stores are located within shopping malls and all are operated under leases
classified as operating leases. Our leases in North America typically have a ten-year term and
contain provisions for base rent plus percentage rent based on defined sales levels. Many of the
leases contain a provision whereby either we or the landlord may terminate the lease after a
certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume
is not achieved. In addition, some of these leases contain various restrictions relating to change
of control of our company. Our leases also subject us to risks relating to compliance with changing
mall rules and the exercise of discretion by our landlords on various matters, including rights of
termination in some cases.
Our leases in the U.K. typically have terms of 10-15 years and generally contain a provision
whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The
leases typically provide the lessee with the first right for renewal at the end of the lease. We
may also be required to make deposits and rent guarantees to secure new leases as we expand. Real
estate taxes also change according to government time schedules to reflect current market rental
rates for the locations we lease.
In fiscal 2007, we expect to spend a total of $35 to $40 million on capital expenditures.
Capital spending in fiscal 2006 totaled $52.6 million. Capital spending in fiscal 2006 was
primarily for the construction of our new distribution center, the opening of 35 new stores (33 in
North America and two in the United Kingdom), the re-branding of 25 stores in the United Kingdom,
and the continued installation and upgrades of central office information technology systems. In
fiscal 2006, the average investment per new store, which includes leasehold improvements, fixtures,
equipment and inventory, was approximately $0.5 million. We anticipate the investment per
store in fiscal 2007 will be approximately the same as fiscal 2006.
On February 20, 2007, we announced a $25 million share repurchase program of our outstanding
common stock over the next twelve months. The program was authorized by our board of directors.
Purchases may be made in the open market or in privately negotiated transactions, with the level
and timing of activity depending on market conditions, other investment opportunities, and other
factors. Purchases may be increased, decreased or discontinued at any time without notice. As of
March 9, 2007, approximately 160,000 shares at an average price of $26.48 per share have been
repurchased under this program. Future repurchases will be reported
in our quarterly and annual reports under Item 5 on a monthly basis.
We believe that cash generated from operations and borrowings under our credit agreement will
be sufficient to fund our working capital and other cash flow requirements for at least the next 18
months. Our credit agreement expires on September 30, 2007.
Off-Balance Sheet Arrangements
We do not have any arrangements classified as off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments include future minimum obligations
under operating leases and purchase obligations. Our purchase obligations primarily consist of
purchase orders for merchandise inventory, construction commitments related to our new distribution
center and obligations associated with building out our stores. The future minimum payments for
these obligations as of December 30, 2006 for periods subsequent to this date are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Period as of December 30, 2006 |
|
|
Total |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Beyond |
|
|
(In thousands) |
Operating lease
obligations |
|
|
347,886 |
|
|
|
42,222 |
|
|
|
44,106 |
|
|
|
43,432 |
|
|
|
42,016 |
|
|
|
38,590 |
|
|
|
137,520 |
|
Purchase obligations |
|
|
44,719 |
|
|
|
44,421 |
|
|
|
228 |
|
|
|
60 |
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
Total |
|
$ |
392,605 |
|
|
$ |
86,644 |
|
|
$ |
44,334 |
|
|
$ |
43,492 |
|
|
$ |
42,021 |
|
|
$ |
38,594 |
|
|
$ |
137,520 |
|
Inflation
We do not believe that inflation has had a material adverse impact on our business or
operating results during the periods presented. We cannot assure you, however, that our business
will not be affected by inflation in the future.
33
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting
principles requires the appropriate application of certain accounting policies, many of which
require us to make estimates and assumptions about future events and their impact on amounts
reported in our financial statements and related notes. Since future events and their impact cannot
be determined with certainty, the actual results will inevitably differ from our estimates. Such
differences could be material to the financial statements.
We believe application of accounting policies, and the estimates inherently required therein,
are reasonable. These accounting policies and estimates are periodically reevaluated, and
adjustments are made when facts and circumstances dictate a change. Historically, we have found our
application of accounting policies to be appropriate, and actual results have not differed
materially from those determined using necessary estimates.
Our accounting policies are more fully described in note 2 to our consolidated financial
statements, which appear elsewhere in this annual report on Form 10-K. We have identified certain
critical accounting policies which are described below.
Inventory
Inventory is stated at the lower of cost or market, with cost determined on an average cost
basis. Historically, we have not conducted sales whereby we offer significant discounts or
markdowns, nor have we experienced significant occurrences of obsolete or slow moving inventory.
However, future changes in circumstances, such as changes in guest merchandise preference, could
cause reclassification of inventory as obsolete or slow-moving inventory. The effect of this
reclassification would be the recording of a reduction in the value of inventory to realizable
values.
Throughout the year we record an estimated cost of shortage based on past historical results.
Periodic physical inventories are taken and any difference between the actual physical count of
merchandise and the recorded amount in our records are adjusted and recorded as shortage.
Historically, the timing of the physical inventory has been near the end of the fiscal year so that
no material amount of shortage was required to be estimated on activity between the date of the
physical count and year-end. However, future physical counts of merchandise may not be at times at
or near the end of a fiscal quarter or fiscal year-end, and our estimate of shortage for the
intervening period may be material based on the amount of time between the date of the physical
inventory and the date of the fiscal quarter or year-end.
Long-Lived Assets
If facts and circumstances indicate that a long-lived asset, including property and equipment,
may be impaired, the carrying value is reviewed. If this review indicates that the carrying value
of the asset will not be recovered as determined based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of the asset is reduced to its estimated
fair value. No long-lived assets were impaired in fiscal 2006, 2005, or 2004. In fiscal 2004, we
determined that one store which had been designated for closure would remain open. This
determination resulted in the reversal of $0.1 million in impairment charges taken in fiscal 2001
for costs to be incurred upon the closing of the store. Impairment losses in the future are
dependent on a number of factors such as site selection and general economic trends, and thus could
be significantly different than historical results. To the extent our estimates for net sales,
gross profit and store expenses are not realized, future assessments of recoverability could result
in additional impairment charges.
Goodwill and Other Intangibles
The Company has adopted SFAS No. 142. Under the provisions of this standard, intangible assets
deemed to have indefinite lives and goodwill are not subject to amortization. All other intangible
assets are amortized over their estimated useful lives. Goodwill and other intangible assets not
subject to amortization are tested for impairment annually or more frequently if events or changes
in circumstances indicate that the asset might be impaired. This testing requires comparison of
carrying values to fair values, and when appropriate, the carrying value of impaired assets is
reduced to fair value. We reviewed our goodwill and other intangible
assets as of December 30, 2006 and determined that no impairment
existed.
Revenue Recognition
Revenues from retail sales, net of discounts and excluding sales tax, are recognized at the
time of sale. Guest returns have not been significant. Revenues from gift certificates are
recognized at the time of redemption. Unredeemed gift cards are included in current liabilities on
the consolidated balance sheets.
34
We have an automated frequent shopper program in the United States, the Stuff Fur Stuff® club,
whereby guests enroll in the program and receive one point for every dollar or partial dollar spent
and after reaching 100 points receive a $10 discount on a future purchase. This program was
automated in July 2006 and replaced our former Buy Stuff Program, which was a manual punch card
system with limited tracking capability. The reward earned under the new program did not change.
An estimate of the obligation related to the program, based on historical redemption rates, is
recorded as deferred revenue and a reduction of net retail sales at the time of purchase. The
deferred revenue obligation is reduced, and a corresponding amount is recognized in net retail
sales, in the amount of and at the time of redemption of the $10 discount.
Under the previous Buy Stuff Program, the first card had no expiration date. Beginning in June
2002, and continuing each summer up to July 1, 2006, a series of cards was issued that had an
expiration date of December 31 of the year following the year in which that series of cards was
first issued. Beginning in July 2006, the automated Stuff Fur Stuff® club was introduced which
provides greater visibility to the rewards earned by our guests and the historical redemption
rates. We track redemptions of these various cards and use actual redemption rates by card series
and historical results to estimate how much revenue to defer. We review these redemption rates and
assess the
adequacy of the deferred revenue account at the end of each fiscal quarter. Due to the estimates
involved in these assessments, adjustments to the deferral rate are generally made no more often
than bi-annually in order to allow time for more definite trends to emerge.
Based upon an assessment at the end of fiscal 2003, the deferred revenue account was adjusted
downward by $1.1 million with a corresponding increase to net retail sales, an increase in net
income of $0.7 million. Additionally, the amount of revenue being deferred beginning in fiscal
2004 was decreased by 0.2%, and by another 0.5% beginning with the third quarter of 2004, to give
effect to the change in redemption experience. The changes made to the deferral rate in fiscal
2004 were prospective in nature with no impact on previously reported results of operations.
Beginning with the second quarter of fiscal 2005, the amount of revenue being deferred was reduced
by 0.1% on a prospective basis from its then current level due to further changes in the Companys
redemption experience.
Based on the most recent assessment at the end of fiscal 2006, the deferred revenue account
was adjusted downward by $3.6 million, effective at the beginning of fiscal 2006, with a
corresponding increase to net sales, and a $2.2 million increase in net income. Additionally, the
amount of revenue being deferred for future periods has been decreased by 0.6%, to give effect to
the change in redemption experience and the increased visibility of the redemptions with the
automated system. An additional 0.1% adjustment of the ultimate redemption rate at the end of
fiscal 2006 for the current cards expiring on December 30, 2006 and December 29, 2007 would have an
approximate impact of $0.5 million on the deferred revenue balance and net retail sales.
Recent Accounting Pronouncements
In June 2006, the FASB
issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
establishes threshold and
measurement attributes for financial statement measurement and recognition of tax positions taken or expected to be
taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will
adopt FIN 48 on December 31, 2006.
We do not expect the adoption of FIN 48 will have a significant impact on the financial results of the Company
and will not result
in a significant cumulative effect adjustment to the December 31, 2006 balance of retained earnings.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and states that a fair value measurement should be determined based on
assumptions that market participants would use in pricing the asset or liability. We are required
to adopt SFAS 157 in the first quarter of 2008. We are currently assessing the financial impact of
SFAS 157 on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates, and we bear this risk in two
specific ways. First, our revolving credit facility carries a variable interest rate that is tied
to market indices and, therefore, our results of operations and our cash flows can be impacted by
changes in interest rates. Outstanding balances under our credit facility bear interest at our
option of prime minus 1.0% or LIBOR plus 1.5%. We had no borrowings outstanding during fiscal
2006. Accordingly, a 100 basis point change in interest rates would result in no material change to
our annual interest expense. The second component of interest rate risk involves the short term
investment of excess cash in short term, investment grade interest-bearing securities. These
investments are considered to be cash equivalents and are shown that way on our balance sheet. If
there are changes in interest rates, those changes would affect the investment income we earn on
these investments and, therefore, impact our cash flows and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules are listed under Item 15(a) and filed as part of this
annual report on Form 10-K.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Bear and Chief Financial Bear,
has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)), as of the end of the period covered by this report. Our management, with the
participation of our Chief Executive Bear and Chief Financial Bear also conducted an evaluation of
our internal control over financial reporting to determine whether any changes occurred during the
period covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Based on this evaluation, our management,
including the Chief Executive Bear and Chief Financial Bear, concluded that our disclosure controls
and procedures were effective as of December 30, 2006, the end of the period covered by this annual
report.
It should be noted that our management, including the Chief Executive Bear and the Chief
Financial Bear, do not expect that our disclosure controls and procedures or internal controls will
prevent all error and all fraud. A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of our financial reporting for external
purposes in accordance with accounting principles generally accepted in the United States of
America. With the participation of our Chief Executive Bear and our Chief Financial Bear,
management conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of
December 30, 2006.
In conduction our evaluation of the effectiveness of our internal control over financial reporting,
we have excluded the acquisition of The Bear Factory Limited and Amsbra Limited (collectively, the
U.K. Acquisition). Total revenues of these entities for the period from the respective
acquisitions through December 30, 2006 were $32.8 million. These entities were acquired for total
consideration of $39.4 million, subject to certain contingent purchase price adjustments. Refer to
Note 3 to our consolidated financial statements for further discussion of the U.K. acquisition and
the impact on our consolidated financial results.
The Companys independent registered public accounting firm has audited and issued their
report on managements assessment of the Companys internal control over financial reporting. That
report appears in this Item 9A.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Build-A-Bear Workshop, Inc.:
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting that Build-A-Bear Workshop, Inc. and subsidiaries (the
Company) maintained effective internal control over financial reporting as of December 30, 2006,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial
36
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on
criteria established in Internal ControlIntegrated Framework issued by COSO. Also, in our opinion,
the Company maintained, in all material respects, effective internal control over financial
reporting as of December 30, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by COSO.
The Company acquired The Bear Factory Limited and Amsbra Limited, during the fiscal year ended
December 30, 2006. Management excluded from its assessment of the effectiveness of the Companys
internal control over financial reporting as of December 30, 2006, these entities internal control
over financial reporting associated with total revenues of $32.8 million, included in the
consolidated financial statements of the Company for the periods from the respective acquisitions
through December 30, 2006. These entities were acquired for total consideration of $39.4 million,
subject to certain contingent purchase price adjustments. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the internal control over
financial reporting of these entities.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 30, 2006, and
December 31, 2005, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the years in the three-year period ended December 30, 2006, and our report
dated March 15, 2007 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
St. Louis, Missouri
March 15, 2007
Changes in Internal Controls
There were no changes in internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) that occurred during the fourth quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, appearing under the caption Board of Directors in our
Proxy Statement (the Proxy Statement) to be filed with the SEC in connection with our Annual
Meeting of Shareholders scheduled to be held on May 10, 2007 is incorporated by reference in
response to this Item 10.
The information appearing under the caption Section 16(a) Beneficial Ownership reporting
Compliance in the Proxy Statement is incorporated by reference in response to this Item 10.
Business Conduct Policy
The Board of Directors has adopted a Business Conduct Policy applicable to our directors,
officers and employees, including all executive officers. The Business Conduct Policy has been
posted in the Investor Relations section of our corporate web site at http://ir.buildabear.com. We
intend to satisfy the amendment and waiver disclosure requirements under applicable securities
regulations by posting any amendments of, or waivers to, the Business Conduct Policy on our web
site.
The information appearing under the caption Code of Ethics in the Proxy Statement is
incorporated by reference in response to this Item 10.
Executive Officers and Key Employees
Set forth below is the name, age, position and a brief account of the business experience of
each of our executive officers and key employees as of March 9, 2007.
|
|
|
|
|
Name |
|
Age |
|
Position(s) |
Maxine Clark |
|
58 |
|
Chief Executive Bear and Chairman of the Board |
Scott Seay |
|
44 |
|
President and Chief Operating Officer Bear |
Tina Klocke |
|
47 |
|
Chief Financial Bear, Treasurer and Secretary |
Teresa Kroll |
|
52 |
|
Chief Marketing Bear |
Paul Bundonis |
|
45 |
|
Chief Workshop Bear |
Maxine Clark has been our Chief Executive Bear since our inception in 1997, our President from
our inception in 1997 to April 2004 and has served as Chairman of our board of directors since our
conversion to a corporation in April 2000. From November 1992 until January 1996, Ms. Clark was the
President of Payless ShoeSource, Inc. Prior to joining Payless, Ms. Clark spent over 19 years in
various divisions of The May Department Stores Company in areas including merchandise development,
merchandise planning, merchandise research, marketing and product development. Ms. Clark is a
member of the Board of Directors of The J.C. Penney Company, Inc. and Chairman of its Corporate
Governance Committee. She also serves on the Board of Trustees of the International Council of
Shopping Centers and Washington University in St. Louis and on the Board of Directors of Barnes
Jewish Hospital. Ms. Clark is Chairman of the Board of Directors of Teach for America St. Louis.
She is also a member of the Committee of 200, an organization for women entrepreneurs around the
world.
Scott Seay joined Build-A-Bear Workshop in May 2002 as Chief Workshop Bear and was
named President and Chief Operating Bear in January 2007. Prior to joining us, Mr. Seay was Chief
of Field Operations for Kinkos Inc., a national chain of copy centers, from April 1999 to May
2002. From April 1991 to April 1999, Mr. Seay held several operational roles including Senior Vice
President of Operations West for CompUSA Inc., a computer retailer. From April 1983 to April 1991,
Mr. Seay held several operational positions for The Home Depot, Inc.
Tina Klocke has been our Chief Financial Bear since November 1997, our Treasurer since April
2000, and Secretary since February 2004. Prior to joining us, she was the Controller for Clayton
Corporation, a manufacturing company, where she supervised all accounting and finance functions as
well as human resources. Prior to joining Clayton in 1990, she was the controller for Love Real
Estate Company, a diversified investment management and development firm. She began her career in
1982 with Ernst & Young LLP.
Teresa Kroll has been our Chief Marketing Bear since September 2001. Prior to joining us Ms.
Kroll was Vice President-Advertising for The WIZ, a unit of Cablevision, from 1999 to 2001. From
1995 to 1999, Ms. Kroll was Director of Marketing for Montgomery Ward Holding Corp., a department
store retailer. From 1980 to 1994 Ms. Kroll held various administrative and marketing positions for
Venture Stores, Inc.
Paul Bundonis joined Build-A-Bear Workshop in May 2006 as Managing Director, Western Region
and was named Chief Workshop Bear in January 2007. Prior to joining us, Mr. Bundonis was President
and Chief Operating Officer at Olly Shoes, a
38
childrens shoe retailer, from 2003 to 2006. From 2000 to 2003, Mr. Bundonis was Director Store
Operations Planning and Development at Express (Limited Brands), a specialty retailer. From 1998
to 2000, he was Vice President Merchandise Planning and Replenishment at Zany Brainy, Inc., a
specialty retailer. From 1979 to 1998, Mr. Bundonis held various operations positions at Eddie
Bauer, Inc. and R.H. Macy, Inc.
Barry Erdos served as our President and Chief Operating Officer Bear during the 2006 fiscal
year and until January 5, 2007. On January 5, 2007, Mr. Erdos resigned as President and Chief
Operating Officer Bear. Also effective on January 5, 2007, Scott Seay was appointed President and
Chief Operating Bear and Paul Bundonis assumed the role of Chief
Workshop Bear.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the sections titled Executive Compensation and Information
About the Board of Directors Board of Directors Compensation in the Proxy Statement is
incorporated herein by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information contained in the section titled Security Ownership of Certain Beneficial
Owners and Management in the Proxy Statement is incorporated herein by reference in response to
this Item 12.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
(a) |
|
|
(b) |
|
|
remaining available for |
|
|
|
Number of securities to |
|
|
Weighted-average |
|
|
future issuance under equity |
|
|
|
be issued upon exercise of |
|
|
exercise price of |
|
|
compensation plans |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities |
|
Plan category |
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) (1) |
|
Equity compensation plans approved
by security holders |
|
|
529,200 |
|
|
$ |
16.10 |
|
|
|
2,530,420 |
|
Equity compensation plans not
approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
529,200 |
|
|
$ |
16.10 |
|
|
|
2,530,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of securities remaining available for future issuance
under equity compensation plans includes 880,689 shares available
for issuance under our Associate Stock Purchase Plan (ASPP).
Shares sold under our ASPP can be obtained from treasury stock,
authorized but unissued shares or open market purchases of our
common stock. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section titled Certain Relationships and Related Party
Transactions in the Proxy Statement is incorporated herein by reference in response to this Item
13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the section titled Principal Accountant Fees and Policy
Regarding Pre-Approval of Services Provided by the Independent Auditor in the Proxy Statement is
incorporated herein by reference in response to Item 14.
39
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The financial statements and schedules set forth below are filed on the indicated pages as
part of this annual report on Form 10-K.
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Build-A-Bear Workshop, Inc.:
We have audited the accompanying consolidated balance sheets of Build-A-Bear Workshop, Inc. and
subsidiaries (the Company) as of December 30, 2006 and December 31, 2005, and the related
consolidated statements of operations, stockholders equity, and cash flows for each of the years
in the three-year period ended December 30, 2006. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of
December 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 30, 2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the Consolidated Financial Statements, the Company adopted
Statement of Financial Accounting Standards No. 123R Shared Based Payment, effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 30, 2006, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 15, 2007 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 15, 2007
41
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
53,109 |
|
|
$ |
90,950 |
|
Inventories |
|
|
50,905 |
|
|
|
40,157 |
|
Receivables |
|
|
7,389 |
|
|
|
6,629 |
|
Prepaid expenses and other current assets |
|
|
11,805 |
|
|
|
6,839 |
|
Deferred tax assets |
|
|
2,388 |
|
|
|
3,232 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
125,596 |
|
|
|
147,807 |
|
Property and equipment, net |
|
|
130,347 |
|
|
|
89,973 |
|
Note receivable from franchisee |
|
|
|
|
|
|
4,518 |
|
Goodwill |
|
|
36,927 |
|
|
|
|
|
Other intangible assets, net |
|
|
2,873 |
|
|
|
1,454 |
|
Other assets, net |
|
|
4,027 |
|
|
|
2,356 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
299,770 |
|
|
$ |
246,108 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
46,761 |
|
|
$ |
34,996 |
|
Accrued expenses |
|
|
16,301 |
|
|
|
15,792 |
|
Gift cards and customer deposits |
|
|
28,128 |
|
|
|
22,865 |
|
Deferred revenue |
|
|
6,454 |
|
|
|
7,508 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
97,644 |
|
|
|
81,161 |
|
|
|
|
|
|
|
|
Deferred franchise revenue |
|
|
2,297 |
|
|
|
2,306 |
|
Deferred rent |
|
|
34,754 |
|
|
|
30,687 |
|
Other liabilities |
|
|
352 |
|
|
|
586 |
|
Deferred tax liabilities |
|
|
459 |
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies See Note 12 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01. Shares authorized: 15,000,000; No shares
issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $0.01. Shares authorized: 50,000,000;
Issued and outstanding: 20,537,421 and 20,120,655 shares, respectively |
|
|
205 |
|
|
|
201 |
|
Additional paid-in capital |
|
|
88,866 |
|
|
|
85,259 |
|
Other comprehensive income |
|
|
(997 |
) |
|
|
|
|
Retained earnings |
|
|
76,190 |
|
|
|
46,700 |
|
Notes receivable from officers |
|
|
|
|
|
|
(151 |
) |
Unearned compensation |
|
|
|
|
|
|
(1,652 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
164,264 |
|
|
|
130,357 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
299,770 |
|
|
$ |
246,108 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net retail sales |
|
$ |
432,572 |
|
|
$ |
358,901 |
|
|
$ |
300,469 |
|
Franchise fees |
|
|
3,521 |
|
|
|
1,976 |
|
|
|
846 |
|
Licensing revenue |
|
|
979 |
|
|
|
932 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
437,072 |
|
|
|
361,809 |
|
|
|
301,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sold |
|
|
227,509 |
|
|
|
180,373 |
|
|
|
150,903 |
|
Selling, general, and administrative |
|
|
158,712 |
|
|
|
133,921 |
|
|
|
115,939 |
|
Store preopening |
|
|
3,958 |
|
|
|
4,812 |
|
|
|
2,186 |
|
Interest expense (income), net |
|
|
(1,530 |
) |
|
|
(1,710 |
) |
|
|
(299 |
) |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
388,649 |
|
|
|
317,396 |
|
|
|
268,729 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
48,423 |
|
|
|
44,413 |
|
|
|
32,933 |
|
Income tax expense |
|
|
18,933 |
|
|
|
17,099 |
|
|
|
12,934 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
29,490 |
|
|
|
27,314 |
|
|
|
19,999 |
|
Cumulative dividends and accretion of redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
1,262 |
|
Cumulative dividends of nonredeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common and participating
preferred stockholders |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
18,474 |
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common stockholders |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
8,519 |
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to participating preferred stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.46 |
|
|
$ |
1.38 |
|
|
$ |
2.30 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.44 |
|
|
$ |
1.35 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing common per share amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
20,169,814 |
|
|
|
19,735,067 |
|
|
|
3,702,365 |
|
Diluted |
|
|
20,468,256 |
|
|
|
20,229,978 |
|
|
|
18,816,435 |
|
See accompanying notes to consolidated financial statements.
43
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred |
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Notes |
|
|
|
|
|
|
|
|
|
stock |
|
|
Common |
|
|
paid-in |
|
|
comprehensive |
|
|
Retained |
|
|
receivable |
|
|
Unearned |
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Class C |
|
|
stock |
|
|
capital |
|
|
income |
|
|
earnings |
|
|
from officers |
|
|
compensation |
|
|
Total |
|
Balance, January 3, 2004 |
|
|
24 |
|
|
|
20 |
|
|
|
50 |
|
|
|
5 |
|
|
|
10,918 |
|
|
|
|
|
|
|
10,649 |
|
|
|
(1,821 |
) |
|
|
|
|
|
|
19,845 |
|
Interest on notes receivable from officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
Collection of notes receivable from officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
144 |
|
Cumulative dividends and accretion of redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,262 |
) |
|
|
|
|
|
|
|
|
|
|
(1,262 |
) |
Payment of cash dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
Exercise of stock options and exchange of outstanding shares, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
4 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
463 |
|
Shares withheld in lieu of tax withholdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(540 |
) |
Stock-based compensation related to stock options and restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
1,974 |
|
Initial public offering, net of offering expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
25,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,735 |
|
Conversion of redeemable and non-redeemable preferred stock to common stock |
|
|
(24 |
) |
|
|
(20 |
) |
|
|
(49 |
) |
|
|
173 |
|
|
|
39,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,152 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,999 |
|
|
|
|
|
|
|
|
|
|
|
19,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
77,708 |
|
|
|
|
|
|
|
19,386 |
|
|
|
(1,770 |
) |
|
|
(10 |
) |
|
|
95,510 |
|
Interest on notes receivable from officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
Collection of notes receivable from officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,645 |
|
|
|
|
|
|
|
1,645 |
|
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
2,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,437 |
) |
|
|
|
|
Employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,671 |
|
Exercise of stock options, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
5,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,833 |
|
Shares withheld in lieu of tax withholdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(2,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,411 |
) |
Stock-based compensation related to restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
795 |
|
|
|
795 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,314 |
|
|
|
|
|
|
|
|
|
|
|
27,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
201 |
|
|
$ |
85,259 |
|
|
$ |
|
|
|
$ |
46,700 |
|
|
$ |
(151 |
) |
|
$ |
(1,652 |
) |
|
$ |
130,357 |
|
Reclassification
of unearned compensation upon adoption of SFAS 123R |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,652 |
|
|
|
|
|
Interest on notes receivable from officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
Collection of notes receivable from officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
155 |
|
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479 |
|
Exercise of stock options, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,782 |
|
Shares withheld in lieu of tax withholdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141 |
) |
Stock-based compensation related to restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,139 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(997 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,490 |
|
|
|
|
|
|
|
|
|
|
|
29,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
205 |
|
|
$ |
88,866 |
|
|
$ |
(997 |
) |
|
$ |
76,190 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
164,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
19,999 |
|
Adjustments to reconcile net income to
net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
22,394 |
|
|
|
17,592 |
|
|
|
14,948 |
|
Deferred taxes |
|
|
(1,130 |
) |
|
|
(2,035 |
) |
|
|
(1,875 |
) |
Tax benefit from stock option exercises |
|
|
(1,269 |
) |
|
|
3,091 |
|
|
|
410 |
|
Loss on disposal of property and equipment |
|
|
82 |
|
|
|
526 |
|
|
|
533 |
|
Impairment of goodwill |
|
|
|
|
|
|
|
|
|
|
97 |
|
Impairment charge (credit) |
|
|
|
|
|
|
|
|
|
|
(54 |
) |
Stock-based compensation |
|
|
2,139 |
|
|
|
795 |
|
|
|
1,974 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(8,368 |
) |
|
|
(9,366 |
) |
|
|
(8,218 |
) |
Receivables |
|
|
(1,826 |
) |
|
|
(2,804 |
) |
|
|
(1,629 |
) |
Prepaid expenses and other assets |
|
|
(1,021 |
) |
|
|
(1,612 |
) |
|
|
(1,105 |
) |
Accounts payable |
|
|
3,419 |
|
|
|
9,229 |
|
|
|
3,998 |
|
Accrued expenses and other liabilities |
|
|
9,125 |
|
|
|
11,912 |
|
|
|
19,449 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
53,035 |
|
|
|
54,642 |
|
|
|
48,527 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(52,577 |
) |
|
|
(31,083 |
) |
|
|
(16,494 |
) |
Purchases of other assets and other intangible assets |
|
|
(2,063 |
) |
|
|
(1,569 |
) |
|
|
(1,238 |
) |
Loan to franchisee |
|
|
|
|
|
|
(4,425 |
) |
|
|
|
|
Purchase of business, net of cash acquired |
|
|
(39,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(93,772 |
) |
|
|
(37,077 |
) |
|
|
(17,732 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of employee stock options and employee stock purchases |
|
|
2,112 |
|
|
|
4,413 |
|
|
|
52 |
|
Collection of notes receivable from officers |
|
|
155 |
|
|
|
1,645 |
|
|
|
144 |
|
Payment of cash dividend |
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
Tax benefit from stock option exercises |
|
|
1,270 |
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of offering costs |
|
|
|
|
|
|
|
|
|
|
25,735 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,537 |
|
|
|
6,058 |
|
|
|
15,931 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
(641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents |
|
|
(37,841 |
) |
|
|
23,623 |
|
|
|
46,726 |
|
Cash and cash equivalents, beginning of year |
|
|
90,950 |
|
|
|
67,327 |
|
|
|
20,601 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
53,109 |
|
|
$ |
90,950 |
|
|
$ |
67,327 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
11 |
|
|
$ |
79 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
18,969 |
|
|
$ |
11,562 |
|
|
$ |
13,578 |
|
|
|
|
|
|
|
|
|
|
|
Noncash transaction: |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative dividends and accretion of redeemable preferred stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,262 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
(1) Description of Business
Build-A-Bear Workshop, Inc. (the Company) is a specialty retailer of plush animals and related
products. At December 30, 2006, the Company operated 271 stores (unaudited) located in the United
States, Canada, the United Kingdom, and Ireland. The Company was formed in September 1997 and began
operations in October 1997. The Company changed to a Delaware C Corporation on April 3, 2000. The
Company previously operated as a Missouri Limited Liability Company.
During 2001, the Company and a third party formed Build-A-Bear Entertainment, LLC (BABE) for
the purpose of promoting the Build-A-Bear Workshop brand and characters of the Company through
certain entertainment media. Prior to February 2003, the Company owned 51% and was the managing
member. BABE had no active operations for the period from December 29, 2001 through February 10,
2003. On February 10, 2003, the Company purchased, for $200,000, the 49% minority interest in BABE,
which then became a wholly-owned subsidiary.
During 2002, the Company formed Build-A-Bear Workshop Franchise Holdings, Inc. (Holdings) for
the purpose of entering into franchise agreements with companies in foreign countries other than
Canada. Holdings is a wholly-owned subsidiary of the Company. Since 2002, Holdings has signed
franchise agreements with third parties to open Build-A-Bear Workshop stores in various countries
throughout the world. For each of the franchise agreements, Holdings received a one-time,
nonrefundable fee that has been deferred and is being amortized over the life of the respective
franchise agreement. Holdings also receives a percentage of all sales by the franchisees. As of
December 30, 2006, the number of Build-A-Bear Workshop franchise stores that are open and operating
in these countries is as follows (unaudited):
|
|
|
|
|
Japan |
|
|
7 |
|
Australia |
|
|
6 |
|
Denmark |
|
|
5 |
|
Taiwan |
|
|
3 |
|
Other |
|
|
13 |
|
On
April 2, 2006, Holdings acquired all of the outstanding shares of The Bear Factory Limited, a
stuffed animal retailer in the United Kingdom, and Amsbra Limited, our former U.K. franchisee.
During 2006, the Company formed Build-A-Bear Workshop UK Holdings, Ltd (UK Holdings) as the parent
company to The Bear Factory and Amsbra. UK Holdings is a wholly-owned subsidiary of Holdings. The
results of the acquisitions operations have been included in the consolidated financial statements
since the date of acquisition. In conjunction with those
transactions, we obtained 40 (unaudited) retail
locations in the United Kingdom and Ireland. Amsbra operated 11
(unaudited) franchised Build-A-Bear Workshop
stores located in the United Kingdom. Upon completion of the acquisition, all of the franchised
locations in the United Kingdom became company-owned stores. Also during 2006, the Company formed
Build-A-Bear Workshop Ireland and Build-A-Bear Workshop France as wholly-owned subsidiaries of
Holdings.
During 2003, the Company formed Build-A-Bear Retail Management, Inc. (BABRM) for the purpose
of providing purchasing, legal, information technology, accounting, and other general management
services for Build-A-Bear Workshop stores. BABRM is a wholly-owned subsidiary of the Company.
(2) Summary of Significant Accounting Policies
A summary of the Companys significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Build-A-Bear
Workshop, Inc. and its wholly-owned subsidiaries: Holdings, BAB Canada, BABE, and BABRM. All
significant intercompany accounts are eliminated in consolidation.
(b) Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending on the Saturday closest to
December 31. The periods presented in these financial statements are the fiscal years ended
December 30, 2006 (fiscal 2006), December 31, 2005 (fiscal 2005), and January
46
1, 2005 (fiscal 2004). All fiscal years presented included 52 weeks. References to years in these
financial statements relate to fiscal
years or year ends rather than calendar years.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term highly liquid investments with an
original maturity of three months or less.
The majority of the Companys cash and cash equivalents exceed federal deposit insurance
limits. The Company has not experienced any losses in such accounts and management believes that
the Company is not exposed to any significant credit risk on cash and cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost or market, with cost determined on an average-cost
basis.
(e) Receivables
Receivables consist primarily of amounts due to the Company in relation to tenant allowances,
corporate product sales, franchisee royalties and product sales, and licensing revenue. The Company
assesses the collectibility of all receivables on an ongoing basis by considering its historical
credit loss experience, current economic conditions, and other relevant factors. Based on this
analysis, the Company has determined that no material allowance for doubtful accounts was necessary
at either December 30, 2006 or December 31, 2005.
(f) Property and Equipment
Property and equipment consist of leasehold improvements, furniture and fixtures, and computer
equipment and software and are stated at cost. Leasehold improvements are depreciated using the
straight-line method over the shorter of the useful life of the assets or the life of the lease
which is generally ten years. Furniture and fixtures and computer equipment are depreciated using
the straight-line method over the estimated service lives ranging from three to seven years.
Computer software is amortized using the straight-line method over a period of three years. New
store construction deposits are recorded at the time the deposit is made as
construction-in-progress and reclassified to the appropriate property and equipment category at the
time of completion of construction, when operations of the store commence. Maintenance and repairs
are expensed as incurred and improvements are capitalized. Gains or losses on the disposition of
fixed assets are recorded upon disposal.
(g) Note Receivable from Franchisee
The 2005 note receivable from franchisee consists of principal and accrued interest related to
a loan made to one of the Companys international franchisees. The note is stated at face value
plus accrued interest. The note receivable was included in the purchase price of the U.K.
acquisition on April 2, 2006.
(h) Goodwill
The Company has adopted SFAS No. 142. Under the provisions of this standard, goodwill is not
subject to amortization. Goodwill is tested for impairment annually or more frequently if events
or changes in circumstances indicate that the asset might be impaired. This testing requires
comparison of carrying values to fair values, and when appropriate, the carrying value of impaired
assets is reduced to fair value. We reviewed our goodwill as of
December 30, 2006 and determined that no impairment existed.
(i) Other Intangible Assets
Other intangible assets consist primarily of costs related to trademarks and other
intellectual property. Trademarks and other intellectual property represent third-party costs that
are capitalized and amortized over their estimated lives ranging from one to ten years using the
straight-line method.
47
(j) Other Assets
Other assets consist primarily of deferred leasing fees and deferred costs related to
franchise agreements. Deferred leasing fees are initial, direct costs related to the Companys
operating leases and are amortized over the term of the related leases. Amortization expense
related to other assets was $0.5 million, $0.3 million, and $0.3 million for 2006, 2005, and 2004,
respectively.
(k) Long-lived Assets
Whenever facts and circumstances indicate that the carrying value of a long-lived asset may
not be recoverable, the carrying value is reviewed. If this review indicates that the carrying
value of the asset will not be recovered, as determined based on projected undiscounted cash flows
related to the asset over its remaining life, the carrying value of the asset is reduced to its
estimated fair value.
(l) Deferred Rent
Certain of the Companys operating leases contain predetermined fixed escalations of minimum
rentals during the original lease terms. For these leases, the Company recognizes the related
rental expense on a straight-line basis over the life of the lease and records the difference
between the amounts charged to operations and amounts paid as deferred rent. The Company also
receives certain lease incentives in conjunction with entering into operating leases. These lease
incentives are recorded as deferred rent at the beginning of the lease term and recognized as a
reduction of rent expense over the lease term. In addition, certain of the Companys leases
contain future contingent increases in rentals. Such increases in rental expense are recorded in
the period that it is probable that store sales will meet or exceed the specified target that
triggers contingent rental expense.
(m) Franchises
The Company defers initial, one-time nonrefundable franchise fees and amortizes them over the
life of the respective franchise agreements, which extend for periods up to 10 years. Continuing
franchise fees are recognized as revenue as the fees are earned. The Company defers direct and
incremental costs incurred with third parties when entering into franchise agreements and amortizes
them over the life of the respective franchise agreements.
(n) Retail Revenue Recognition
Net retail sales are net of discounts, exclude sales tax, and are recognized at the time of
sale. Shipping and handling costs billed to customers are included in net retail sales.
Revenues from the sale of gift cards are recognized at the time of redemption. Unredeemed gift
cards are included in gift cards and customer deposits on the consolidated balance sheets. The
company escheats a portion of unredeemed gift cards according to Delaware escheatment regulations
that require remittance of the cost of merchandise portion of unredeemed gift cards over five years
old. The difference between the value of gift cards and the amount
escheated is recorded as a reduction in selling, general, and
administrative expenses
in the consolidated statement of operations.
The Company has an automated frequent shopper program in the United States, the Stuff Fur
Stuff® club, whereby guests enroll in the program and receive one point for every dollar or partial
dollar spent and after reaching 100 points receive a $10 discount on a future purchase. This
program was automated in July 2006 and replaced the former Buy Stuff Program, which was a manual
punch card system with limited tracking capability. The reward earned under the new program did
not change. An estimate of the obligation related to the program, based on historical redemption
rates, is recorded as deferred revenue and a reduction of net retail sales at the time of purchase.
The deferred revenue obligation is reduced, and a corresponding amount is recognized in net retail
sales, in the amount of and at the time of redemption of the $10 discount.
Under the previous Buy Stuff Program, the first card had no expiration date. Beginning in June
2002, and continuing each summer up to July 1, 2006, a series of cards was issued that had an
expiration date of December 31 of the year following the year in which that series of cards was
first issued. Beginning in July 2006, the automated Stuff Fur Stuff® club was introduced which
provides greater visibility to the rewards earned by our guests and the historical redemption
rates. Management tracks redemptions of these various cards and uses actual redemption rates by
card series and historical results to estimate how much revenue to defer. Management reviews these
redemption rates and assesses the adequacy of the deferred revenue account at the end of each
fiscal quarter. Due to the estimates involved in these assessments, adjustments to the deferral
rate are generally made no more often than bi-annually in order to allow time for more definite
trends to emerge.
48
Based upon an assessment at the end of fiscal 2003, the deferred revenue account was adjusted
downward by $1.1 million with a corresponding increase to net retail sales, an increase in net
income of $0.7 million. Additionally, the amount of revenue being
deferred beginning in fiscal 2004 was decreased by 0.2%, and by another 0.5% beginning with
the third quarter of 2004, to give effect to the change in redemption experience. The changes made
to the deferral rate in fiscal 2004 were prospective in nature with no impact on previously
reported results of operations. Beginning with the second quarter of fiscal 2005, the amount of
revenue being deferred was reduced by 0.1% on a prospective basis from its then current level due
to further changes in the Companys redemption experience.
Based on the most recent assessment at the end of fiscal 2006, the deferred revenue account
was adjusted downward by $3.6 million, effective at the beginning of fiscal 2006, with a
corresponding increase to net sales, and a $2.2 million increase in net income. Additionally, the
amount of revenue being deferred for future periods has been decreased by 0.6%, to give effect to
the change in redemption experience and the increased visibility of the redemptions with the
automated system. An additional 0.1% adjustment of the ultimate redemption rate at the end of
fiscal 2006 for the current cards expiring on December 30, 2006 and December 29, 2007 would have an
approximate impact of $0.5 million on the deferred revenue balance and net retail sales.
(o) Cost of Merchandise Sold
Cost of merchandise sold includes the cost of the merchandise, royalties paid to licensors of
third party branded merchandise, store occupancy cost, including store depreciation, freight costs
from the manufacturer to the store, cost of warehousing and distribution, packaging, damages and
shortages, and shipping and handling costs incurred in shipment to customers.
(p) Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include store payroll and related benefits,
advertising, credit card fees, and store supplies, as well as central office management payroll and
related benefits, travel, information systems, accounting, insurance, legal, and public relations.
It also includes depreciation and amortization of central office leasehold improvements, furniture,
fixtures, and equipment, as well as amortization of trademarks and intellectual property.
(q) Store Preopening Expenses
Store preopening expenses, including store set-up, certain labor and hiring costs, and rental
charges incurred prior to store openings are expensed as incurred.
(r) Advertising
Production costs of commercials and programming are charged to operations in the period during
which the production is first aired. The costs of other advertising, promotion and marketing
programs are charged to operations in the period the program takes place. Advertising expense was
$31.0 million, $27.2 million, and $22.7 million for fiscal years 2006, 2005 and 2004, respectively.
(s) Income Taxes
Income taxes are accounted for using a balance sheet approach known as the asset and liability
method. The asset and liability method accounts for deferred income taxes by applying the statutory
tax rates in effect at the date of the consolidated balance sheets to differences between the book
basis and the tax basis of assets and liabilities.
(t) Earnings Per Share
Certain classes of preferred stock were entitled to participate in cash dividends on common
stock prior to their conversion. For purposes of calculating basic earnings per share,
undistributed earnings were allocated to common and participating preferred shares on a pro rata
basis. Basic earnings per share is determined by dividing net income allocated to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if options to issue common
stock or conversion rights of preferred stocks were exercised. In periods in which the inclusion of
such instruments is anti-dilutive, the effect of such securities is not given consideration.
49
All outstanding classes of preferred stock were converted to common stock in conjunction with
the completion of the Companys initial public offering on October 28, 2004.
(u) Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS
123R requires companies to recognize the cost of awards of equity instruments, such as stock
options and restricted stock, based on the fair value of those awards at the date of grant and
eliminates the choice to account for employee stock options under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company adopted SFAS 123R
effective January 1, 2006 using the modified prospective method and, as such, results for prior
periods have not been restated. Under this method, in addition to reflecting compensation expense
for new share-based awards, expense is also recognized to reflect the remaining service period of
awards that had been included in pro forma disclosures in prior periods. Prior to January 1, 2006,
the fair value of restricted stock awards was expensed by the Company over the vesting period,
while compensation expense for stock options was recognized over the vesting period only to the
extent that the grant date market price of the stock exceeded the exercise price of the options.
For 2006, selling, general and administrative expense includes $2.1 million ($1.4 million
after tax) of stock-based compensation expense which had a $0.07 impact on both basic and diluted
earnings per share. Of this amount, $0.2 million ($0.2 after tax) is attributable to the Companys
adoption of SFAS 123R. This incremental expense from the adoption of SFAS 123R did not reduce basic
or diluted earnings per share based upon the insignificance of the expense. The additional
stock-based compensation expense not related to the adoption of SFAS 123R was related to the
vesting of restricted stock awards.
As of December 30, 2006, there was $4.4 million of total unrecognized compensation expense
related to nonvested restricted stock awards and options which is expected to be recognized over a
weighted-average period of 2.75 years.
The following table illustrates the effect on net income and earnings per share as if the
Company had applied the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123), prior to January 1, 2006 (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net income: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
27,314 |
|
|
$ |
19,999 |
|
Add stock-based employee
compensation expense
recorded, net of related tax
effects |
|
|
489 |
|
|
|
1,446 |
|
Deduct stock-based employee
compensation expense under
fair value-based method, net
of related tax effects |
|
|
(2,758 |
) |
|
|
(2,643 |
) |
|
|
|
|
|
|
|
Pro Forma |
|
$ |
25,045 |
|
|
$ |
18,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
1.38 |
|
|
$ |
2.30 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
1.27 |
|
|
$ |
2.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
1.35 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
1.24 |
|
|
$ |
1.02 |
|
|
|
|
|
|
|
|
The fair value of each option was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: (a) dividend
yield of 0%; (b) expected volatility of 50%; (c) risk-free interest rate of 3.5%; and (d) a
weighted average expected life of 6.3 years for 2005 and 9.4
years for 2004. The weighted average grant date fair value of options
granted during fiscal 2005 and fiscal 2004 was $17.23 and $8.63,
respectively. There were no new options granted in fiscal 2006. The pro
forma disclosures above utilize the accelerated expense attribution method under FASB
Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans An Interpretation of APB Opinions No. 15 and 25. Upon adoption of SFAS 123R, the
Company made a policy decision that the straight-line expense attribution method would be utilized
for all future stock-based compensation awards with graded vesting.
On October 21, 2005, the Compensation Committee of the Board of Directors of the Company
approved accelerated vesting of all unvested stock options which were granted prior to March 9,
2005. These options have exercise prices ranting from $20.00 to $34.65 per share. Options to
purchase 174,056 shares of the Companys stock became exercisable on October 21, 2005 as a result
of this acceleration, including 71,000 shares held by the Companys named executive officers. Of
these options, 173,056 had exercise prices in excess of the current market value at the time of the
acceleration of vesting.
The Compensation Committees decision to accelerate the vesting of the accelerated options was
based upon the issuance of SFAS 123R. The acceleration of the vesting of these stock options
enabled the Company to avoid compensation charges related to these options in subsequent periods of
the effective date under the provisions of SFAS 123R.
The aggregate compensation expense that would have been recorded subsequent to the adoption of
SFAS 123R, but is eliminated as a result of the acceleration of the vesting of these options, is
approximately $1.8 million ($1.1 million net of tax). This amount is instead reflected in the
above pro forma disclosures for 2005.
50
\
Prior to the adoption of SFAS 123R, the Company presented the benefit of all tax deductions
resulting from the exercise of stock options and restricted stock awards as operating cash flows in
the consolidated statements of cash flows. SFAS 123R requires the benefits of tax deductions in
excess of grant-date fair value be reported as a financing cash flow, rather than as an operating
cash flow. Excess tax benefits of $1.3 million, which were classified as a financing cash inflow in
fiscal 2006, would have been classified as an operating cash inflow if the Company had not adopted
SFAS 123R.
(v) Fair Value of Financial Instruments
For purposes of financial reporting, management has determined that the fair value of
financial instruments, including cash and cash equivalents, receivables, accounts payable, and
accrued expenses, approximates book value at December 30, 2006 and December 31, 2005.
(w) Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to
make a number of estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to such estimates and assumptions include the carrying amount of property
and equipment and intangibles, inventories, the valuation of assets and liabilities in the purchase
price allocation for business combinations and deferred income tax assets and the determination of
deferred revenue under the Companys frequent shopper program.
(x) Sales Tax Policy
The Companys revenues in the consolidated statement of operations are net of sales taxes.
(y) Foreign Currency Translation
Assets and liabilities of the Companys foreign operations are translated at the exchange rate
in effect at the balance sheet date, while revenues and expenses are translated at average rates
prevailing during the years. Translation adjustments are reported in other comprehensive income, a
separate component of stockholders equity.
(z) Recent Accounting Pronouncements
In June 2006, the
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48
establishes threshold and
measurement attributes for financial statement measurement and recognition of tax positions taken or expected to be
taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will
adopt FIN 48 on December 31, 2006.
Management does not expect the adoption of FIN 48 will have a significant impact on the financial results of the Company
and will not result
in a significant cumulative effect adjustment to the December 31, 2006 balance of retained earnings.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and states that a fair value measurement should be determined based on
assumptions that market participants would use in pricing the asset or liability. The Company is
required to adopt SFAS 157 in the first quarter of 2008. The Company is currently assessing the
financial impact of SFAS 157 on its consolidated financial statements.
(3) Business Acquisition
On April 2, 2006, the Company acquired all of the outstanding shares of The Bear Factory
Limited (Bear Factory), a stuffed animal retailer in the United Kingdom, and Amsbra Limited
(Amsbra), the Companys former U.K. franchisee (collectively, the U.K. Acquisition). The results
of the U.K. Acquisition operations have been included in the consolidated financial statements
since that date. In conjunction with those transactions, we obtained
40 (unaudited) retail locations in the
United Kingdom and Ireland. The aggregate cash purchase price for the U.K. Acquisition was $39.4
million, excluding cash acquired of $0.3
million. In addition to the cash purchase price, the Company had previously advanced $4.5 million
to Amsbra as a note receivable. The amount of this note receivable and the related accrued
interest is a non-cash component of the purchase price.
The Company has not completed its assessment of the U.K. Acquisition assets and liabilities.
Until that assessment is complete, the allocation of the purchase price is preliminary and may be
subject to revisions.
51
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (in thousands):
|
|
|
|
|
Current assets |
|
$ |
6,497 |
|
Property and equipment |
|
|
6,192 |
|
Goodwill |
|
|
31,727 |
|
Intangibles |
|
|
1,824 |
|
|
|
|
|
Total assets acquired |
|
|
46,240 |
|
|
|
|
|
|
Current liabilites assumed |
|
|
(8,607 |
) |
Loan previously advanced |
|
|
4,517 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
42,150 |
|
|
|
|
|
The following unaudited pro forma summary presents the Companys revenue, net income, basic
earnings per share and diluted earnings per share as if the U.K. Acquisition had occurred on
January 2, 2005 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
Fiscal 2005 |
|
Revenue |
|
$ |
446,140 |
|
|
$ |
404,057 |
|
Net Income |
|
|
27,735 |
|
|
|
21,189 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
$ |
1.38 |
|
|
$ |
1.07 |
|
Diluted earnings per common share: |
|
$ |
1.36 |
|
|
$ |
1.05 |
|
Pro forma adjustments have been made to reflect depreciation and amortization using estimated
asset values recognized after applying purchase accounting adjustments.
This pro forma information is presented for informational purposes only and is not necessarily
indicative of actual results had the acquisition been effected at the beginning of the respective
periods presented, and is not necessarily indicative of future results.
(4) Comprehensive Income
Comprehensive income for fiscal 2006 and fiscal 2005 was $30.1 million and $27.3 million,
respectively. The difference between comprehensive income and net income resulted from foreign
currency translation adjustments.
(5) Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Land |
|
$ |
2,261 |
|
|
$ |
|
|
Furniture and fixtures |
|
|
33,938 |
|
|
|
19,727 |
|
Computer hardware |
|
|
15,649 |
|
|
|
12,655 |
|
Building |
|
|
14,970 |
|
|
|
|
|
Leasehold improvements |
|
|
122,043 |
|
|
|
98,991 |
|
Computer software |
|
|
12,988 |
|
|
|
7,250 |
|
Construction in progress |
|
|
2,200 |
|
|
|
5,853 |
|
|
|
|
|
|
|
|
|
|
|
204,049 |
|
|
|
144,476 |
|
Less accumulated depreciation |
|
|
73,702 |
|
|
|
54,503 |
|
|
|
|
|
|
|
|
|
|
$ |
130,347 |
|
|
$ |
89,973 |
|
|
|
|
|
|
|
|
For 2006, 2005, and 2004, depreciation expense was $20.5 million, $16.4 million, and $13.8
million, respectively.
52
(6) Goodwill
On April 2, 2006, the Company acquired all of the outstanding shares of The Bear Factory
Limited (Bear Factory), a stuffed animal retailer in the United Kingdom, and Amsbra Limited
(Amsbra), the Companys former U.K. franchisee (collectively, the U.K. Acquisition). The purchase
was recorded in accordance with SFAS No. 141, Business Combinations and is reported as a
component of the Companys retail segment. The following table summarizes the Companys goodwill
(in thousands):
|
|
|
|
|
U.K. Acquisition |
|
$ |
31,727 |
|
Acquisition costs |
|
|
1,005 |
|
Severance costs |
|
|
785 |
|
|
|
|
|
|
|
|
33,517 |
|
|
|
|
|
|
Effect of foreign currency translation |
|
|
3,410 |
|
|
|
|
|
|
|
|
|
|
Goodwill, as of December 30, 2006 |
|
$ |
36,927 |
|
|
|
|
|
There was no tax-deductible goodwill as of December 30, 2006.
(7) Other Intangible Assets
Other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Trademarks and other intellectual property at cost |
|
$ |
8,897 |
|
|
$ |
6,026 |
|
Less accumulated amortization |
|
|
6,024 |
|
|
|
4,572 |
|
|
|
|
|
|
|
|
Total, net |
|
$ |
2,873 |
|
|
$ |
1,454 |
|
|
|
|
|
|
|
|
Trademarks and intellectual property are amortized over three to ten years. Amortization
expense related to trademarks and intellectual property was $1.4 million in 2006 and $0.9 million
each year for 2005 and 2004. Estimated amortization expense related to other intangible assets as
of December 30, 2006, for each of the years in the subsequent five year period and thereafter is:
2007- $1.3 million; 2008 $0.8 million; 2009 $0.4 million; 2010 $0.1 million; 2011 $0.1
million and all remaining years $0.2 million.
Trademarks and intellectual property acquired in the U.K. Acquisition were $2.0 million at
cost and had $0.5 million in amortization in fiscal 2006.
(8) Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Accrued wages, bonuses and related expenses |
|
$ |
3,559 |
|
|
$ |
3,926 |
|
Sales tax payable |
|
|
5,384 |
|
|
|
4,217 |
|
Current income taxes payable |
|
|
6,482 |
|
|
|
6,653 |
|
Accrued rent and related expenses |
|
|
876 |
|
|
|
996 |
|
|
|
|
|
|
|
|
|
|
$ |
16,301 |
|
|
$ |
15,792 |
|
|
|
|
|
|
|
|
53
(9) Income Taxes
The components of the provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
15,660 |
|
|
$ |
15,770 |
|
|
$ |
12,432 |
|
State |
|
|
2,156 |
|
|
|
2,584 |
|
|
|
2,035 |
|
Foreign |
|
|
2,220 |
|
|
|
780 |
|
|
|
342 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,282 |
) |
|
|
(1,757 |
) |
|
|
(1,617 |
) |
State |
|
|
(119 |
) |
|
|
(278 |
) |
|
|
(258 |
) |
Foreign |
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
18,933 |
|
|
$ |
17,099 |
|
|
$ |
12,934 |
|
|
|
|
|
|
|
|
|
|
|
The income tax expense is different from the amount computed by applying the U.S.
statutory Federal income tax rates to income before income taxes. The reasons for these differences
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income before taxes |
|
$ |
48,421 |
|
|
$ |
44,413 |
|
|
$ |
32,933 |
|
UK net operating loss no tax benefit |
|
|
1,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
49,873 |
|
|
|
44,413 |
|
|
|
32,933 |
|
U.S. statutory Federal income tax rate |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
Computed income taxes |
|
|
17,456 |
|
|
|
15,545 |
|
|
|
11,527 |
|
State income taxes, net of Federal tax benefit |
|
|
1,325 |
|
|
|
1,498 |
|
|
|
1,155 |
|
Other |
|
|
152 |
|
|
|
56 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
18,933 |
|
|
$ |
17,099 |
|
|
$ |
12,934 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
39.1 |
% |
|
|
38.5 |
% |
|
|
39.3 |
% |
Temporary differences that gave rise to deferred income tax assets and liabilities
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
3,529 |
|
|
$ |
4,240 |
|
Accrued rents |
|
|
3,409 |
|
|
|
3,210 |
|
Deferred compensation |
|
|
829 |
|
|
|
380 |
|
Intangible assets |
|
|
1,283 |
|
|
|
1,173 |
|
Stock compensation |
|
|
234 |
|
|
|
350 |
|
Accrued severance |
|
|
207 |
|
|
|
|
|
Net
operating loss carryovers |
|
|
435 |
|
|
|
|
|
Other |
|
|
223 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
10,149 |
|
|
|
9,564 |
|
Less:
valuation allowance |
|
|
(435 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets |
|
|
9,714 |
|
|
|
9,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(6,001 |
) |
|
|
(6,963 |
) |
Other |
|
|
(389 |
) |
|
|
(380 |
) |
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
(6,390 |
) |
|
|
(7,343 |
) |
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
3,324 |
|
|
$ |
2,221 |
|
|
|
|
|
|
|
|
As of December 30, 2006, the Company has recognized a net operating
loss for its wholly-owned U. K. subsidiaries of $1.5 million. The tax
impact of that loss is $0.4 million based on a local tax rate in the U.
K. of 30%. The entire benefit of that loss has been reduced by a
valuation allowance. At the time when the loss is utilized, that
valuation allowance will be relieved. There are no statutory expiration limits on net operating loss carryforwards
in the U.K. The Company had no valuation
allowance at December 31, 2005.
54
(10) Long-Term Debt
On June 30, 2006, the Company amended its previous line of credit with a bank increasing their
borrowing capacity from $15
million to $30 million. The amended line of credit has an effective date of June 30, 2006 with a
maturity date of September 30, 2007. Borrowings under the amended line of credit (the credit
agreement) are not collateralized, but availability under the credit agreement can be limited by
the lender based on the Companys levels of accounts receivable, inventory, and property and
equipment. The credit agreement requires the Company to comply with certain financial covenants,
including maintaining a minimum tangible net worth, maintaining a minimum fixed charge coverage
ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings
before interest, depreciation and amortization ratio. The credit agreement also places certain
restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of
assets, loans, transactions with affiliates, and investments. It also prohibits the Company from
declaring dividends without the banks prior consent, unless such payment of dividends would not
violate any terms of the loan agreement. Borrowings bear interest at the Companys option of prime
minus 1.0% or LIBOR plus 1.5%.
There was no outstanding balance under the credit agreement at
December 30, 2006 or December 31, 2005 other than a standby letter of credit for $1.1 million. Giving effect to this
standby letter of credit, there was $28.9 million available for borrowing under the credit
agreement at December 30, 2006 and December 31, 2005.
(11) Commitments and Contingencies
(a) Operating Leases
The Company leases its retail stores, web fulfillment site, and corporate offices under
agreements which expire at various dates through 2023. The majority of leases contain provisions
for base rent plus contingent payments based on defined sales. Total office and retail store base
rent expense was $40.5 million, $23.8 million, and $19.9 million, and contingent rents were $1.5
million, $1.8 million, and $1.2 million for 2006, 2005, and 2004, respectively.
Future minimum lease payments at December 30, 2006, were as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
42,222 |
|
2008 |
|
|
44,106 |
|
2009 |
|
|
43,432 |
|
2010 |
|
|
42,016 |
|
2011 |
|
|
38,590 |
|
Subsequent to 2011 |
|
|
137,520 |
|
|
|
|
|
|
|
$ |
347,886 |
|
|
|
|
|
(b) Litigation
In the normal course of business, the Company is subject to certain claims or lawsuits.
Management is not aware of any claims or lawsuits that will have a material adverse effect on the
consolidated financial position or results of operations of the Company.
(12) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except share and per share date):
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
19,999 |
|
Cumulative dividends and accretion of redeemable
preferred stock |
|
|
|
|
|
|
|
|
|
|
1,262 |
|
Cumulative dividends of nonredeemable
preferred stock |
|
|
|
|
|
|
|
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common and participating
preferred stockholders |
|
|
29,490 |
|
|
|
27,314 |
|
|
|
18,474 |
|
|
|
|
|
|
|
|
|
|
|
Dividends and accretion related to dilutive
preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 |
|
|
|
|
|
|
|
|
|
|
113 |
|
Series A-2 |
|
|
|
|
|
|
|
|
|
|
20 |
|
Series A-3 |
|
|
|
|
|
|
|
|
|
|
101 |
|
Series A-4 |
|
|
|
|
|
|
|
|
|
|
29 |
|
Series A-5 |
|
|
|
|
|
|
|
|
|
|
293 |
|
Series B-4 |
|
|
|
|
|
|
|
|
|
|
41 |
|
Series D |
|
|
|
|
|
|
|
|
|
|
928 |
|
|
|
|
|
|
|
|
|
|
|
Total dividends and accretion |
|
|
|
|
|
|
|
|
|
|
1,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
19,999 |
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common
stockholders |
|
$ |
29,490 |
|
|
$ |
27,314 |
|
|
$ |
8,519 |
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to participating
preferred stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,955 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding |
|
|
20,169,814 |
|
|
|
19,735,067 |
|
|
|
3,702,365 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of participating
preferred shares outstanding |
|
|
|
|
|
|
|
|
|
|
7,805,238 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding |
|
|
20,169,814 |
|
|
|
19,735,067 |
|
|
|
3,702,365 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
236,316 |
|
|
|
420,280 |
|
|
|
556,545 |
|
Restricted stock |
|
|
62,125 |
|
|
|
74,631 |
|
|
|
205,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,468,256 |
|
|
|
20,229,978 |
|
|
|
4,464,755 |
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 |
|
|
|
|
|
|
|
|
|
|
1,203,221 |
|
Series A-2 |
|
|
|
|
|
|
|
|
|
|
148,017 |
|
Series A-3 |
|
|
|
|
|
|
|
|
|
|
1,016,444 |
|
Series A-4 |
|
|
|
|
|
|
|
|
|
|
217,641 |
|
Series A-5 |
|
|
|
|
|
|
|
|
|
|
1,122,950 |
|
Series B-1 |
|
|
|
|
|
|
|
|
|
|
226,182 |
|
Series B-2 |
|
|
|
|
|
|
|
|
|
|
1,193,595 |
|
Series B-3 |
|
|
|
|
|
|
|
|
|
|
255,467 |
|
Series B-4 |
|
|
|
|
|
|
|
|
|
|
1,318,130 |
|
Series C |
|
|
|
|
|
|
|
|
|
|
4,084,723 |
|
Series D |
|
|
|
|
|
|
|
|
|
|
3,365,310 |
|
|
|
|
|
|
|
|
|
|
|
Total dilutive convertible preferred shares |
|
|
|
|
|
|
|
|
|
|
14,151,680 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares dilutive |
|
|
20,468,256 |
|
|
|
20,229,978 |
|
|
|
18,616,435 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
$ |
1.46 |
|
|
$ |
1.38 |
|
|
$ |
2.30 |
|
|
|
|
|
|
|
|
|
|
|
Per participating preferred share |
|
$ |
|
|
|
$ |
|
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.44 |
|
|
$ |
1.35 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
56
In calculating diluted earnings per share for fiscal 2006, options to purchase 166,588
shares of common stock were outstanding at the end of the period, but were not included in the
computation of diluted earnings per share due to their anti-dilutive effect.
In calculating diluted earnings per share for fiscal 2005, options to purchase 173,560 shares
of common stock were outstanding at the end of the period, but were not included in the computation
of diluted earnings per share due to their anti-dilutive effect. An additional 51,750 shares of
restricted common stock were outstanding at the end of the period, but excluded from the
calculation of diluted earnings per share due to their anti-dilutive effect under provisions of
Statement of Financial Accounting Standards No. 128, Earnings per Share.
No options were excluded from the diluted earnings per share calculation for fiscal 2004.
(13) Stock Incentive Plans
On April 3, 2000, the Company adopted the 2000 Stock Option Plan (the Plan). In 2003, the
Company adopted the Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan, and, in 2004, the
Company adopted the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (collectively, the
Plans).
Under the Plans, as amended, up to 3,700,000 shares of common stock were reserved and may be
granted to employees and nonemployees of the Company. The Plan allows for the grant of incentive
stock options, nonqualified stock options, and restricted stock. Options granted under the Plan
expire no later than 10 years from the date of the grant. The exercise price of each incentive
stock option shall not be less than 100% of the fair value of the stock subject to the option on
the date the option is granted. The exercise price of the nonqualified options shall be determined
from time to time by the compensation committee of the board of directors (the Committee). The
vesting provision of individual options is at the discretion of the Committee and generally ranges
from one to four years.
(a) Stock Options
The following table is a summary of the balance and activity for the Plans related to stock
options for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Average |
|
|
Remaining |
|
|
Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(in thousands) |
|
Outstanding, January 3, 2004 |
|
|
1,067,549 |
|
|
$ |
4.82 |
|
|
|
|
|
|
|
|
|
Granted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price less than fair market value |
|
|
302,234 |
|
|
|
8.78 |
|
|
|
|
|
|
|
|
|
Exercise price equal to fair market value |
|
|
2,000 |
|
|
|
20.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
268,912 |
|
|
|
2.05 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
63,463 |
|
|
|
8.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2005 |
|
|
1,039,408 |
|
|
|
6.52 |
|
|
|
|
|
|
|
|
|
Granted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price less than fair market value |
|
|
218,292 |
|
|
|
32.73 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
475,970 |
|
|
|
5.76 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
13,107 |
|
|
|
28.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
|
768,623 |
|
|
|
14.06 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
208,951 |
|
|
|
7.23 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
30,472 |
|
|
|
25.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2006 |
|
|
529,200 |
|
|
$ |
16.10 |
|
|
|
6.0 |
|
|
$ |
6,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable As Of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2006 |
|
|
525,450 |
|
|
|
16.05 |
|
|
|
5.9 |
|
|
$ |
6,291 |
|
The total intrinsic value of options exercised in fiscal 2006 and fiscal 2005 was
approximately $4.3 million and $10.5 million, respectively. The Company generally issues new
shares to satisfy option exercises.
The Company granted options during 2004 at an exercise price of $8.78 per share, which had
been determined to be the fair value of its common stock at the time based on an independent
appraisal. Subsequent to such grants, the Company determined that the fair value of the underlying
common stock should have been deemed to be approximately $15.00 per share. As a result of this
57
determination, this option issuance generated stock-based compensation of $1.9 million to be
recognized over the vesting period of the 302,234 underlying options. These options became fully
vested upon completion of the Companys initial public offering on October
28, 2004. Accordingly, all unrecognized compensation expense related to this grant was recognized
at that time and is reflected in the consolidated statement of operations for the fiscal year ended
January 1, 2005.
In May of 2004, a former officer of the Company surrendered 48,964 shares of Class C preferred
stock in exchange for the exercise of 255,600 stock options with exercise prices ranging from $0.47
to $6.10 per share. In conjunction with this transaction, the vesting of 9,400 options with an
exercise price of $6.04 per share was accelerated by one calendar month. Stock compensation costs
of $26,000 are reflected in the consolidated statements of operations for the modification of the
terms of these options. The Company also extended the due date of a loan made to the same former
officer. The loan was originally due upon the earlier of the officers separation date from the
Company or September 19, 2006. The officer separated from the Company during 2004. On the date of
separation, the due date of the loan was extended until September 19, 2006. The loan was collected
in full on November 24, 2004.
In May of 2004, the Company accelerated the vesting of 5,625 options with an exercise price of
$9.10 per share. The options were held by a former member of the Companys board of directors. The
options were originally scheduled to vest at a rate of 1,875 per year on April 24 of each year
through April 24, 2007. Simultaneously with this acceleration, the Company allowed the former
director to exercise 7,500 options with an exercise price of $9.10 per share for no consideration.
The 7,500 options consisted of the 5,625 accelerated options plus 1,875 previously vested options.
At the time of this modification, the fair value of the Companys common stock was $8.78 per share.
Accordingly, the Company recognized $66,000 in compensation expense at the time of this
modification, which is reflected in the consolidated statements of operations.
Shares available for future option, non-vested stock and restricted stock grants were
1,649,731 and 1,796,166 at the end of 2006 and 2005, respectively.
(b) Restricted Stock
The following table is a summary of the balance and activity for the Plans related to unvested
restricted stock granted as compensation to employees and directors for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Number of |
|
|
Date Fair Value |
|
|
|
Shares |
|
|
per Award |
|
Outstanding, January 1, 2005 and January 3, 2004 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
82,946 |
|
|
|
32.37 |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
|
82,946 |
|
|
|
32.37 |
|
Granted |
|
|
230,702 |
|
|
|
29.18 |
|
Vested |
|
|
42,705 |
|
|
|
30.60 |
|
Forfeited |
|
|
43,490 |
|
|
|
29.27 |
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2006 |
|
|
227,453 |
|
|
$ |
30.06 |
|
|
|
|
|
|
|
|
|
On April 3, 2000, the Company issued 274,815 shares of restricted common stock to an
officer of the Company in exchange for a promissory note of $1,236,667 that bore interest at 6.60%
per annum. Both principal and interest were collected in full in April 2005.
On September 19, 2001, the Company issued 40,982 shares of contractually restricted common
stock to two officers of the Company in exchange for nonrecourse promissory notes totaling $249,990
that bear interest at 4.82% per annum. Both principal and interest are due September 2006. On
November 24, 2004, the Company collected all outstanding principal and interest related to 20,491
shares of this restricted stock. On September 19, 2006, the Company collected all outstanding
principal and interest on the remaining 20,291 shares of this restricted stock. The collection of
these funds removed all remaining restrictions from those shares.
On November 17, 2004, the Company granted 330 shares of non-vested common stock to a member of
its board of directors as compensation for services. The shares were issued subject to a
restriction of continued service on the board of directors, and all restrictions lapsed one year
from the grant date. The fair value of the non-vested stock at the date of grant was $30.33 per
share.
In March 2005, the Company granted 51,750 shares of restricted, non-vested stock to certain
executives of the Company. The shares vest ratably over a four year period from the date of grant
if a certain net income level is achieved by the Company in fiscal 2005 and the executives remain
employed by the Company over the vesting period. The executives are entitled to vote these
restricted shares and will be eligible for participation in any dividends declared during the
vesting period. The net income level required for vesting was achieved in fiscal 2005. Under the
provisions of APB Opinion No. 25 and related interpretations, the compensation
58
related to
these shares was adjusted to the market value ($29.64 per share) of the Companys common stock as of
December 31, 2005, the date the performance condition was satisfied. During 2005, 1,000 shares of
the non-vested stock were forfeited by an executive due to the cessation of the executives
employment with the Company. In July 2005, 1,000 shares of non-vested stock were issued under the
same terms as the March 2005 grant noted above to a new executive who joined the Company. At
December 31, 2005, the total fair value of these restricted stock grants was approximately $1.5
million. During fiscal 2005, the Company recorded compensation expense of approximately $0.6
million related to these restricted stock grants. The 51,750 shares of non-vested stock were
excluded from the calculation of diluted earnings per share because the achievement of the
specified net income level was not known until the end of fiscal 2005. These non-vested shares will
be included in the calculation of diluted earnings per share beginning January 1, 2006.
During 2005, an additional 31,196 shares of non-vested stock were granted to various members
of the Companys board of directors as compensation for services. The shares were issued subject to
a restriction of continued service on the board of directors, and all restrictions lapse over a
period from one to three years from the grant date. The weighted average grant date fair value of
these non-vested shares was $28.95 per share.
During 2006, 195,040 of non-vested restricted stock were granted to employees of the Company.
The shares vest over a period of 4 years from the grant date at a grant date fair value of $29.14.
An additional 28,321 shares of non-vested stock were granted to various members of the Companys
board of directors as compensation for services. The shares were issued subject to a restriction
of continued service on the board of directors and all restrictions lapse over a period of one to
three year from the grant date. In September 2006, a one time discretionary grant of 4,941 shares
of restricted stock were granted to an executive of the Company for continued valued contributions
to the Company and vest over a period of one year from the grant date. In May 2006, 2,400 shares
of restricted stock were granted to a newly hired employee. The shares vest over a period of 4
years from the grant date.
The aggregate unearned compensation expense related to restricted stock was $4.3 million as of
December 30, 2006. Based on the vesting provisions of the underlying equity instruments, future
compensation expense related to previously issued restricted stock at December 30, 2006 was as
follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
1,887 |
|
2008 |
|
|
1,190 |
|
2009 |
|
|
1,035 |
|
2010 |
|
|
237 |
|
|
|
|
|
|
|
$ |
4,349 |
|
|
|
|
|
The outstanding restricted and non-vested stock is included in the number of
outstanding shares on the face of the consolidated balance sheets, but is treated as outstanding
stock options for accounting purposes. The shares of restricted and non-vested stock, accounted for
as options, are included in the calculation of diluted earnings per share using the treasury stock
method, with the proceeds equal to the sum of unrecognized compensation cost and amounts to be
collected from the outstanding loans related to the restricted stock, where applicable.
(c) Associate Stock Purchase Plan
In October 2004, the Company adopted an Associate Stock Purchase Plan (ASPP). Under the ASPP,
substantially all full-time employees are given the right to purchase shares of the Companys
common stock, subject to certain limitations, at 85% of the lesser of the fair market value on the
purchase date or the beginning of each purchase period. Up to 1,000,000 shares of the Companys
common stock are available for issuance under the ASPP. The employees of the Company purchased
34,488 shares at $20.00 per share through the ASPP during fiscal 2006. The expense recorded
related to the ASPP during fiscal 2006 was determined using the Black-Scholes option pricing model
and the provision of FASB Technical Bulletin 97-1, Accounting under Statement 123 for Certain
Employee Stock Purchase Plans with a Look-Back Option (FTB 97-1), as amended by SFAS 123R. The
assumptions used in the option pricing model for fiscal 2006 were: (a) dividend yield of 0%; (b)
volatility of 20%; (c) risk-free interest rate of 6.0%; and (d) an expected life of 0.25 years.
Prior to the adoption of SFAS 123R, the ASPP was considered noncompensatory and no expense was
recorded in the consolidated statement of operations.
59
(14) Stockholders Equity
(a) Reorganization and Preferred Stock Sales
Effective April 3, 2000, the Company reorganized from an LLC to a C Corporation. The existing
LLC members received a total of 9,482,482 shares of Series A, B, and C convertible nonredeemable
preferred stock and 217,519 shares of common stock in exchange for their member units.
On April 5, 2000, the Company issued a total of 2,666,666 shares of Series A and B convertible
redeemable preferred stock in exchange for $9,837,876 in cash and $1,934,485 in a promissory note
from a related party. The note was subsequently collected in full within 30 days of issuance. The
proceeds are net of the costs associated with the preferred stock sales of $227,632.
From September through December 2001, the Company issued a total of 3,467,337 shares of Series
D convertible redeemable preferred stock in exchange for $21,024,016 in cash. The cash proceeds are
net of the costs associated with the preferred stock sales of $141,911.
(b) Preferred Stock
Prior to the Companys initial public offering, 25,000,000 shares of preferred stock were
authorized. Preferred stock consisted of various series of Class A, B, C, and D preferred stock.
Each class had various dividend, liquidation, and redemption rights as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series of |
|
Defined |
|
|
Defined |
|
|
Shares Issued and |
|
|
Liquidation |
|
Preferred |
|
Liquidation |
|
|
Cumulative |
|
|
Outstanding as of |
|
|
Preference as of |
|
Stock |
|
Rights |
|
|
Dividends |
|
|
January 3, 2004 |
|
|
January 3, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
A-1 |
|
$ |
2.451890 |
|
|
|
0.171632 |
|
|
|
1,137,898 |
|
|
$ |
3,522 |
|
A-2 |
|
|
3.556556 |
|
|
|
0.248959 |
|
|
|
139,981 |
|
|
|
629 |
|
A-3 |
|
|
2.600746 |
|
|
|
0.182052 |
|
|
|
961,263 |
|
|
|
3,156 |
|
A-4 |
|
|
3.484283 |
|
|
|
0.243900 |
|
|
|
205,824 |
|
|
|
905 |
|
A-5 |
|
|
5.649780 |
|
|
|
0.395485 |
|
|
|
1,061,986 |
|
|
|
7,575 |
|
B-1 |
|
|
1.808051 |
|
|
|
0.000000 |
|
|
|
275,352 |
|
|
|
498 |
|
B-2 |
|
|
1.720493 |
|
|
|
0.000000 |
|
|
|
1,453,072 |
|
|
|
2,500 |
|
B-3 |
|
|
2.305925 |
|
|
|
0.000000 |
|
|
|
311,003 |
|
|
|
717 |
|
B-4 |
|
|
3.739067 |
|
|
|
0.000000 |
|
|
|
1,604,680 |
|
|
|
6,000 |
|
C-1 |
|
|
0.105315 |
|
|
|
0.000000 |
|
|
|
3,418,306 |
|
|
|
360 |
|
C-2 |
|
|
0.973290 |
|
|
|
0.000000 |
|
|
|
1,385,507 |
|
|
|
1,349 |
|
C-3 |
|
|
0.720934 |
|
|
|
0.000000 |
|
|
|
194,276 |
|
|
|
140 |
|
D |
|
|
6.100000 |
|
|
|
0.427000 |
|
|
|
3,467,337 |
|
|
|
24,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,616,485 |
|
|
$ |
51,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, $1.3 million was recorded to increase the carrying value of the Series
A-5, B-4, and D redeemable preferred stock to its redemption value. This includes cumulative
dividends of $1.1 million and accretion of equity issuance costs of $0.2 million for 2004 for the
redeemable preferred stock. Cumulative dividends in arrears for the nonredeemable preferred stock
totaled approximately $1.7 million at January 3, 2004 and approximately $2.0 million at the date of
conversion in conjunction with the initial public offering.
As of August 10, 2004, the Certificate of Incorporation was amended primarily with respect to
the liquidation and redemption preferences of the Series A and Series D preferred stock as well as
the dividend rights for all series of preferred stock. Previously, Series A and Series D preferred
stock accrued a dividend and any accrued and unpaid dividends were added to the original
liquidation preference and redemption amounts for these series. Additionally, these series had
certain dividend preference rights over other classes of stock.
The amended Certificate of Incorporation effectively set the liquidation preferences and
redemption amounts for the Series A and Series D stock to be equal to the original amounts plus the
amounts of accrued and unpaid dividends as of July 31, 2004. Additionally, any dividend preferences
or restrictions on all series of preferred stock were removed and all series of preferred stock
participate on an as converted basis ratably with common stock for any declared dividends.
In August 2004, following the amendment of the Certificate of Incorporation, the Company paid
a cash dividend of $10.0 million to the common and preferred stockholders. The dividend equated to
$0.55 per share for all classes of stock.
60
\
All shares of preferred stock, including shares of preferred stock issuable in exchange for
accrued but unpaid dividends, were converted into 17,316,689 shares of common stock upon the
completion of the Companys initial public offering.
(c) Initial Public Offering
On October 28, 2004, the Company completed an initial public offering (the offering) of
7,482,000 shares of common stock, of which 5,982,000 shares were sold by selling shareholders, at a
price of $20.00 per share. The proceeds to the Company from the offering, after underwriting
discounts and offering costs, were approximately $25.7 million. In conjunction with the offering,
all shares of preferred stock, including shares of preferred stock issuable in exchange for accrued
but unpaid dividends, were converted into 17,316,689 shares of common stock.
As a result of the initial public offering, the Companys charter was amended to authorize
50,000,000 shares of $0.01 par value common stock and 15,000,000 shares of $0.01 par value
preferred stock.
(d) Share Activity
The following table summarizes the changes in outstanding shares of all series of common and
preferred stock for fiscal 2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Preferred Stock |
|
|
Nonredeemable Preferred Stock |
|
|
Common |
|
|
|
Class A |
|
|
Class B |
|
|
Class D |
|
|
Class A |
|
|
Class B |
|
|
Class C |
|
|
Stock |
|
Shares as of December January 3, 2004 |
|
|
1,061,986 |
|
|
|
1,604,680 |
|
|
|
3,467,337 |
|
|
|
2,444,966 |
|
|
|
2,039,427 |
|
|
|
4,998,089 |
|
|
|
533,316 |
|
Exercise of stock options and exchange of
outstanding shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,964 |
) |
|
|
268,912 |
|
Shares withheld in lieu of tax withholdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,463 |
) |
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330 |
|
Conversion of preferred stock to common
stock |
|
|
(1,061,986 |
) |
|
|
(1,604,680 |
) |
|
|
(3,467,337 |
) |
|
|
(2,444,966 |
) |
|
|
(2,039,427 |
) |
|
|
(4,949,125 |
) |
|
|
17,316,689 |
|
Additional shares issued in the offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares as of January 1, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,557,784 |
|
Employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,823 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,970 |
|
Shares withheld in lieu of tax withholdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,868 |
) |
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares as of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,120,655 |
|
Employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,488 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,621 |
|
Shares withheld in lieu of tax withholdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,683 |
) |
Forfeiture of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,362 |
) |
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares as of December 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,537,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
(15) Employee Benefit Plans
(a) 401(k) Savings Plan
During 2000, the Company established a defined contribution plan that conforms to IRS
provisions for 401(k) plans. The Build-A-Bear Workshop, Inc. Employees Savings Trust covers
associates who work 1,000 hours or more in a year and have attained age 21. The Company, at the
discretion of its board of directors, can provide for a Company match on the first 6% of employee
deferrals. For 2006, 2005, and 2004, the Company provided a match of 30% on the first 6% of
employee deferrals totaling $0.3 million, $0.3 million, and $0.2 million, respectively. The Company
match vests over a five-year period.
(16) Related-Party Transactions
The Company bought fixtures for new stores and furniture for the corporate offices from a
related party. The total payments to this related party for fixtures and furniture amounted to $2.7
million, $3.3 million, and $1.9 million in 2006, 2005, and 2004, respectively. The Company leased
part of its corporate office from the same related party in 2004. Rent under this lease amounted to
$0.1 million 2004. As of December 30, 2005 nothing was due to this related party. The total due to
this related party as of December 31, 2005 was $0.1 million.
The Company paid $0.8 million in 2004 for construction management services to an entity
controlled by a stockholder holding in excess of 5% of one class of the Companys capital stock
prior to the initial public offering. The Company leased one of its retail stores from this same
related party in fiscal 2003. Subsequent to the initial public offering, this stockholder no longer
owns in excess of 5% of any class of the Companys capital stock. As a result, the entity
controlled by this stockholder is no longer considered a related party. The Company plans to
continue to use the same entity for construction management services in the future.
The Company paid $0.4 million 2004 for design and other creative services to a stockholder
holding in excess of 5% of one class of the Companys capital stock prior to the initial public
offering. Subsequent to the initial public offering, this stockholder no longer owns in excess of
5% of any class of the Companys capital stock. As a result, the stockholder is no longer
considered a related party. The Company plans to continue to use this stockholder for design and
other creative services in the future.
The Company made charitable contributions of $1.0 million, $0.8 million and $0.2 million in
2006, 2005 and 2004, respectively, to charitable foundations controlled by the executive officers
of the Company. The total due to the charitable foundations as of December 30, 2006 and December
31, 2005 was $0.2 million.
(17) Major Vendors
Three vendors accounted for approximately 83%, 86%, and 85% of inventory purchases in 2006,
2005, and 2004, respectively.
(18) Segment Information
The Companys operations are conducted through three reportable segments consisting of retail,
international franchising, and licensing and entertainment. The retail segment includes the
operating activities of company-owned stores in the United States, Canada, the United Kingdom and
Ireland, and other retail delivery operations, including the Companys web store and
non-traditional store locations such as baseball ballparks. The international franchising segment
includes the licensing activities of the Companys franchise agreements with store locations in
Europe, Asia, and Australia. The licensing and entertainment segment has been established to
market the naming and branding rights of the Companys intellectual properties for third party use.
These operating segments represent the basis on which the Companys chief operating decision-maker
regularly evaluates the business in assessing performance, determining the allocation of resources
and the pursuit of future growth opportunities. The operating segments have discrete sources of
revenue, different capital structures and different cost structures. The reporting segments follow
the same accounting policies used for the Companys consolidated financials statements.
62
Following is a summary of the financial information for the Companys reporting segments (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
Licensing & |
|
|
|
|
|
Retail |
|
|
Franchising |
|
|
Entertainment |
|
Total |
|
|
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
300,469 |
|
|
$ |
846 |
|
|
$ |
347 |
|
|
$ |
301,662 |
|
Net income (loss) before income taxes |
|
|
33,796 |
|
|
|
(990 |
) |
|
|
127 |
|
|
|
32,933 |
|
Capital expenditures |
|
|
16,545 |
|
|
|
49 |
|
|
|
|
|
|
|
16,594 |
|
Depreciation and amortization |
|
|
14,438 |
|
|
|
510 |
|
|
|
|
|
|
|
14,948 |
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
|
358,901 |
|
|
|
1,976 |
|
|
|
932 |
|
|
|
361,809 |
|
Net income (loss) before income taxes |
|
|
43,764 |
|
|
|
119 |
|
|
|
530 |
|
|
|
44,413 |
|
Capital expenditures |
|
|
30,987 |
|
|
|
46 |
|
|
|
50 |
|
|
|
31,083 |
|
Depreciation and amortization |
|
|
17,039 |
|
|
|
552 |
|
|
|
1 |
|
|
|
17,592 |
|
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
|
432,571 |
|
|
|
3,521 |
|
|
|
979 |
|
|
|
437,071 |
|
Net income before income taxes |
|
|
27,609 |
|
|
|
1,794 |
|
|
|
86 |
|
|
|
29,489 |
|
Capital expenditures |
|
|
52,525 |
|
|
|
34 |
|
|
|
18 |
|
|
|
52,577 |
|
Depreciation and amortization |
|
|
21,683 |
|
|
|
699 |
|
|
|
12 |
|
|
|
22,394 |
|
|
Total Assets as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2006 |
|
$ |
295,337 |
|
|
$ |
2,683 |
|
|
$ |
1,750 |
|
|
$ |
299,770 |
|
December 31, 2005 |
|
$ |
235,754 |
|
|
$ |
9,279 |
|
|
$ |
1,075 |
|
|
$ |
246,108 |
|
The Companys reportable segments are primarily determined by the types of products
and services that they offer. Each reportable segment may operate in many geographic areas. The
Company allocates revenues to geographic areas based on the location of the customer or franchisee.
The following schedule is a summary of the Companys sales to external customers and long-lived
assets by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
United Kingdom |
|
|
|
|
|
|
|
|
|
America |
|
|
& Ireland |
|
|
Other |
|
|
Total |
|
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
300,781 |
|
|
$ |
169 |
|
|
$ |
712 |
|
|
$ |
301,662 |
|
Property and equipment, net |
|
|
75,815 |
|
|
|
|
|
|
|
|
|
|
|
75,815 |
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
|
359,615 |
|
|
|
471 |
|
|
|
1,723 |
|
|
|
361,809 |
|
Property and equipment, net |
|
|
89,924 |
|
|
|
|
|
|
|
49 |
|
|
|
89,973 |
|
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
|
400,832 |
|
|
|
32,717 |
|
|
|
3,522 |
|
|
|
437,071 |
|
Property and equipment, net |
|
$ |
115,779 |
|
|
$ |
14,549 |
|
|
$ |
19 |
|
|
$ |
130,347 |
|
(19) Subsequent Event
On February 20, 2007 the Company announced a $25 million share repurchase program of
outstanding common stock over the next twelve months. The program was authorized by the Companys
board of directors. Purchases may be made in the open market or in privately negotiated
transactions, with the level and timing of activity depending on market conditions, other
investment opportunities, and other factors. Purchases may be increased, decreased or discontinued
at any time without notice.
63
(a)(2) Financial Statement Schedules
No additional Financial Statement Schedules are filed as a part of this report pursuant to
Item 8 and Item 15(d).
(a)(3) Exhibits.
The following is a list of exhibits filed as a part of the Annual Report on Form 10-K:
|
|
|
Exhibit |
|
|
Number |
|
Description |
2.1
|
|
Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the
Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-l,
filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
3.1
|
|
Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1
of our Current Report on Form 8-K, filed on November 11, 2004) |
|
|
|
3.2
|
|
Amended and Restated Bylaws (incorporated by reference from Exhibit 3.4 to our Registration
Statement on Form S-l, filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
4.1
|
|
Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to
our Registration Statement on Form S-l, filed on October 1, 2004, Registration No.
333-118142) |
|
|
|
4.2
|
|
Stock Purchase Agreement by and among the Registrant, Catterton Partners IV, L.P., Catterton
Partners IV Offshore, L.P. and Catterton Partners IV Special Purpose, L.P. and the Purchasers named
therein dated as of April 3, 2000 (incorporated by reference from Exhibit 4.2 to our Registration
Statement on Form S-l, filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
4.3
|
|
Stock Purchase Agreement by and among the Registrant and the other Purchasers named therein dated
as of September 21, 2001 (incorporated by reference from Exhibit 4.3 to our Registration Statement
on Form S- 1, filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
4.4
|
|
Amended and Restated Registration Rights Agreement, dated September 21, 2001 by and among
Registrant and certain stockholders named therein (incorporated by reference from Exhibit 4.5 to
our Registration Statement on Form S-l, filed on August 12, 2004, Registration No.
333-118142) |
|
|
|
10.1*
|
|
Build-A-Bear Workshop, Inc. 2000 Stock Option Plan (incorporated by reference from Exhibit 10.1 to
our Registration Statement on Form S-l, filed on August 12, 2004, Registration No.
333-118142) |
|
|
|
10.1.1*
|
|
Form of Incentive Stock Option Agreement under the Build-A-Bear Workshop, Inc. 2000 Stock Option
Plan (incorporated by reference from Exhibit 10.1.1 to Pre-Effective Amendment No. 3 to our
Registration Statement on Form S-l, filed on October 1, 2004, Registration No. 333-118142) |
|
|
|
10.1.2*
|
|
Form of Nonqualified Stock Option Agreement under the Build-A-Bear Workshop, Inc. 2000 Stock
Option Plan (incorporated by reference from Exhibit 10.1.2 to Pre-Effective Amendment No. 3 to our
Registration Statement on Form S-l, filed on October 1, 2004, Registration No. 333-118142) |
|
|
|
10.2*
|
|
Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan, as amended (incorporated by reference from
Exhibit 10.2 to our Registration Statement on Form S-l, filed on August 12, 2004, Registration No.
333- 118142) |
|
|
|
10.2.1*
|
|
Form of Manager-Level Incentive Stock Option Agreement under the Build-A-Bear Workshop, Inc. 2002
Stock Option Plan (incorporated by reference from Exhibit 10.2.1 to Pre-Effective Amendment No. 3
to our Registration Statement on Form S-l, filed on October 1, 2004, Registration No.
333-118142) |
|
|
|
10.2.2*
|
|
Form of Nonqualified Stock Option Agreement under the Build-A-Bear Workshop, Inc. 2002 Stock
Option Plan (incorporated by reference from Exhibit 10.2.2 to Pre-Effective Amendment No. 3 to our
Registration Statement on Form S-l, filed on October 1, 2004, Registration No. 333-118142) |
|
|
|
10.3*
|
|
Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (incorporated by reference from Exhibit 10.3
to Pre-Effective Amendment No. 3 to our Registration Statement on Form S-l, filed on October 1,
2004, Registration No. 333-118142) |
|
|
|
10.3.1*
|
|
Form of Incentive Stock Option Agreement under the Build-A-Bear Workshop, Inc. 2004 Stock Incentive
Plan (incorporated by reference from Exhibit 10.3.1 to Pre-Effective Amendment No. 3 to our
Registration Statement on Form S-l, filed on October 1, 2004, Registration No. 333-118142) |
|
|
|
10.3.2*
|
|
Form of Director Nonqualified Stock Option Agreement under the Build-A-Bear Workshop, Inc. 2004
Stock Incentive Plan (incorporated by reference from Exhibit 10.3.2 to Pre-Effective Amendment No.
3 to our Registration Statement on Form S-l, filed on October 1, 2004, Registration No.
333-118142) |
|
|
|
10.3.3*
|
|
Model Incentive Stock Option Agreement Under the Registrants 2004 Stock Incentive Plan
(incorporated by reference from Exhibit 10.3.3 to Pre-Effective Amendment No. 5 to our Registration
Statement on Form S-l, filed on October 12, 2004, Registration No. 333-118142) |
|
|
|
10.3.4*
|
|
Form of Employee Nonqualified Stock Option Agreement under the Registrants 2004 Stock Incentive
Plan (incorporated by reference from Exhibit 10.3.4 to Pre-Effective Amendment No. 5 to our
Registration Statement on Form S-l, filed on October 12, 2004, Registration No. 333-118142) |
|
|
|
10.3.5*
|
|
Form of the Restricted Stock Agreement under the Registrants 2004 Stock Incentive Plan
(incorporated by
|
64
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
reference from Exhibit 10.3.5 to Pre-Effective Amendment No. 5 to our Registration Statement on
Form S-1, filed on October 12, 2004, Registration No. 333-118142) |
|
|
|
10.3.6*
|
|
Amended and Restated Build-A-Bear Workshop, Inc 2004 Stock Incentive Plan (incorporated by
reference from Exhibit 10.1 on our Current Report on Form 8-K, filed on August 1, 2006) |
|
|
|
10.4*
|
|
Employment, Confidentiality and Noncompete Agreement dated May 1, 2004 between Maxine Clark and the
Registrant (incorporated by reference from Exhibit 10.4 to Pre-Effective Amendment No. 2 to our
Registration Statement on Form S-l, filed on September 20, 2004, Registration No.
333-118142) |
|
|
|
10.4.1*
|
|
First Amendment dated February 22, 2006 to the Employment, Confidentiality and Noncompete Agreement
dated May 1, 2004 between Maxine Clark and the Registrant (incorporated by reference from Exhibit
10.4.1 to our Annual Report on Form 10-K for the year ended December 31, 2005) |
|
|
|
10.5*
|
|
Employment, Confidentiality and Noncompete Agreement dated April 13, 2004 between Barry Erdos and
the Registrant (incorporated by reference from Exhibit 10.5 to Pre-Effective Amendment No. 2 to our
Registration Statement on Form S-l, filed on September 20, 2004, Registration No.
333-118142) |
|
|
|
10.5.1*
|
|
First Amendment dated February 22, 2006 to the Employment, Confidentiality and Noncompete Agreement
dated April 13, 2004 between Barry Erdos and the Registrant (incorporated by reference from Exhibit
10.5.1 to our Annual Report on Form 10-K for the year ended December 31, 2005) |
|
|
|
10.5.2*
|
|
Separation Agreement and General Release dated January 5, 2007 between Barry Erdos and the
Registrant (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K,
filed on January 5, 2007) |
|
|
|
10.6*
|
|
Employment, Confidentiality and Noncompete Agreement dated March 7,
2004 between Tina Klocke and the Registrant (incorporated by reference from Exhibit 10.6 to
Pre-Effective Amendment No. 2 to our Registration Statement on Form S-l, filed on September 20,
2004, Registration No. 333-118142) |
|
|
|
10.6.1*
|
|
First Amendment dated February 22, 2006 to the Employment, Confidentiality and Noncompete Agreement
dated March 7, 2004 between Tina Klocke and the Registrant (incorporated by reference from Exhibit
10.6.1 to our Annual Report on Form 10-K for the year ended
December 31, 2005) |
|
|
|
10.7*
|
|
Employment, Confidentiality and Noncompete Agreement dated July 9, 2001 between John Burtelow and
the Registrant (incorporated by reference from Exhibit 10.7 to Pre-Effective Amendment No. 2 to our
Registration Statement on Form S-l, filed on September 20, 2004, Registration No.
333-118142) |
|
|
|
10.7.1*
|
|
First Amendment dated March 28, 2005 to Employment, Confidentiality and Noncompete Agreement dated
July 9, 2001 between John Burtelow and the Registrant (incorporated by reference from Exhibit 10.1
to our Current Report on Form 8-K, filed on April 1, 2005) |
|
|
|
10.8*
|
|
Employment, Confidentiality and Noncompete Agreement dated as of March 7, 2004 between Scott Seay
and the Registrant (incorporated by reference from Exhibit 10.8 to Pre-Effective Amendment No. 2
to our Registration Statement on Form S-l, filed on September 20, 2004, Registration No.
333-118142) |
|
|
|
10.8.1*
|
|
First Amendment dated February 22, 2006 to the Employment, Confidentiality and Noncompete Agreement
dated March 7, 2004 between Scott Seay and the Registrant (incorporated by reference from Exhibit
10.8.1 to our Annual Report on Form 10-K for the year ended December 31, 2005) |
|
|
|
10.8.2*
|
|
Second Amendment dated January 5, 2007 to the Employment, Confidentiality and Noncompete Agreement
dated March 7, 2004 between Scott Seay and the Registrant (incorporated by reference from
Exhibit 10.2 to our Current Report on Form 8-K, filed on January 5, 2007) |
|
|
|
10.9*
|
|
Employment, Confidentiality and Noncompete Agreement dated September 10, 2001 between Teresa Kroll
and the Registrant (incorporated by reference from Exhibit 10.9 to Pre-Effective Amendment No. 2 to
our Registration Statement on Form S-l, filed on September 20, 2004, Registration No.
333-118142) |
|
|
|
10.9.1*
|
|
First Amendment dated February 22, 2006 to the Employment, Confidentiality and Noncompete Agreement
dated September 10, 2001 between Teresa Kroll and the Registrant (incorporated by reference from
Exhibit 10.9.1 to our Annual Report on Form 10-K for the year ended December 31, 2005) |
|
|
|
10.10*
|
|
Form of Indemnification Agreement between the Registrant and its directors and executive officers
(incorporated by reference from Exhibit 10.11 to our Registration Statement on Form S-l, filed on
August 12, 2004, Registration No. 333-118142) |
|
|
|
10.11
|
|
Third Amendment to Loan Documents among the Registrant, Shirts Illustrated, LLC, Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail Management,
LLC (incorporated by reference from Exhibit 10.12 to our Registration Statement on Form S-l, filed
on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.11.1
|
|
Fifth Amendment to Loan Documents among the Registrant, Shirts Illustrated, LLC, Build-A-Bear
Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Retail Management,
LLC (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on July
10, 2006) |
|
|
|
10.12
|
|
Third Amended and Restated Loan Agreement between the Registrant, Shirts Illustrated, LLC, Build-A-
Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, and Build-A-Bear Retail
Management, Inc., as borrowers, and U.S. Bank National Association, as Lender, entered into on
September 27, 2005 with an effective date of May 31, 2005 (incorporated by reference from Exhibit
10.1 to our Current Report on Form 8-K, filed on October 3, 2005) |
|
|
|
65
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.13
|
|
Second Amended and Restated Revolving Credit Note dated May 31, 2005 by the Registrant, Shirts
Illustrated, LLC, Build-A-Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC,
and Build-A-Bear Retail Management, Inc., as Borrowers, in favor of U.S. Bank National Association
(incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K, filed on
October 3, 2005) |
|
|
|
10.13.1
|
|
Third Amended and Restated Revolving Credit Note dated June 30, 2006 by the Registrant,
Build-A-Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear
Retail Management, Inc., and Build-A-Bear UK Holdings Ltd., as Borrowers, in favor of U.S. Bank
National Association (incorporated by reference from Exhibit 10.2 to our Current Report on Form
8-K, filed on July 10, 2006) |
|
|
|
10.14*
|
|
Restricted Stock Purchase Agreement dated April 3, 2000 by and between Maxine Clark and the
Registrant (incorporated by reference from Exhibit 10.16 to our Registration Statement on Form S-l,
filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.15*
|
|
Secured Promissory Note of Maxine Clark in favor of the Registrant, dated April 3, 2000
(incorporated by reference from Exhibit 10.17 to our Registration Statement on Form S-l, filed on
August 12, 2004, Registration No. 333-118142) |
|
|
|
10.16*
|
|
Repayment and Stock Pledge Agreement dated April 3, 2000 by and between Maxine Clark and the
Registrant (incorporated by reference from Exhibit 10.18 to our Registration Statement on Form S-l,
filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.17*
|
|
Restricted Stock Purchase Agreement dated September 19, 2001 by and between Tina Klocke and the
Registrant (incorporated by reference from Exhibit 10.22 to our Registration Statement on Form S-l,
filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.18*
|
|
Secured Promissory Note of Tina Klocke in favor of the Registrant, dated September 19, 2001
(incorporated by reference from Exhibit 10.23 to our Registration Statement on Form S-l, filed on
August 12, 2004, Registration No. 333-118142) |
|
|
|
10.19*
|
|
Repayment and Stock Pledge Agreement dated September 19, 2001 by and between Tina Klocke and the
Registrant (incorporated by reference from Exhibit 10.24 to our Registration Statement on Form S-l,
filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.20
|
|
Public Warehouse Agreement dated April 5, 2002 between the Registrant and JS Logistics, Inc., as
amended (incorporated by reference from Exhibit 10.25 to our Registration Statement on Form S-l,
filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.20.1
|
|
Second Amendment dated June 16, 2005 to the Public Warehouse Agreement dated April 5, 2002 between
the Registrant and JS Warehousing, Inc. (incorporated by reference from Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended on April 2, 2005) |
|
|
|
10.20.2
|
|
Second Amendment dated June 16, 2005 to the Public Warehouse Agreement dated April 5, 2002 between
the Registrant and JS Warehousing, Inc. (incorporated by reference from Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2005) |
|
|
|
10.21
|
|
Agreement for Logistics Services dated as of February 24, 2002 by and among the Registrant and HA
Logistics, Inc. (incorporated by reference from Exhibit 10.26 to our Registration Statement on Form
S-l, filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.21.1
|
|
Letter Agreement extending
Agreement for Logistics Services between HA Logistics, Inc. and the
Registrant dated March 22, 2005 (incorporated by reference from Exhibit 10.3 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 2. 2005) |
|
|
|
10.21.2
|
|
Letter Agreement extending Agreement for Logistics Services between HA Logistics, Inc. and the
Registrant dated May 3, 2005 (incorporated by reference from Exhibit 10.4 to our Quarterly
Report on Form 10-Q for the fiscal quarter ended April 2, 2005) |
|
|
|
10.21.3
|
|
Letter Agreement dated June 7, 2005 amending the Agreement for Logistics Services dated February
24, 2002 by and among the Registrant and HA Logistics, Inc. (incorporated by reference from Exhibit
10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2005) |
|
|
|
10.22
|
|
Lease Agreement dated as of June 21, 2001 between the Registrant and Walt Disney World Co.
(incorporated by reference from Exhibit 2.1 of our Registration Statement on Form S-l, filed on
August 12, 2004, Registration No. 333-118142) |
|
|
|
10.23
|
|
Amendment and Restatement of Sublease dated as of June 14, 2000 by and between NewSpace, Inc.
and the Registrant (incorporated by reference from Exhibit 10.28 to our Registration Statement
on Form S-l, filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.24
|
|
Lease dated May 5, 1997 between Smart Stuff, Inc. and Hycel Partners I, L.P. (incorporated by
reference from Exhibit 10.29 to our Registration Statement on Form S-l, filed on August 12, 2004,
Registration No. 333-118142) |
|
|
|
10.25
|
|
Agreement dated October 16, 2002 between the Registrant and Hycel Properties Co., as amended
(incorporated by reference from Exhibit 10.30 to our Registration Statement on Form S-l, filed on
August 12, 2004, Registration No. 333-118142) |
|
|
|
10.26
|
|
Letter Agreement dated September 30, 2003 between the Registrant and Hycel Properties Co.
(incorporated by reference from Exhibit 10.30.1 to Pre-Effective Amendment No. 5 to our
Registration Statement on Form S-l, filed on October 12, 2004, Registration No. 333-118142) |
|
|
|
10.27
|
|
Construction Management Agreement dated November 10, 2003 by and between the Registrant and
Hycel |
|
|
|
66
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
Properties Co. (incorporated by reference from Exhibit 10.31 to our Registration Statement on Form
S-l, filed on August 12, 2004, Registration No. 333-118142) |
|
|
|
10.28
|
|
Agreement dated July 19, 2001 between the Registrant and Adrienne Weiss Company (incorporated by
reference from Exhibit 10.32 to our Registration Statement on Form S-l, filed on August 12, 2004,
Registration No. 333-118142) |
|
|
|
10.29
|
|
Lease between 5th Midtown LLC and the Registrant dated July 21, 2004 (incorporated by reference
from Exhibit 10.33 to Pre-Effective Amendment No. 1 to our Registration Statement on Form S-l,
filed on September 10, 2004, Registration No. 333-118142) |
|
|
|
10.30
|
|
Exclusive Patent License Agreement dated March 12, 2001 by and between Tonyco, Inc. and the
Registrant (incorporated by reference from Exhibit 10.34 to Pre-Effective Amendment No. 2 to our
Registration Statement on Form S-l, filed on September 20, 2004, Registration No.
333-118142) |
|
|
|
10.31
|
|
Standard Form Industrial Building Lease dated August 28, 2004 between First Industrial, L.P.
and the Registrant (incorporated by reference from Exhibit 10.35 to Pre-Effective Amendment
No. 4 to our Registration Statement on Form S-l, filed on October 5, 2004, Registration
No. 333-118142) |
|
|
|
10.32
|
|
Loan Agreement by and between
Amsbra, Ltd., as Borrower, and Build-A-Bear Workshop Franchise
Holdings, Inc., as Lender, entered into on October 4, 2005 with an effective date of September 26,
2005 (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on
October 11, 2005) |
|
|
|
10.33
|
|
Revolving Credit Note by Amsbra, Ltd., as Borrower, in favor of Build-A-Bear Workshop Franchise
Holdings, Inc., dated as of September 26, 2005 (incorporated by reference from Exhibit 10.2 to our
Current Report on Form 8-K, filed on October 11, 2005) |
|
|
|
10.34
|
|
Debenture dated October 11, 2005 by and between Amsbra, Ltd. and Build-A-Bear Workshop
Franchise Holdings, Inc. (incorporated by reference from Exhibit 10.3 to our Current Report on
Form 8-K, filed on October 11, 2005) |
|
|
|
10.35
|
|
Facility Construction Agreement dated December 22, 2005 between the Registrant and Duke
Construction Limited Partnership (incorporated by reference from Exhibit 10.35 to our Annual
Report on Form 10-K for the year ended December 31, 2005) |
|
|
|
10.36
|
|
Real Estate Purchase Agreement
dated December 19, 2005 between Duke Realty Ohio and the Registrant
(incorporated by reference from Exhibit 10.36 to our Annual Report on Form 10-K for the year ended
December 31, 2005)
|
|
|
|
10.37*
|
|
Description of Board Compensation for Non-Management Directors effective November 10, 2005
(incorporated by reference from Exhibit 10.1 from our Current Report on Form 8-K, filed on November
16, 2005) |
|
|
|
10.38
|
|
Share Purchase Agreement dated March 3, 2006 between the Hamleys Group Limited, Build-A-Bear
Workshop UK Holdings Limited and The Bear Factory Limited (incorporated by reference from Exhibit
10.38 to our Annual Report on Form 10-K for the year ended
December 31, 2005) |
|
|
|
10.39
|
|
Sale and Purchase Agreement dated March 3, 2006 between the Registrant, Build-A-Bear Workshop UK
Holdings Limited, the selling shareholders of Amsbra, Ltd. and Andrew Mackay (incorporated by
reference from Exhibit 10.39 to our Annual Report on Form 10-K for the year ended December 31,
2005) |
|
|
|
10.40*
|
|
Employment, Confidentiality and Noncompete Agreement dated January 16, 2007 between Paul Bundonis
and the Registrant (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K,
filed on January 18, 2007) |
|
|
|
10.41*
|
|
Rules of the Build-A-Bear Workshop, Inc. Share Option Scheme (incorporated by reference from
Exhibit 10.1 to our Current Report on Form 8-K, filed on February 9, 2007) |
|
|
|
10.42*
|
|
Nonqualified Deferred Compensation Plan |
|
|
|
11.1
|
|
Statement regarding computation of earnings per share (incorporated by reference from Note 12
of the Registrants audited consolidated financial statements included herein) |
|
|
|
13.1
|
|
Annual Report to Shareholders for the Fiscal Year Ended December 30, 2006 (The Annual Report,
except for those portions which are expressly incorporated by reference in the Form 10-K, is
furnished for the information of the Commission and is not deemed filed as part of the Form
10-K) |
|
|
|
21.1
|
|
List of Subsidiaries of the Registrant |
|
|
|
23.1
|
|
Consent of KPMG LLP |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, executed by the Chief Executive Bear)
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, executed by the Chief Financial Bear) |
|
|
|
32.1
|
|
Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Executive Bear) |
|
|
|
32.2
|
|
Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Financial Bear) |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Confidential treatment requested as to certain portions filed separately with
the Securities and Exchange Commission. |
67
BUILD-A-BEAR WORKSHOP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
BUILD-A-BEAR WORKSHOP, INC.
(Registrant)
|
|
Date: March 15, 2007 |
By: |
/s/ Maxine Clark
|
|
|
|
Maxine Clark |
|
|
|
Chief Executive Bear |
|
|
|
|
|
|
By: |
/s/ Tina Klocke
|
|
|
|
Tina Klocke |
|
|
|
Chief Financial Bear, Treasurer and Secretary |
|
|
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Maxine Clark and Tina Klocke, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities to sign the Annual Report on
Form 10-K of Build-A-Bear Workshop, Inc. (the Company) for the fiscal year ended December 30,
2006 and any other documents and instruments incidental thereto, together with any and all
amendments and supplements thereto, to enable the Company to comply with the Securities Act of
1934, as amended, and any rules, regulations and requirements of the Securities and Exchange
Commission in respect thereof, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
/s/ Mary Lou Fiala
Mary Lou Fiala
|
|
Director
|
|
March 15, 2007 |
|
|
|
|
|
/s/ James M. Gould
James M. Gould
|
|
Director
|
|
March 15, 2007 |
|
|
|
|
|
/s/ Louis M. Mucci
Louis M. Mucci
|
|
Director
|
|
March 15, 2007 |
|
|
|
|
|
/s/ William Reisler
William Reisler
|
|
Director
|
|
March 15, 2007 |
|
|
|
|
|
/s/ Coleman Peterson
Coleman Peterson
|
|
Director
|
|
March 15, 2007 |
68
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
|
|
Director
|
|
March 15, 2007 |
|
|
|
|
|
/s/ Maxine Clark
Maxine Clark
|
|
Chief Executive Bear and Chairman of the Board (Principal Executive Officer)
|
|
March 15, 2007 |
|
|
|
|
|
/s/ Tina Klocke
Tina Klocke
|
|
Chief Financial Bear, Treasurer and Secretary (Principal Financial and Accounting Officer)
|
|
March 15, 2007 |
69
exv10w42
Exhibit 10.42
NONQUALIFIED
DEFERRED COMPENSATION PLAN
BASIC PLAN DOCUMENT
(Including Code §409A provisions)
Nonqualified Deferred Compensation Prototype Plan
NONQUALIFIED
DEFERRED COMPENSATION PLAN
BASIC PLAN DOCUMENT
By execution of the Adoption Agreement associated with this Basic Plan Document, the Employer
establishes this Nonqualified Deferred Compensation Plan (Plan) for the benefit of certain
Employees and Contractors the Employer designates in its Adoption Agreement. The primary purpose of
the Plan is to provide additional compensation to Participants upon termination of employment or
service with the Employer. The Employer will pay benefits under the Plan only in accordance with
the terms and conditions set forth in the Plan.
PREAMBLE
Plan Type. The Employer in its Adoption Agreement will specify whether it establishes the Plan
as a nonqualified deferred compensation plan or as an ineligible Code §457(f) plan. A nonqualified
deferred compensation plan is an unfunded plan that may be: (i) an excess benefit plan; (ii) a
plan maintained primarily for the purpose of providing deferred compensation for a select group of
management or highly compensated employees (top-hat plan); or (iii) a plan for Contractors. A
top-hat plan includes a supplemental executive retirement plan (SERP).
Possible Nonuniformity. The Employer in its Adoption Agreement will specify such Plan terms as
will apply to all Participants uniformly or as may apply to a given Participant. The Employer need
not provide the same Plan benefits or apply the same Plan terms and conditions to all Participants,
even as to Participants who are of similar pay, title and other status with the Employer. The
elections the Employer makes in its Adoption Agreement apply uniformly to all Participants, except
to the extent the Employer adopts inconsistent provisions with respect to one or more Participants
in a separate attachment designated as Exhibit A and attached to the Adoption Agreement. The
Employer may create a separate Exhibit A for one or more Participants, specifying such terms and
conditions as are applicable to a given Participant. The Employer, in Exhibit A, may modify any
Plan provision or any Adoption Agreement election as to one or more Participants.
I. DEFINITIONS
1.01 Account means the account the Employer establishes under the Plan for each Participant
and, as applicable, means a Participants Elective Deferral Account, Nonelective Contribution
Account or Matching Contribution Account.
1.02 Accrued Benefit means the total dollar amount credited to a Participants Account.
1.03 Adoption Agreement means the document the Employer executes to establish the Plan and
includes all Exhibits and other documents referenced therein.
1.04 Aggregated Plans means this Plan and any other like-type plan or arrangement (account
balance plan or separation pay arrangement) of the Employer in which a Participant participates and
as to which the Plan or Applicable Guidance requires the aggregation of all such nonqualified
deferred compensation in applying Code §409A.
1.05 Applicable Guidance means as the context requires Code §§83, 409A and 457, Treas. Reg.
§1.83, Prop. Treas. Reg. §1.409A, Treas. Reg. §1.457-11, or other written Treasury or IRS guidance
regarding or affecting Code §§83, 409A or 457(f). Applicable Guidance also includes, through
December 31, 2006, or other applicable date, Notice 2005-1.
1.06 Base Salary means a Participants Compensation consisting only of regular salary and
excluding any other Compensation.
1.07 Basic Plan Document means this Nonqualified Deferred Compensation Plan document.
1
Nonqualified Deferred Compensation Prototype Plan
1.08 Beneficiary means the person or persons entitled to receive Plan benefits in the event
of a Participants death.
1.09 Bonus means a Participants Compensation consisting only of bonus and excluding any
other Compensation. A Bonus also may be Performance-Based Compensation under Section 1.36.
1.10 Change in Control means, as to an Employer which is a corporation, a change: (i) in the
ownership of the Employer; (ii) in the effective control of the Employer; or (iii) in the ownership
of a substantial portion of the assets of the Employer, within the meaning of Prop. Treas. Reg.
§1.409A-3(g)(5) or in Applicable Guidance. The Employer in its Adoption Agreement will elect
whether a Change in Control includes any or all the events described in clauses (i), (ii) or (iii)
and also may elect to increase the percentage change required under any such event to constitute a
Change in Control. Pending the issuance of Applicable Guidance as to the application of the Change
in Control provisions to partnerships (or to other unincorporated Employers), if the Employer
elects in its Adoption Agreement to permit Change in Control as a payment event, the Employer will
apply clauses (i) and (iii) by analogy.
1.11 Change in the Employers Financial Health means an adverse change in the Employers
financial condition as described in Applicable Guidance.
1.12 Code means the Internal Revenue Code of 1986, as amended.
1.13 Commissions means Compensation or portions of Compensation a Participant earns if: (i)
a substantial portion of Participants services to the Employer consists of the direct sale of a
product or a service to a customer; (ii) the Compensation the Employer pays to the Participant
consists either of a portion of the purchase price for the product or service or of an amount
calculated solely by reference to volume of sales; and (iii) payment is contingent upon the
Employer receiving payment for the product or services from a customer who is unrelated to the
Employer or to the Participant. A customer is related if treated as related under Prop. Treas. Reg.
§§1.409A-1(f)(3)(ii) or -1(f)(3)(iv).
Compensation with respect to any Participant means such Participants wages, salaries, fees
for professional services and other amounts received (without regard to whether or not an amount is
paid in cash) for personal services actually rendered in the course of employment with the Employer
maintaining the Plan to the extent that the amounts are includible in gross income (including, but
not limited to, commissions paid salesmen, compensation for services on the basis of a percentage
of profits, commissions on insurance premiums, tips, regular bonuses as described in the Employers
payroll records, fringe benefits, and reimbursements or other expense allowances under a
nonaccountable plan as described in Regulation 1.62-2(c)) for a Plan Year.
Compensation shall exclude (a)(1) contributions made by the Employer to a plan of deferred
compensation to the extent that, the contributions are not includible in the gross income of the
Participant for the taxable year in which contributed, (2) Employer contributions made on behalf of
an Employee to a simplified employee pension plan described in Code Section 408(k) to the extent
such contributions are excludable from the Employees gross income, (3) any distributions from a
plan of deferred compensation; (b) amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an Employee either becomes freely
transferable or is no longer subject to a substantial risk of forfeiture; (c) amounts realized from
the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d)
other amounts which receive special tax benefits, or contributions made by the Employer (whether or
not under a salary reduction agreement) towards the purchase of any annuity contract described in
Code Section 403(b) (whether or not the contributions are actually excludable from the gross income
of the Employee); and (e) any bonuses, other than regular bonuses (as described in the
Employers payroll records).
For purposes of this Section, the determination of Compensation shall be made by including
amounts which are contributed by the Employer pursuant to a salary reduction agreement and which
are not includible in the gross income of the Participant under Code Sections 125, 132(f)(4),
402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section
414(h)(2) that are treated as Employer contributions.
For a Participants initial year of participation, Compensation shall be recognized
for the entire Plan Year.
The Employer, in its Adoption Agreement, may modify the definition of Compensation or may
specify a different definition of Compensation either as to Employees, as to Contractors or both.
2
Nonqualified Deferred Compensation Prototype Plan
1.15 Contractor means a person or entity (as described in Prop. Treas. Reg. §1.409A-1(f)(1),
and which is not on the accrual method of accounting for Federal income tax purposes) providing
services to the Employer and who is not an Employee. For this Plan, a Contractor excludes a
Contractor providing significant services to the Employer and to at least two unrelated entities as
described in Prop. Treas. Reg. §1.409A-1(f)(3) or other Applicable Guidance.
1.16 Disability means a physical or mental condition of a Participant resulting from bodily
injury, disease, or mental disorder which renders such Participant incapable of continuing any
gainful occupation and which condition constitutes total disability under the federal Social
Security Acts.
1.17. Deferred Compensation means the Participants Account Balance attributable to Elective
Deferrals and Employer Contributions and includes Earnings on such amounts. Compensation Deferred
is Compensation that the Participant or the Employer has deferred under this Plan. Compensation is
Deferred Compensation if: (i) under the terms of the Plan and the relevant facts and circumstances,
the Participant has a Legally Binding Right to Compensation during a Taxable Year that the
Participant has not actually or constructively received and included in gross income; and (ii)
pursuant to the Plan terms, the Compensation is payable to or on behalf of the Participant in a
later Taxable Year. Deferred Compensation includes Separation Pay paid pursuant to a
Separation Pay Arrangement except as otherwise described in Prop. Treas. Reg. §1.409A-1(b)(9) which
excludes: (i) certain collectively bargained Separation Pay Arrangements; (ii) payments based upon
an involuntary Separation from Service or pursuant to a Window Program where the payments do not
exceed certain dollar limitations and are paid no later than December 31 of the second calendar
year which follows the calendar year in which the Separation from Service occurs; and (iii) certain
reimbursements, in-kind benefits, direct payments to the provider of goods and services on behalf
of the Participant, or de minimis payments where the expenses incurred and the reimbursements are
paid no later than December 31 of the second calendar year following the calendar year in which the
Separation from Service occurs. Deferred Compensation for purposes of this Plan does not
include: (i) Compensation payable after the last day of the Participants Taxable Year pursuant
to the normal timing of the Employers payroll period as provided in Prop. Treas. Reg.
§1.409A-1(b)(3); (ii) certain short-term deferrals as provided in Prop. Treas. Reg.
§1.409A-1(b)(4); (iii) certain restricted property as described in Prop. Treas. Reg.
§1.409A-1(b)(6); (iv) certain foreign arrangements as described in Prop. Treas. Reg.
§1.409A-1(b)(8); and (v) any other amounts which under Applicable Guidance are not a Grandfathered
Amount or a 409A Amount under Article VII.
1.18 Earnings means Trust earnings, gain or loss applicable to a Participants Account. In
the absence of a Trust, Earnings means the Plans actual or notional earnings, gain and loss
applicable to a Participants Account as described in Section 5.02.
1.19 Effective Date of the Plan is the date the Employer specifies in the Adoption
Agreement.
1.20 Elective Deferral means Compensation a Participant elects to defer into the
Participants Account under the Plan.
1.21 Elective Deferral Account means the portion of a Participants Account attributable to
Elective Deferrals and Earnings thereon.
1.22 Employee means a person or entity (as described in Prop. Treas. Reg. §1.409A-1(f)(1),
and which is not on the accrual method of accounting for Federal income tax purposes) providing
services to the Employer in the capacity of a common law employee of the Employer.
1.23 Employer means the person or entity: (i) receiving the services of the Participant;
(ii) with respect to whom the Legally Binding Right to Compensation arises; and (iii) who or which
executes an Adoption Agreement establishing the Plan. The Employer includes all persons with whom
the Employer would be considered a single employer under Code §§414(b) or (c). In the case of an
Ineligible 457 Plan, Employer means a State or a Tax-Exempt Organization.
3
Nonqualified Deferred Compensation Prototype Plan
1.24 Employer Contribution means amounts the Employer contributes or credits to an Account
under the Plan, including Nonelective Contributions and Matching Contributions but not including
Elective Deferrals.
1.25 Employer Contribution Account means the portion of a Participants Account attributable
to Employer Contributions and Earnings thereon.
1.26 ERISA means the Employee Retirement Income Security Act of 1974, as amended.
1.27 409A Amount means: (i) any Compensation Deferred prior to January 1, 2005, unless such
Deferred Compensation is a Grandfathered Amount; and (ii) any Compensation Deferred in Taxable
Years beginning after December 31, 2004. In determining 409A Amounts, the rules of Section 1.04
regarding Aggregated Plans apply.
1.28 Grandfathered Amount means prior to January 1, 2005, a Participant: (i) had a Legally
Binding Right to be paid Deferred Compensation; and (ii) such Deferred Compensation is Vested,
unless the Employer after October 3, 2004, materially modifies the Plan (within the meaning of
Section 7.04). For purposes of determining whether Deferred Compensation is Vested, the
conditioning of payment of the Deferred Compensation on the completion of services in 2005 for a
payroll period that includes December 31, 2004, does not constitute a requirement to render
additional services or a Substantial Risk of Forfeiture. If the Plan is a Separation Pay
Arrangement, the Employer will determine any Grandfathered Amount in accordance with the Preamble
to the Prop. Treas. Reg. §1.409A and Applicable Guidance. In determining Grandfathered Amounts, the
rules of Section 1.04 regarding Aggregated Plans apply.
1.29 Ineligible 457 Plan means this Plan which is subject to Code §457(f) and that is not an
eligible 457 plan under Code §457(b).
1.30 Legally Binding Right means, in reference to Compensation, the grant by the Employer to
the Participant of a right to Compensation where, after the Participant has performed the services
which created the Legally Binding Right, the Compensation is not subject to unilateral reduction or
elimination by the Employer or any other person, The Employer, based on the facts and circumstances
and in accordance with Prop. Treas. Reg. §1.409A-1(b)(1), will determine: (i) whether a Legally
Binding Right exists; or (ii) whether a Legally Binding Right does not exist on account of the
existence of negative discretion which has substantive significance to reduce or eliminate the
Compensation.
1.31 Matching Contribution means a fixed or discretionary Employer contribution made with
respect to a Participants Elective Deferral.
1.32 Matching Contribution Account means the portion of a Participants Account attributable
to Matching Contributions and Earnings thereon.
1.33 Nonelective Contribution means a fixed or discretionary Employer Contribution that is
unrelated to a Participants Elective Deferrals.
1.34 Nonelective Contribution Account means the portion of a Participants Account
attributable to Nonelective Contributions and Earnings thereon.
1.35 Participant means an Employee or Contractor the Employer designates under Adoption
Agreement Section 2.01 to participate in the Plan.
1.36 Performance-Based Compensation means Compensation (including a Bonus) where the amount
of, or entitlement to, the Compensation is contingent on satisfaction of preestablished
organizational or individual performance criteria relating to a performance period of at least 12
consecutive months during which the Participant performs services. The Employer must establish the
organizational or individual performance criteria in writing not later than 90 days after
commencement of the performance period and the outcome must be substantially uncertain at the time
that the Employer establishes the performance criteria. The Employer may establish performance
criteria without the necessity of action by its shareholders, board of directors,
compensation committee or similar entities. Performance-Based Compensation may be based on
4
Nonqualified Deferred Compensation Prototype Plan
subjective performance criteria provided: (i) the criteria relate the Participants performance, a
group of service providers that includes the Participant or a business unit for which the
Participant provides services which may include the Employer; and (ii) the person who decides
whether the subjective performance criteria have been met is someone other than the Participant,
the Participants family member (within the meaning of Code §267(c)(4) applied as if the family of
an individual includes the spouse of any member of the family), a person under the supervision of
the Participant or such a family member, or where the compensation of the decision maker is
controlled in whole or in part by the Participant or such a family member. The Employer will
determine the status of Compensation as Performance-Based Compensation in accordance with Prop.
Treas. Reg. §1.409A-1(e) and Applicable Guidance.
1.37 Plan means the Nonqualified Deferred Compensation Plan of the Employer established by
and including the Adoption Agreement, the Basic Plan Document and the Trust, if any. The Employer
will set forth the name of the Plan in its Adoption Agreement. For purposes of applying Code §409A
requirements: (i) this Plan is an account balance plan under Prop. Treas. Reg.
§1.409A-1(c)(2)(i)(A) or is a separation pay arrangement under Prop. Treas. Reg.
§1.409A-1(c)(2)(i)(C); and (ii) this plan constitutes a separate plan for each Participant. This
Plan does not constitute: (i) a Code §401(a) plan with and exempt trust under Code §501(a); (ii) a
Code §403(a) annuity plan; (iii) a Code §403(b) annuity; (iv) a Code §408(k) SEP; (v) a Code
§408(p) Simple IRA; (vi) a Code §501(c)(18) trust to which an active participant makes deductible
contributions; (vii) a Code §457(b) plan; or (viii) a Code §415(m) plan.
1.38 Retirement Age means the date the Employer elects in the Adoption Agreement. A
Participant is not entitled to distribution of his/her Vested Accrued Benefit based solely on
attainment of Retirement Age, unless the Employer elects in the Adoption Agreement to permit such
distributions.
1.39 Separation from Service means in the case of an Employee, the Employees
termination of employment with the Employer whether on account of death, retirement or otherwise.
(A) Effect of Leave. An Employee does not incur a Separation from Service if the
Employee is on military leave, sick leave, or other bona fide leave of absence (such as temporary
employment by the government), if such leave does not exceed a period of six months, or if longer,
the period for which a statute or contract provides the Employee with the right to reemployment
with the Employer. If a Participants leave exceeds six months but the Participant is not entitled
to reemployment under a statute or contract, the Participant incurs a Separation from Service on
the next day following the expiration of six months.
(B) Insignificant Service. If an Employee continues to perform services for the
Employer, but the services are not more than insignificant, the Employee incurs a Separation from
Service. For this purpose, an Employee will be deemed to provide more than insignificant service
(and no Separation from Service occurs) if the Employee provides service at an annual rate and
receives annual remuneration from the Employer which are equal to at least 20% of the average
annual service performed and to at least 20% of the average annual remuneration earned during the
immediately preceding 3 full calendar years of employment, or if less, the period the Employer
employed the Employee.
(C) Significant Non-Employee Service. In addition, a former Employee who continues to
render significant services to the Employer in a non-Employee capacity is not deemed to have
incurred a Separation from Service. For this purpose a former Employee is deemed to render
significant service if the former Employee provides service at an annual rate and receives annual
remuneration from the Employer which are equal to at least 50% of the average annual service
performed and to at least 50% of the average annual remuneration earned during the immediately
preceding 3 full calendar years of employment, or if less, the period the Employer employed the
Employee.
(D) Contractor. Separation from Service, in the case of a Contractor, means
the expiration of the contract or contracts under which the Contractor performs services for the
Employer provided that the expiration constitutes a good-faith and complete termination of the
contractual relationship between the Contractor and the Employer. A good-faith and complete
termination does not occur if: (i) the Employer anticipates a renewal of the service contract for
the services provided under the expired contract or the Employer anticipates the Contractor
becoming an Employee; and (ii) neither the Employer nor the Contractor has eliminated the
Contractor as a possible provider of such additional services. The Employer is deemed to
intend renewal of the Contractors expired contract if renewal is conditioned only upon the
need for services,
5
Nonqualified Deferred Compensation Prototype Plan
the Employers ability to pay for the services, or both. See Section 4.01(B) as
to Contractor deemed Separation from Service provisions.
(E) Employer Determination. The Employer will determine whether an Employee has
incurred a Separation from Service: (i) based on the facts and circumstances; (ii) subject to the
provisions of this Section 1.39; and (iii) without application of the same desk rule under Rev.
Rul. 79-336 and Rev. Rul. 80-229. The Employer will determine whether an Employee or Contractor has
incurred a Separation from Service in accordance with Prop. Treas. Reg. §1.409A-1(h) and Applicable
Guidance.
1.40 Separation Pay means any Compensation where one of the conditions to a right to the
Compensation is Separation from Service, whether voluntary or involuntary. Separation Pay includes:
(i) payments in the form of reimbursements for expenses incurred and the provision of other taxable
benefits; (ii) payments due on account of Separation from Service, regardless of whether such
payments are conditioned on the Participants execution of a release of claims, noncompetition or
nondisclosure provisions or other similar requirements; and (iii) such other amounts as are
described in Prop. Treas. Reg. §1.409A-1(m) or in Applicable Guidance.
1.41 Separation Pay Arrangement means any arrangement that provides for Separation Pay,
including the portion of any arrangement that provides for Separation Pay.
1.42 Service Year means a Participants Taxable Year in which the Participant performs
services which give rise to Compensation.
1.43 Specified Employee means a Participant who is a key employee as described in Code
§416(i), disregarding paragraph (5) thereof. However, a Participant is not a Specified Employee
unless any stock of the Employer is publicly traded on an established securities market or
otherwise. If a Participant is a key employee at any time during the 12 months ending on the
identification date, the Participant is a Specified Employee for the 12 month period commencing on
the first day of the fourth month following the identification date. The Employer in its Adoption
Agreement will elect the identification date which may be any date in the calendar year and the
same identification date must apply as to all deferred compensation arrangements of the Employer.
The Employer may amend its Adoption Agreement to change the identification date but any such
amendment is not effective for 12 months after the adoption of the amendment. If the Employer fails
to elect an identification date in its Adoption Agreement, the identification date is December 31.
The Employers election of an identification date on or before December 31, 2006, applies to any
Separation from Service occurring on or after January 1, 2005. The Employer, in determining whether
this Section 1.43 and all related Plan provisions apply, will determine whether the Employer has
any publicly traded stock as of the date of a Participants Separation from Service. In the case of
a spin-off or merger, or in the case of nonresident alien Employees, the Employer will apply the
Specified Employee provisions of the Plan in accordance with Prop. Treas. Reg. §1.409A-1(i) and
other Applicable Guidance.
1.44 Specified Time or Fixed Schedule means, in reference to a payment of Deferred
Compensation, the Employer at the time of the deferral of the Compensation can objectively
determine: (i) the amount payable; and (ii) the payment date or dates. An amount is objectively
determinable if the deferral election specifically identifies the amount or if the Employer can
determine the amount pursuant to a nondiscretionary formula. For this purpose, the Participants or
the Employers designation of a calendar year or years for payment without more is deemed to mean
payment on January 1 in such years. A Specified Time or Fixed Schedule also means as described in
Prop. Treas. Reg. §1.409A-3(g)(1) and other Applicable Guidance.
1.45 State means: (i) one of the fifty states of the United States or the District of
Columbia, or (ii) a political subdivision of a State, or any agency or instrumentality of a State
or its political subdivision. A State does not include the federal government or an agency or
instrumentality thereof.
1.46 Substantial Risk of Forfeiture means as to 409A Amounts, and other than for
purposes of application of Code §457(f), Compensation which is payable conditioned: (i) on the
performance of substantial future services by any person including the Participant; or (ii) on the
occurrence of a condition related to a purpose of the Compensation, and where under clause (i) or
(ii) the possibility of forfeiture is substantial. A
condition related to the purpose of the Compensation relates to the Participants performance
6
Nonqualified Deferred Compensation Prototype Plan
for the Employer or to the Employers business activities or organizational goals. A Substantial
Risk of Forfeiture does not include any addition of a condition after a Legally Binding Right to
the Compensation arises or any extension of a period during which the Compensation is subject to a
Substantial Risk of Forfeiture. Compensation is not subject to a Substantial Risk of Forfeiture
merely because payment is conditioned on the Participants refraining from performing services.
Compensation is not subject to a Substantial Risk of forfeiture beyond the date or time that the
Participant otherwise could have elected to receive the Compensation unless the amount of
Compensation (disregarding Earnings) is materially greater than the amount of Compensation that the
Participant otherwise could have elected to receive. As such, a Participants Elective Deferrals
generally may not be made subject to a Substantial Risk of Forfeiture. In determining whether the
possibility of forfeiture is substantial in the case of rights to Compensation granted to a
Participant who owns significant voting power or value in the Employer, the Employer will apply
Prop. Treas. Reg. §1.409A-1(d)(3) and Applicable Guidance. A Substantial Risk of Forfeiture for
Grandfathered Amounts means as defined in Treas. Reg. §1.83-3(c) and in Notice 2005-1,
Q/A-16(b) or in Applicable Guidance. A Substantial Risk of Forfeiture for purposes of application
of Code §457(f) under an Ineligible 457 Plan means as described in Code §457(f)(3)(B), Treas. Reg.
§1.83-3(c) and Applicable Guidance.
1.47 Tax-Exempt Organization means any tax-exempt organization other than a governmental
unit or a church or a qualified church-controlled organization within the meaning of Code
§§3121(w)(3)(A) and 3121(w)(3)(B).
1.48 Taxable Year means the 12 consecutive month period ending each December 31.
1.49 Trust means the trust described in Section 5.01 of the Basic Plan Document and created
under Section 5.01 of the Adoption Agreement.
1.50 Unforeseeable Emergency means: (i) a severe financial hardship of the Participant or
Beneficiary resulting from an illness or accident of the Participant or Beneficiary, of the
Participants spouse or of the Beneficiarys spouse, or the Participants or Beneficiarys
dependent (as defined in Code §152(a)); (ii) loss of the Participants or Beneficiarys property
due to casualty; or (iii) other similar extraordinary and unforeseeable circumstances arising as a
result of events beyond the Participants or Beneficiarys control. The Employer will determine
whether a Participant or Beneficiary incurs an Unforeseeable Emergency based on the relevant facts
and circumstances and in accordance with Prop. Treas. Reg. §1.409A-3(g)(3) or Applicable Guidance,
but in any case, the Plan may not make payment to the extent that the Unforeseeable Emergency may
be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by
liquidation of the Participants assets to the extent that such liquidation of assets would not
itself cause severe financial hardship; or (iii) by the Participants cessation of Elective
Deferrals under the Plan. The Plan must limit the amount of any payment based on Unforeseeable
Emergency to the amount that is reasonably necessary to satisfy the emergency need, which may
include amounts necessary to pay any Federal, state or local income taxes or penalties reasonably
anticipated to result from the payment. The Employer in making the determination as to the amount
of payment must take into account any additional Compensation available to the Participant if
he/she cancels an Elective Deferral election under Section 4.03(D)(vii). If the Employer in its
Adoption Agreement elects to permit payment based on Unforeseeable Emergency, the Employer further
will elect whether to permit payment based on all events that will constitute an Unforeseeable
Emergency or to limit such events to a subset of specific events which will so qualify.
1.51 Valuation Date means the last day of each Taxable Year and such other dates as the
Employer may determine.
1.52 Vested means Deferred Compensation which is not subject to a Substantial Risk of
Forfeiture. or to a requirement to perform further services for the Employer. For purposes of
determining whether an amount satisfies the vesting requirement for Grandfathered Amounts under
Article VII, Substantial Risk of Forfeiture means as described in Treas. Reg. §1.83-3(c) and does
not mean as defined in Section 1.46 for purposes of application of Code §409A.
1.53 Window Program means a program the Employer establishes to provide, for a limited
period of time not exceeding one year, Separation Pay in connection with Separation from Service,
or in connection
with Separation from Service under prescribed circumstances, and otherwise as described in
Prop. Treas. Reg. §1.409A-1(b)(9)(v) or in Applicable Guidance.
7
Nonqualified Deferred Compensation Prototype Plan
1.54 Wraparound Election means as to a Participant who also is a participant in a 401(k)
plan of the Employer, an election (or elections, if made separately) to defer compensation under
both plans with the result that the Participant will achieve under the 401(k) plan, the maximum
amount of elective deferrals and matching contributions, if any, as is permissible under Code
§§402(g), 401(k)(3), 401(m), 415 and 414(v). For a Taxable Year as to any Participant, the maximum
amount of Elective Deferrals the Plan will transfer may not exceed the Code §402(g) limit and the
maximum amount of Matching Contributions the Plan will transfer may not exceed the Code §402(g)
limit, applying such limit separately as to each contribution type. Under a Wraparound Election,
the Plan promptly following completion of 401(k) plan testing and within any time required under
Applicable Guidance, will transfer from the Participants Account such Elective Deferrals and
related Matching Contributions for the Taxable Year (but without Earnings thereon) as are
consistent with the Wraparound Election, to the Participants account under the 401(k) plan to be
held and administered in accordance with the 401(k) plan. Any remaining amounts not transferred to
the 401(k) plan will remain in and be administered in accordance with this Plan. The Employer in
its Adoption Agreement will specify whether a participant may make a Wraparound Election. A
Participant will make a Wraparound Election subject to any timing requirements of Applicable
Guidance and on a form the Employer provides for this purpose.
1.55 Year of Service means the computation period of twelve (12) consecutive months, herein
set forth, during which the Employee has at least 1,000 hours of service. For vesting purposes,
the computation periods shall be the Plan Year, including periods prior to the Effective Date. The
computation period shall be the Plan Year.
Nothwithstanding the foregoing, for any short Plan Year, the determination of whether an
Employee has completed a Year of Service shall be made in accordance with Department of Labor
regulation 2530.203-2©. However, in determining whether an Employee has completed a Year of
Service for benefit accrual purposes in the short Plan Year, the number of hours of service shall
be proportionately reduced based on the number of full months in the short Plan Year.
Years of Service with any affiliated employer shall be recognized.
II. PARTICIPATION
2.01 Participant Designated. The Employer will designate from time to time in its
Adoption Agreement those Employees or Contractors (by name, job title or other classification) who
are Participants in the Plan.
2.02 Elective Deferrals. The Employer will specify in its Adoption Agreement whether
Participants may elect to make Elective Deferrals to their Accounts.
(A) Limitations. The Employer will specify in its Adoption Agreement any amount
limitations or conditions applicable to Elective Deferrals.
(B) Election Form and Timing. A Participant must make his/her Elective Deferral
election on an election form the Employer provides for that purpose. The Participant must make the
election no later than the latest of the applicable times specified below. The Employer in its
Adoption Agreement will elect that a Participant must make and deliver his/her election to the
Employer no later than: (i) such applicable time; or (ii) the number of days prior to such
applicable time as the Employer sets forth in its Adoption Agreement. The Employer will disregard
any election which is not timely under this Section 2.02(B).
(1) General Timing Rule. Except as otherwise provided in this Section 2.02(B), a
Participant must deliver his/her election to the Employer no later than the end of the Taxable Year
prior to the Service Year.
(2) New Participant/New Plan. If the Plan becomes effective, or an Employee or
Contractor first becomes a Participant, on a date which is not the first day of a Taxable Year, the
Participant must make and
deliver his/her Elective Deferral election for that Taxable Year not later than 30 days after
the Plan goes into effect or the Participant becomes a Participant. The election may apply only to
Compensation for services
8
Nonqualified Deferred Compensation Prototype Plan
the Participant performs subsequent to the date the Participant delivers
the election to the Employer. For Compensation that is earned for a specified performance period,
including an annual bonus, and where the new Participant makes an Elective Deferral election after
the service period commences, the Employer will pro rate the election by multiplying the
Compensation by the ratio of the number of days left in the performance period at the time of the
election, over the total number of days in the entire performance period.
(3) Certain Forfeitable Rights. If payment of Deferred Compensation is subject to a
forfeiture condition requiring the Participant to perform services for the Employer for at least 12
months after the Participant obtains the Legally Binding Right to the Compensation, the Participant
may make an Elective Deferral election no later than 30 days after the Participant obtains the
Legally Binding Right to the Compensation, provided the Participant makes the election at least 12
months prior to the earliest date on which the service forfeiture condition could lapse.
(4) Performance-Based Compensation. As to any Performance-Based Compensation based on
services performed over a period of at least 12 months, a Participant may elect no later than 6
months before the end of the service period to defer such Compensation, provided that the
Participant: (i) continuously must perform services from a date no later than the date the Employer
establishes the performance criteria and at least through the date of the Participants election;
and (ii) may not make an election after the Compensation has become substantially certain to be
paid and is readily ascertainable.
(5) Commissions. For purposes of election timing under this Section 2.02(B), if
Compensation consists of Commissions, the Participant is treated as providing the services giving
rise to the Commissions in the Taxable Year in which the customer remits payment to the Employer.
(6) Final Payroll Period. As the Employer elects in its Adoption Agreement, if
Compensation is payable after the last day of the Participants Taxable Year, but is Compensation
for the Participants services during the final payroll period within the meaning of Code §3401(b)
which contains the last day of the Taxable Year, the Compensation is treated for purposes of an
election under this Section 2.02(B), as Compensation for the current Taxable Year in which the
final payroll period commenced or for the subsequent Taxable Year in which the Employer pays the
Compensation. This Section 2.02(B)(6) does not apply to Compensation for services performed over
any period other than the final payroll period as described herein and the Employer will apply this
Section 2.02(B)(6) in accordance with Prop. Treas. Reg. §1.409A-2(a)(11) and Applicable Guidance.
If the Employer amends its plan after December 31, 2006, to alter the timing rule of this Section
2.02(B)(6), any such amendment may not take effect until 12 months after the later of the date the
amendment if adopted and is effective.
(7) Separation Pay/Window Program. If the Participants election relates to Separation
Pay and the Separation Pay: (i) is due to an actual involuntary Separation from Service; and (ii)
is the result of bona-fide, arms length negotiations, then the Participant may make an election
under this Section 2.02(B) at any time up to the time that the Participant has a Legally Binding
Right to the Separation Pay. If the Separation Pay results from a Window Program, the Participant
may make the election at any time up to the time that the Participants election to participate in
the Window Program becomes irrevocable.
(8) Wraparound Elections. A Participants Wraparound Election under Section 1.54 is
not an election under this Section 2.02(B) even if as a result of the election the amount of the
Participants Elective Deferrals under this Plan increases, provided that the Wraparound Election
does not affect the timing and form of payment of Deferred Compensation under this Plan.
(9) Fiscal Year Employer. In the event that the Employers taxable year is a
non-calendar year, a Participant may elect to defer Compensation which is co-extensive with the
Employers fiscal year by making an election no later than the end of the Employers fiscal year
which precedes the Employers fiscal year in which the Participant performs the service for which
the Compensation is payable and in accordance with Prop. Treas. Reg. §1.409A-2(a)(5) and Applicable
Guidance.
(C) Early Elections/Changes. The Employer in its Adoption Agreement will elect whether
a Participants election made prior to the Section 2.02(B) deadline becomes irrevocable as to a
Taxable Year: (i)
following the last day on which a Participant may make an election under Section 2.02(B) for
such Taxable Year; or (ii) if earlier, when the Participant makes the election for a Taxable Year.
If the Employer elects to
9
Nonqualified Deferred Compensation Prototype Plan
permit changes to an election up to the Section 2.02(B) election
deadline, a Participant may make any number of changes to his/her Elective Deferral election during
the period prior to the election becoming irrevocable. If the Employer elects in its Adoption
Agreement and under Section 2.02(D) that a Participants election is continuing, the Participant is
deemed to have made an election as to each Taxable Year on the last day that the Participant could
have made an election under Section 2.02(B). As such, the Participant may revoke or modify a
continuing election for a Taxable Year up to the date that such election is deemed made for that
Taxable Year. A change payment election under Section 4.03(B) does not render an Elective Deferral
election and an accompanying initial payment election under Section 4.03(A), revocable within the
meaning of this Section 2.02(C).
(D) Election Duration. As the Employer elects in its Adoption Agreement, a
Participants Elective Deferral election remains in effect: (i) only for the duration of the
Taxable Year for which the Participant makes the election; or (ii) for the duration of the Taxable
Year for which the Participant makes the election and for all subsequent Taxable Years unless the
Participant executes a subsequent timely election, modification or revocation. A Participant,
subject to Plan requirements regarding election timing, including those in Article VII, may make a
new election, or may revoke or modify an existing election effective no earlier than for the next
Taxable Year, provided that a Participant may cancel an existing and otherwise irrevocable election
for a Taxable Year at any time following the Participants receipt of an Unforeseeable Emergency
distribution or of a distribution from the Employers 401(k) plan based upon hardship within the
meaning of Treas. Reg. §1.401(k)-1(d)(3).
2.03 Nonelective Contributions. The Employer will specify in its Adoption Agreement
whether the Employer will or may make Nonelective Contributions to the Plan, and the terms and
conditions applicable to any Nonelective Contributions.
2.04 Matching Contributions. The Employer will specify in its Adoption Agreement
whether the Employer will or may make Matching Contributions to the Plan, and the terms and
conditions applicable to any Matching Contributions.
2.05 Actual or Notional Contribution. The Employer will specify in its Adoption
Agreement whether it will make any Employer Contribution as a notional contribution or as an actual
contribution to an Account. If the Employer establishes the Trust, any Employer Contributions to
the Trust will be actual contributions.
2.06 Allocation Conditions. The Employer will specify in its Adoption Agreement any
employment or other condition applicable to the allocation of Employer Contributions for a Taxable
Year.
2.07 Timing. The Employer may elect to make any Employer Contribution for a Taxable
Year at such times as Code §409A or Applicable Guidance may permit. The Employer is not required to
contribute any actual contribution (or to post any notional contribution) to an Account at the time
that the Employer makes its contribution election.
2.08 Administration. The Employer will administer all Employer Contributions in the
same manner as Elective Deferrals, except as the Plan otherwise provides. If the Employer
establishes the Trust, the Employer will remit any Elective Deferrals to the Trust and will make
any Employer Contributions to the Trust. Any Employer Contribution is not subject to an immediate
Participant right to elect a cash payment in lieu of the Employer Contribution and such amounts are
payable only in accordance with the Plan terms.
III. VESTING AND SUBSTANTIAL RISK OF FORFEITURE
3.01 Vesting Schedule or other Substantial Risk of Forfeiture. The Employer will
specify in its Adoption Agreement any vesting schedule or other Substantial Risk of Forfeiture
applicable to Participant Accounts. If the Plan is an Ineligible 457 Plan, the Employer must
specify a Substantial Risk of Forfeiture.
3.02 Immediate Vesting on Specified Events. The Employer will specify in its Adoption
Agreement whether a Participants Account is Vested without regard to Years of Service if the
Participant Separates from Service on or following Retirement Age, or as a result of death,
Disability, or other events.
10
Nonqualified Deferred Compensation Prototype Plan
3.03 Application of Forfeitures. A Participant will forfeit any non-Vested Accrued
Benefit upon Separation from Service. The Employer will specify in its Adoption Agreement how it
will apply Participant forfeitures under the Plan.
IV. BENEFIT PAYMENTS
4.01 Separation from Service or Death. The Plan will pay to the Participant the Vested
Accrued Benefit held in the Participants Account following the earlier of the Participants
Separation from Service or death. Payment will commence at the time and payment will be made in the
form and method specified under Section 4.03. In the event of the Participants death, the Plan
will pay to the Participants Beneficiary the Participants Vested Accrued Benefit or any remaining
amount thereof if benefits to the Participant already have commenced, in accordance with the
Participants election or otherwise as the Plan permits.
(A) Payment to Specified Employees. Notwithstanding anything to the contrary in the
Plan or in a Participant or Employer payment election, the Plan may not make payment to a Specified
Employee, based on Separation from Service, earlier than 6 months following Separation from Service
(or if earlier, upon the Specified Employees death), except as permitted under this Section
4.01(A). The Employer in its Adoption Agreement will elect whether any payments that otherwise
would be payable to the Specified Employee during the foregoing 6 month period: (i) will be
accumulated and payment delayed until a date specified in the Adoption Agreement that is after the
6 month period; or (ii) will be delayed by 6 months as to each installment otherwise payable during
the 6 month period. The Employer may amend its Adoption Agreement to change the method of treating
payments otherwise payable within the 6 month period, provided that any change in method may not be
effective for 12 months after the adoption of the amendment unless the Employer makes such an
amendment prior to the Employers stock first becoming readily tradable on an established
securities market. This Section 4.01(A) does not apply to payments made on account of a domestic
relations order under Section 4.03(D)(i), payments made because of a conflict of interest under
Section 4.03(D)(ii), or payment of employment taxes under Section 4.03(D)(v).
(B) Deemed Separation of Contractor. The Employer in its Adoption Agreement may elect
to apply the special payment timing rules in this Section 4.01(B) as to Contractors. Compliance
with this Section 4.01(B) results in the Contractor being deemed to have incurred a Separation from
Service under Section 1.39. Under this Section 4.01(B): (i) the Plan will not pay a Contractors
Account, or any portion thereof, before a date that is at least 12 months after the expiration of
the contract or contracts under which the Contractor performs services for the Employer; and (ii)
no amount payable under clause (i) will be paid to the Contractor if the Contractor (whether as a
Contractor or an Employee) performs significant services for the Employer after the contract(s)
expiration and before the payment date.
4.02 Other Payment Events. The Employer will specify in the Adoption Agreement
whether, in addition to the payment events under Section 4.01, the Plan may pay to a Participant
all or any part of the Participants Account: (i) upon the Participants Disability; (ii) at a
Specified Time or pursuant to a Fixed Schedule; (iii) upon a Change in Control; or (iv) based upon
an Unforeseeable Emergency. Payment will commence at the time and payment will be made in the form
and method specified under Section 4.03.
4.03 Form, Timing and Method/ Payment Election. The Employer will specify in its
Adoption Agreement: (i) the permissible forms of payment (cash or property), the timing of payment
and methods of payment applicable to Plan Accounts (collectively, payment elections); and (ii)
whether a Participant or the Employer may make an initial payment election under Section 4.03(A) or
change payment election under Section 4.03(B). Until the Plan pays a Participants entire Vested
Accrued Benefit, the Plan will continue to credit the Participants Account with Earnings, in
accordance with Section 5.02. As to the permissible forms of payment (cash or property), the
Participant or the Employer may, but is not required to, elect the form of payment as part of and
at the same time as the initial payment election or change payment election.
(A) Initial Payment Election. The Employer will specify in its Adoption Agreement: (i)
whether a Participant or the Employer may make an initial payment election or whether there are no
initial payment
elections and the form, timing and method of payment are controlled by the Employers Adoption
Agreement elections; and (ii) whether any Participant payment election applies to all Account types
or only applies to a Participants Elective Deferral Account. In the event the Employer elects in
its Adoption Agreement not to
11
Nonqualified Deferred Compensation Prototype Plan
provide any Participant or Employer initial payment elections, the
Plan provisions constitute an initial payment election under the Plan. A Participant must make an
initial payment election at the time of the Participants Elective Deferral election under Section
2.02(B). The Employer must make an initial payment election as to a Participant at the time that
the Employer grants a Legally Binding Right to Deferred Compensation to the Participant. A payment
election may apply only to the Deferred Compensation that is the subject of the Elective Deferral
election or the Employer Contribution or may apply to such Deferred Compensation and to all future
Deferred Compensation, as the payment election indicates. A Participant must make any permissible
initial payment election on a form the Employer provides for that purpose. If the Participant or
the Employer as applicable have the right to make an initial payment election but fail to do so,
the Plan will pay the affected Participants Vested Accrued Benefit attributable to the
non-election under this default provision, in a lump-sum cash payment 13 months following the
earliest event permitting payment of the Participants Account under Sections 4.01 or 4.02. If this
default provision applies, the default payment is deemed to be an initial payment election under
the Plan.
(B) Change Payment Election. The Employer will specify in its Adoption Agreement
whether a Participants or the Employers initial payment election under Section 4.03(A) or first
change payment election under this Section 4.03(B) is irrevocable or whether a Participant or the
Employer may change the elections. If the Plan permits Participants or the Employer to change
existing payment elections (initial or change elections) as to any or all Deferred Compensation,
including any Plan default payment applicable in the absence of an actual initial payment election,
any such change payment election must comply with this Section 4.03(B). The Employer in its
Adoption Agreement will elect whether a Beneficiary following a Participants death may make a
change payment election under this Section 4.03(B). A Participant or Beneficiary must make any
change payment election on a form the Employer provides for such purpose.
(1) Conditions on Change Payment Elections. Any Participant or Employer change payment
election: (i) may not take effect until at least 12 months following the date of the change payment
election; (ii) if the change payment election relates to a payment based on Separation from Service
or on Change in Control, or if the payment is at a Specified Time or pursuant to a Fixed Schedule,
the change payment election must result in payment being made not earlier than 5 years following
the date upon which the payment otherwise would have been made (or, in the case of a life annuity
or installment payments treated as a single payment, 5 years from the date the first amount was
scheduled to be paid); and (iii) if the change payment election relates to payment at a Specified
Time or pursuant to a Fixed Schedule, the Participant or Employer must make the change payment
election not less than 12 months prior to the date the payment is scheduled to be made (or, in the
case of a life annuity or installment payments treated as a single payment, 12 months prior to the
date the first amount was scheduled to be paid).
(2) Definition of Payment. Except as otherwise provided in Section 4.03(B)(3), a
payment for purposes of applying Section 4.03(B)(1) is each separately identified amount the Plan
is obligated to pay to a Participant on a determinable date and includes amounts paid for the
benefit of the Participant. An amount is separately identified only if the Employer can
objectively determine the amount. A payment includes the provision of any taxable benefit,
including payment in cash or in-kind. A payment includes, but is not limited to, the transfer,
cancellation or reduction of an amount of Deferred Compensation in exchange for benefits under a
welfare benefit plan, fringe benefits excludible under Code §§119 or 132, or any other benefit that
is excluded from gross income.
(3) Installment Payments and Life Annuities. A life annuity is treated as a single
payment. For purposes of this Section 4.03(B)(3), a life annuity is a series of substantially
equal periodic payments, payable not less frequently than annually, for the life (or life
expectancy) of the Participant, or the joint lives (or life expectancies) of the Participant and of
his/her Beneficiary. A change in the form of payment from one type of life annuity to another
before any annuity payment has been made is not subject to the change payment election requirements
provided that the annuities are actuarially equivalent applying reasonable actuarial assumptions.
The Employer in its Adoption Agreement will elect whether to treat a series of installment payments
which are not a life annuity as a single payment or as a series of separate payments. If the
Employer fails to so elect, the Employer must treat the installments as a single payment. For
purposes of this Section 4.03(B)(3), a series of installment payments means payment of a series
of substantially equal periodic
amounts to be paid over a predetermined number of years, except to the extent that any
increase in the payment amounts reflects reasonable Earnings through the date of payment.
12
Nonqualified Deferred Compensation Prototype Plan
(4) Coordination with Anti-Acceleration Rule. In applying Section 4.03(C), payment
means as described in Sections 4.03(B)(2) and (3). A Participant under a change payment election
may change the form of payment to a more rapid schedule (including a change from installments to a
lump-sum payment) without violating Section 4.03(C), provided any such change remains subject to
the change payment election provisions under this Section 4.03(B). Accordingly, if the
Participants payment change election modifies the payment method from installments to a lump-sum
payment, and if the Plan treats an installment payment as a single payment, a change payment
election must satisfy Section 4.03(B)(1) measured from the first installment payment. Conversely,
if the plan treats an installment payment as a series of payments, a change payment election must
satisfy Section 4.03(B)(1) measured from the last installment payment. If a change payment election
only modifies the timing of an installment payment, and the Plan treats the installments as a
single payment, the change payment election must apply to each installment and must satisfy Section
4.03(B) measured from each installment payment. If in the latter case, the Plan treats installments
as a series of payments, the change payment election may apply to any or all installments and must
satisfy Section 4.03(B) separately as to each payment the change payment election affects.
(5) Multiple Payment Events. If the Plan permits multiple payment events, the change
payment election provisions of Section 4.03(B)(1) apply separately as to each payment due upon each
payment event. The addition of a permissible payment event to Deferred Compensation previously
deferred is subject to the change election provisions of Section 4.03(B)(1) where the additional
event may cause a change in the time or form of payment. The addition of a payment event is not an
impermissible acceleration under Section 4.03(C) provided that the change complies with this
Section 4.03(B)(5).
(6) Certain Payment Delays not Subject to Change Payment Election Rules. The Employer
in its Adoption Agreement will elect whether to apply the some or all of the following payment
delay provisions. If applicable, these provisions do not result in the Plan failing to provide for
payment upon a permissible event as Code §409A requires nor are the delays treated as a change
payment election under this Section 4.03(B).
(a) Non-deductible Payment. The Plan may delay payment to a Participant if the
Employer reasonably anticipates that the Employers deduction for payment of the Participants
Deferred Compensation will be limited or eliminated under Code §162(m). As the Employer elects in
its Adoption Agreement, the Plan will pay such Deferred Compensation at the earliest date at which
the Employer reasonably anticipates that Code §162(m) will not apply or in the calendar year in
which the affected Participant Separates from Service.
(b) Loan Covenants/Contract Terms. The Plan may delay payment to a Participant if the
Employer reasonably anticipates that the payment will violate the terms of a loan agreement or
other similar contract to which the Employer is a party, provided that the Employer entered into
the agreement or contract for legitimate business reasons and that such violation will cause
material harm to the Employer. The Plan will pay such Deferred Compensation at the earliest date at
which the Employer reasonably anticipates that the payment will not cause a violation of the
agreement or contract or that such a violation will not result in material harm to the Employer.
(c) Securities or Other Laws. The Plan may delay payment to a Participant if the
Employer reasonably anticipates that the payment will violate Federal securities law or other
applicable law. The Plan will pay such Deferred Compensation at the earliest date at which the
Employer reasonably anticipates that the payment will not cause a violation of such laws. For
purposes of this Section 4.03(B)(6)(c), a violation of other applicable law does not include a
payment which would cause inclusion of the Deferred Compensation in the Participants gross income
or which would subject the Participant to any Code penalty or other Code provision.
(d) Other. The Plan may delay payment to a Participant upon such other events as
Applicable Guidance may permit.
(e) Amendment. If the Employer amends its Adoption Agreement to add any or all of
payment delays described in this Section 4.03(B)(6), any such amendment may not be effective for at
least 12
months following the Employers adoption of the amendment. As required under Section 4.03(C),
the
13
Nonqualified Deferred Compensation Prototype Plan
Employer may not amend its Adoption Agreement to remove any or all payment delays described in
this Section 4.03(B)(6) as to any previous Deferred Compensation.
(C) No Acceleration-General Rule. Neither the Employer nor a Participant may
accelerate the time or schedule of any Plan payment or amount scheduled to be paid under the Plan.
For this purpose, the following are not an acceleration: (i) payment made in accordance with Plan
provisions or pursuant to an initial payment election under Section 4.03(A) or a change payment
election under Section 4.03(B) under which payment on an accelerated schedule is required on
account of an intervening event which includes Separation from Service, Disability, death, Change
in Control or Unforeseeable Emergency; (ii) The Employers waiver or acceleration of the
satisfaction of any condition constituting a Substantial Risk of Forfeiture provided that payment
is made only upon a permissible payment event and the Employers action otherwise does not violate
Code §409A; and (iii) a choice between a distribution of cash or property if the timing and the
amount of income inclusion to the Participant are the same.
(D) Permissible Accelerations. Notwithstanding Section 4.03(C), the Employer in its
Adoption Agreement may elect to permit any or all of the following accelerations of the time or
schedule of payment: (i) a payment to an individual other than the Participant required under a
domestic relations order under Code §414(p)(1)(B); (ii) a payment required under a certificate of
divestiture under Code §1043(b)(2) relating to conflicts of interest; (iii) a payment from a 457(f)
plan to a Participant for the purpose of payment of the Participants Federal, state local or
foreign income tax due upon a vesting event under the 457(f) plan, provided that the payment does
not exceed the income tax withholding the Employer would have remitted if it had paid wages equal
to the amount of 457(f) income includible at the time of vesting; (iv) a Plan amendment to permit
certain cash-out payments described in Sections 4.03(E) and (F); (v) as it relates to the Deferred
Compensation, a payment to pay the FICA tax under Code §§3101, 3121(a) and 3121(v)(2) and to pay
income taxes at source on wages under Code §3401 or under corresponding provisions of state, local
or foreign tax laws related to payment of the FICA and to pay additional income tax at source on
wages attributable to pyramiding Section §3401 wages and taxes, but the total of all such payments
may not exceed the aggregate of the FICA amount and the income tax withholding related to the FICA
amount; (vi) a payment to any affected Participant at any time that the Plan fails to meet the
requirements of Code §409A and the regulations thereunder, provided that such payment may not
exceed the amount required to be included in income as a result of such failure; (vii) cancellation
of a Participants Elective Deferral election on account of a payment based on Unforeseeable
Emergency or a hardship distribution under Treas. Reg. §1.401(k)-1(d)(3) provided that the election
is fully cancelled and that any subsequent election is subject to Sections 2.02 and 4.03(A); (viii)
payment upon Plan termination in accordance with Section 6.03(B); (ix) payment to prevent the
occurrence of a nonallocation year under Code §409(p) in accordance with Prop. Treas. Reg.
§1.409A-3(h)(2)(ix) or other Applicable Guidance; and (x) a decrease in the amounts deferred under
the Plan as a result of a formula which links Deferred Compensation under this Plan to benefits
paid by or contributions made to a qualified plan of the Employer, including Wraparound Elections,
in accordance with Prop. Treas. Reg. §1.409A-3(h)(3) or other Applicable Guidance.
(E) Cash-Out Upon Separation. The Employer in its Adoption Agreement will elect
whether (notwithstanding a Participants or the Employers payment election or any contrary Plan
terms) the Plan will pay in a single cash payment the entire Vested Accrued Benefit of a
Participant who has Separated from Service (including Grandfathered and 409A Amounts) where the
Participants Vested Accrued Benefit does not exceed $10,000. A payment under this Section 4.03(E)
must terminate the Participants entire interest in the Plan and in all similar deferred
compensation arrangements within the meaning of Prop. Treas. Reg. §1.409A-1(c) or other Applicable
Guidance. The Employer will make any payment under this Section 4.03(E) on or before the later of:
(i) December 31 of the Taxable Year in which the Participant Separates from Service; or (ii) the
15th day of the third month following the Participants Separation from Service.
(F) Cash-out of 409A Amount. The Employer in its Adoption Agreement will elect whether
the Plan will pay in the form of a single cash payment the entire Vested Accrued Benefit of any
Participant attributable to 409A Amounts upon the occurrence of any Plan payment event affecting
the Participant, provided: (i) the Vested Accrued Benefit attributable to 409A Amounts does not
exceed an amount the Employer designates in the Adoption Agreement; and (ii) 409A Amounts for
purposes of this cash-out provision only includes Compensation Deferred on and following the date
the Employer elects this cash-out provision in the Adoption
Agreement. If the Employer elects to apply this Section 4.03(F), any subsequent
14
Nonqualified Deferred Compensation Prototype Plan
amendment to
change or eliminate this feature is subject to the rules regarding payment change elections under
Section 4.03(B).
4.04 Withholding. The Employer will withhold from any payment made under the Plan and
from any amount taxable under Code §409A, all applicable taxes, and any and all other amounts
required to be withheld under Federal, state or local law, including Notice 2005-1 and other
Applicable Guidance.
4.05 Beneficiary Designation. A Participant may designate a Beneficiary (including one
or more primary and contingent Beneficiaries) to receive payment of any Vested Accrued Benefit
remaining in the Participants Account at death. The Employer will provide each Participant with a
form for this purpose and no designation will be effective unless made on that form and delivered
to the Employer. A Participant may modify or revoke an existing designation of Beneficiary by
executing and delivering a new designation to the Employer. In the absence of a properly designated
Beneficiary, the Employer will pay a deceased Participants Vested Accrued Benefit to the
Participants surviving spouse and if none, to the Participants estate. If a Beneficiary is a
minor or otherwise is a person whom the Employer reasonably determines to be legally incompetent,
the Employer may cause the Plan or Trust to pay the Participants Vested Accrued Benefit to a
guardian, trustee or other proper legal representative of the Beneficiary. The Plans or Trusts
payment of the deceased Participants Vested Accrued Benefit to the Beneficiary or proper legal
representative of the Beneficiary completely discharges the Employer, the Plan and Trust of all
further obligations under the Plan.
4.06 Administration of Payment Date(s).
(A) Objective Payment Date(s). The Employer in its Adoption Agreement, or the
Participant or the Employer in an initial payment election or change payment election made pursuant
to the Adoption Agreement must provide for a payment date that the Employer, at the time of the
payment event, objectively can determine. Such payment date may, but need not, coincide with a
payment event, but any payment must be on or following and must relate to a Plan payment event. If
the Adoption Agreement or any such election provides for payment only in a designated calendar
year, the payment date is deemed to be January 1 of that year.
(B) Multiple Payment Events/Fixed Schedule Linked to Payment Events. The Employer in
its Adoption Agreement, or a Participant or the Employer in a payment election under Sections
4.03(A) or (B): (i) may provide for payment upon the earliest or latest of more than one
permissible payment event under Sections 4.01 and 4.02; (ii) may provide that a payment based on
Separation from Service, death, Disability, Change in Control or Unforeseeable Emergency is to be
made in accordance with a Fixed Schedule that the Employer objectively can determine at the time of
the applicable payment event; or (iii) may provide for an alternative payment schedule if the
payment event to which the payment schedule is linked occurs prior to a single specified date.
(C) Treatment of Payment as Made on Designated Payment Date. The Plans payment of
Deferred Compensation is deemed made on the Plan required payment date or payment election required
payment date even if the Plan makes payment after such date, provided the payment is made by the
latest of: (i) the end of the calendar year in which the payment is due; (ii) the 15th
day of the third calendar month following the payment due date; (iii) in case the Employer cannot
calculate the payment amount on account of administrative impracticality which is beyond the
Participants control (or the control of the Participants estate), in the first calendar year in
which payment is practicable; (iv) in case the Employer does not have sufficient funds to make the
payment without jeopardizing the Employers solvency, in the first calendar year in which the
Employers funds are sufficient to make the payment. The Employer may cause the Plan or Trust to
pay a Participants Vested Accrued Benefit on any date which satisfies this Section 4.06(C) and
that is administratively practicable following any Plan specified payment date or the date
specified in any valid payment election.
(D) Disputed Payments. In the event of a dispute between the Employer and a
Participant as to whether Deferred Compensation is payable to the Participant or as to the amount
thereof, the Plan is deemed to make timely payment on any Plan required payment date or payment
election required payment date if: (i) the Participant accepts any portion of the payment that the
Employer is willing to make (unless such acceptance results in a forfeiture of the Participants
claim to the remaining amount); (ii) the Participant
15
Nonqualified Deferred Compensation Prototype Plan
makes prompt, reasonable and good-faith
efforts to collect the payment; and (iii) the Plan makes payment in the first calendar year in
which the Employer and the Participant enter into a legally binding settlement of the dispute, the
Employer concedes that the amount is payable or the Employer is required to cause the Plan to make
payment
under a final and nonappealable judgment or other binding decision. This Section 4.06(D) does
not apply if the Plans failure to make payment on a required date is on account of: (i) the
Participants failure to request payment, to provide information or to take any other action
necessary for the Plan to make payment; or (ii) the Participant
or a member of the Participants
family (as defined in Code §267(c)(4) applied to include the spouse of any family member), any
person or group of persons over whom the Participant or the Participants family has effective
control or any person whose compensation (or any portion thereof) is controlled by the Participant
or the Participants family members, makes the decision to not pay.
4.07 Employer Approval of Participant Elections. A Participants or the Employers
initial payment elections or change payment elections must be consistent with the Plan and with the
Adoption Agreement. The Employer at the time of the election must approve any Participant payment
election as to form, timing and method, where the Adoption Agreement does not expressly authorize
the elected form, timing or method. The Employer, in its absolute discretion, may withhold approval
for any reason, including, but not limited to non-compliance with Plan terms. If the Employer does
not approve a Participants initial payment election or change payment election, the Employer will
pay the Participants Vested Accrued Benefit under Section 4.03 as though the Participant did not
make such payment election.
V. TRUST ELECTION AND PLAN EARNINGS
5.01 Unfunded Plan/Trust Election. The Employer as it elects in its Adoption Agreement
intends this Plan to be an unfunded plan that is wholly or partially exempt under ERISA. No
Participant, Beneficiary or successor thereto has any legal or equitable right, interest or claim
to any property or assets of the Employer, including assets held in any Account under the Plan
except as the Plan otherwise permits. The Employers obligation to pay Plan benefits is an
unsecured promise to pay. Except as provided in the Adoption Agreement, this Plan does not create a
trust for the benefit of any Participant. If the Employer elects to create the Trust, the
applicable provisions of the Basic Plan Document continue to apply, including those of this Section
5.01. The Trustee will pay Plan benefits in accordance with the Plan terms or upon the Employers
direction consistent with Plan terms. Unless the Employer establishes the Trust: (i) the Employer
may elect to make notional contributions in lieu of actual contributions to the Plan; and (ii) the
Employer may elect not to invest any actual Plan contributions. If the Employer elects to invest
any actual Plan contributions, such investments may be held for the Employers benefit in providing
for the Employers obligations under the Plan or for such other purposes as the Employer may
determine. Any assets held in Plan Accounts remain subject to claims of the Employers general
creditors and no Participants or Beneficiarys claim to Plan assets has any priority over any
general unsecured creditor of the Employer.
(A) Restriction on Trust Assets. If an Employer establishes, directly or indirectly,
the Trust (or any other arrangement Applicable Guidance may describe), the Trust and the Trust
assets must be and must remain located within the United States, except with respect to a
Participant who performs outside the United States substantially all services giving rise to the
Deferred Compensation. The Trust may not contain any provision limiting the Trust assets to the
payment of Plan benefits upon a Change in the Employers Financial Health, even if the assets
remain subject to claims of the Employers general creditors. For this purpose, the Employer, upon
a Change in the Employers Financial Health, may not transfer Deferred Compensation to the Trust.
Any Trust the Employer establishes under this Plan shall be further subject to Applicable Guidance,
compliance with which is necessary to avoid the transfer of assets to the Trust being treated as a
transfer of property under Code § 83.
(B) Transitional Relief for Grace Period Assets. As to any Grace Period Assets that
otherwise would violate Section 5.01(A) and Code §409(A)(b), not later than December 31, 2007, or
such other date as Applicable Guidance may specify, the Plan or the Employer will eliminate Grace
Period Assets or otherwise cause such assets to not violate Code §409A(b) by: (i) making payment of
Deferred Compensation in accordance with the Plan terms; (ii) making payment of Deferred
Compensation upon the Employers termination of the Plan under Section 6.03(b); (iii) dissolving
the Trust in accordance with the Trust terms; (iv) desegregating the Grace Period Assets such that
they no longer are associated with the payment of Deferred Compensation; or (v) taking such other
action to come into conformity with Code §409A(b) and Applicable Guidance issued before December
31, 2007, as Applicable guidance may specify. Under clause
16
Nonqualified Deferred Compensation Prototype Plan
(iv), even if the Employer takes no
other prior action, the Grace Period Assets as of December 31, 2007, are by this provision
desegregated and no longer are associated with the payment of Deferred Compensation. Under clauses
(i) and
(ii), if payment consists of both Grace Period Assets and other assets, the payment is treated
for purposes of this Section 5.01(B) as consisting first of Grace Period Assets.
(1) Grace Period Assets. For purposes of this Section 5.01(B), Grace Period Assets
means assets which on or before March 21, 2006, were set aside, transferred or restricted under
Code §§409(A)(b)(1) or 409A(b)(2) so as to become subject to income inclusion under such Code
sections. Grace Period Assets includes actual Earnings on the Grace Period Assets (whether held in
the Trust or otherwise), including such Earnings credited after March 21, 2006. The Employer will
determine Grace Period Assets in accordance with Notice 2006-33 and other Applicable Guidance.
5.02 Actual or Notional Earnings. If the Employer establishes the Trust under Section
5.01, the Trust earnings provisions apply to all Plan contributions and constitute Earnings for
purposes of the Plan. If the Employer does not establish the Trust, the Employer will elect in its
Adoption Agreement whether the Plan periodically will credit actual or notional Plan contributions
with a determinable amount of notional Earnings (at a specified fixed or floating interest rate or
other specified index) or will credit or charge each Participants Account with net investment
earnings, gain and loss actually incurred by the Account. If the Account is credited and charged
with actual Earnings, the Employer will specify in the Adoption Agreement whether the Employer, the
Trustee (subject to the Trust terms) or the Participant has the right to direct the investment of
the Participants Account and also may specify any limitations on the Participants right of
investment direction. If the Adoption Agreement provides for Employer investment direction, the
Employer may make any investment of Plan assets it deems reasonable or appropriate. If the Adoption
Agreement provides for Participant investment direction, this right is limited strictly to
investment direction and the Participant will not be entitled to the distribution of any Account
asset except as the Plan otherwise permits. Except as otherwise provided in the Plan or Trust, all
Plan assets, including all incidents of ownership thereto, at all times will be the sole property
of the Employer.
VI. MISCELLANEOUS
6.01 No Assignment. No Participant or Beneficiary has the right to anticipate,
alienate, assign, pledge, encumber, sell, transfer, mortgage or otherwise in any manner convey in
advance of actual receipt, the Participants Account. Prior to actual payment, a Participants
Account is not subject to the debts, judgments or other obligations of the Participant or
Beneficiary and is not subject to attachment, seizure, garnishment or other process applicable to
the Participant or Beneficiary.
6.02 Not Employment Contract. This Plan is not a contract for employment between the
Employer and any Employee who is a Participant. This Plan does not entitle any Participant to
continued employment with the Employer, and benefits under the Plan are limited to payment of a
Participants Vested Accrued Benefit in accordance with the terms of the Plan.
6.03 Amendment and Termination.
(A) Amendment. The Employer reserves the right to amend the Plan at any time to comply
with Code §409A, Notice 2005-1, Prop. Treas. Reg. §1.409A and other Applicable Guidance or for any
other purpose, provided that such amendment will not result in taxation to any Participant under
Code §409A. Except as the Plan and Applicable Guidance otherwise may require, the Employer may make
any such amendments effective immediately.
(B) Termination. The Employer may terminate, but is not required to terminate, the
Plan and distribute Plan Accounts under the following circumstances:
(1) Dissolution/Bankruptcy. The Employer may terminate the Plan within 12 months
following a dissolution of a corporate Employer taxable under Code §331 or with approval of a
Bankruptcy court under 11 U.S.C. §503(b)(1)(A), provided that the Deferred Compensation is paid to
the Participants and is included in the Participants gross income in the latest calendar year: (i)
in which the plan termination occurs; (ii) in which the amounts no longer are subject to a
Substantial Risk of Forfeiture; or (iii) in which the payment is administratively practicable.
17
Nonqualified Deferred Compensation Prototype Plan
(2) Change in Control. The Employer may terminate the Plan within the 30 days
preceding or the 12 months following a Change in Control provided the Employer distributes all Plan
Accounts (and must distribute the accounts under any substantially similar Employer plan which plan
the Employer also must terminate) within 12 months following the Plan termination.
(3) Other. The Employer may terminate the Plan for any other reason in the Employers
discretion provided that: (i) the Employer also terminates all Aggregated Plans in which any
Participant also is a participant; (ii) the Plan makes no payments in the 12 months following the
Plan termination date other than payments the Plan would have made irrespective of Plan
termination; (iii) the Plan makes all payments within 24 months following the Plan termination
date; and (iv) the Employer within 5 years following the Plan termination date does not adopt a new
plan covering any Participant that would be an Aggregated Plan.
(4) Applicable Guidance. The Employer may terminate the Plan under such other
circumstances as Applicable Guidance may permit.
(C) Effect on Vesting. Any Plan amendment or termination will not reduce the Vested
Accrued Benefit held in any Participant Account at the date of the amendment or termination and
also may not accelerate vesting except as may be permitted without subjecting any Participant to
taxation under Code §409A.
(D) Cessation of Future Contributions. The Employer in its Adoption Agreement may
elect at any time to amend the Plan to cease future Elective Deferrals, Nonelective Contributions
or Matching Contributions as of a specified date. In such event, the Plan remains in effect (except
those provisions permitting the frozen contribution type) until all Accounts are paid in accordance
with the Plan terms, or, if earlier, upon the Employers termination of the Plan.
6.04 Severability. If the Employer or any proper authority determines any provision of
the Plan will cause taxation under Code §409A or is otherwise invalid, the remaining portions of
the Plan will continue in effect and will be interpreted consistent with the elimination of the
invalid provision.
6.05 Notice and Elections. Any notice given or election made under the Plan must be in
writing and must be delivered or mailed by certified mail, to the Employer or to the Participant or
Beneficiary as appropriate. The Employer will prescribe the form of any Plan notice or election to
be given to or made by Participants. Any notice or election will be deemed given or made as of the
date of delivery, or if given or made by certified mail, as of 3 business days after mailing.
6.06 Administration. The Employer will administer and interpret the Plan, including
making a determination of the Vested Accrued Benefit due any Participant or Beneficiary under the
Plan. As a condition of receiving any Plan benefit to which a Participant or Beneficiary otherwise
may be entitled, a Participant or Beneficiary will provide such information and will perform such
other acts as the Employer reasonably may request. The Employer may cause the Plan to forfeit any
or all of a Participants Vested Accrued Benefit, if the Participant fails to cooperate reasonably
with the Employer in the administration of the Participants Plan Account, provided that this
provision does not apply to a bona fide dispute under Section 4.06(D). The Employer may retain
agents to assist in the administration of the Plan and may delegate to agents such duties as it
sees fit. The decision of the Employer or its designee concerning the administration of the Plan is
final and is binding upon all persons having any interest in the Plan. The Employer will indemnify,
defend and hold harmless any Employee designated by the Employer to assist in the administration of
the Plan from any and all loss, damage, claims, expense or liability with respect to this Plan
(collectively, claims) except claims arising from the intentional acts or gross negligence of the
Employee.
6.07 Account Statements. The Employer from time to time will provide each Participant
with a statement of the Participants Vested Accrued Benefit as of the most recent Valuation Date.
The Employer also will provide Account statements to any Beneficiary of a deceased Participant with
a Vested Accrued Benefit remaining in the Plan.
6.08 Accounting. The Employer will maintain for each Participant as is necessary for
proper administration of the Plan, an Elective Deferral Account, a Matching Contribution Account, a
Nonelective
18
Nonqualified Deferred Compensation Prototype Plan
Contribution Account, and separate sub-accounts reflecting 409A Amounts and Grandfathered
Amounts in accordance with Section 7.03.
6.09 Costs and Expenses. Except for investment charges, which will be borne by the
Account to which they pertain, the Employer will pay the costs, expenses and fees associated with
the operation of the Plan, excluding those incurred by Participants or Beneficiaries. The Employer
will pay costs, expenses or fees charged by or incurred by the Trustee only as provided in the
Trust or other agreement between the Employer and the Trustee.
6.10 Reporting. The Employer will report Deferred Compensation for Employee
Participants on Form W-2 for and on Form 1099-MISC for Contractor Participants in accordance with
Notice 2005-1 and Applicable Guidance.
6.11 ERISA Claims Procedure. If this Plan is established as a top-hat plan within
the meaning of DOL Reg. §2520.104-23, the following claims procedure under DOL Reg. §2560.503-1
applies. For purposes of the Plans claims procedure under this Section 6.11, the Plan
Administrator means the Employer. A Participant or Beneficiary may file with the Plan
Administrator a written claim for benefits, if the Participant or Beneficiary disputes the Plan
Administrators determination regarding the Participants or Beneficiarys Plan benefit. However,
the Plan Administrator will cause the Plan to pay only such benefits as the Plan Administrator in
its discretion determines a Participant or Beneficiary is entitled to receive. The Plan
Administrator under this Section 6.11 will provide a separate written document to affected
Participants and Beneficiaries which explains the Plans claims procedure and which by this
reference is incorporated into the Plan. If the Plan Administrator makes a final written
determination denying a Participants or Beneficiarys claim, the Participant or Beneficiary must
file an action with respect to the denied claim within 180 days following the date of the Plan
Administrators final determination.
VII. 2005 AND 2006 TRANSITION RULES AND PROVISIONS APPLICABLE
IF PLAN WAS EFFECTIVE BEFORE 2005
7.01 409A Amounts. The terms of this Plan control as to any 409A Amount.
7.02 Grandfathered Amounts. A Grandfathered Amount remains subject to the terms of the
Plan as in effect before January 1, 2005, unless the Employer makes a material modification to the
Plan under Section 7.04. Notwithstanding the preceding sentence, the restrictions of Section
5.01(A) and the transition relief of Section 5.01(B) as to Grace Period Assets apply to
Grandfathered Amounts.
7.03 Separate Accounting/Earnings. The Employer will account separately for 409A
Amounts and for Grandfathered Amounts within each Participants Account. The Employer also will
account separately for Earnings on the 409A Amounts and Earnings on the Grandfathered Amounts.
Post-2004 Earnings on Grandfathered Amounts are included in the Grandfathered Amount.
7.04 Material Modification. The Employer makes a material modification to the Plan if
at any time the Employer amends the Plan or exercises discretion under the Plan to enhance
materially a benefit or right existing as of October 3, 2004, or to add a new material benefit or
right not existing as of October 3, 2004, and such actions affect amounts which otherwise would be
Grandfathered Amounts. The Employers adoption of this Plan as a new plan or grant of an additional
benefit under an existing Plan after October 3, 2004, and before January 1, 2005, is a material
modification unless: (i) the adoption or grant is consistent with the Employers historical
compensation practices; and (ii) the Plan treats such additional Deferred Compensation as a 409A
Amount. The Employers amendment of the Plan to permit Participants with the option to terminate
participation in the Plan is a material modification.
(A) Not a Material Modification. A material modification does not include: (i) the
Employers amendment of the Plan to comply with Code §409A (except to add one or more provisions
permitted by Code §409A that the Plan did not include as of October 3, 2004, and which would
enhance materially an existing benefit or add a new material benefit); (ii) the Employers
amendment of the Plan to reduce or eliminate any benefit existing as of October 3, 2004; (iii) the
Employers exercise of Plan discretion existing as of October 3, 2004, over the time and manner of
payment (except for the right to accelerate vesting to a date on or before
19
Nonqualified Deferred Compensation Prototype Plan
December 31, 2004, or otherwise to enhance materially an existing benefit or right or to add a
new material benefit or right); (iv) the Employers amendment of the Plan to change the application
of Earnings to a Participants Account as permitted under Prop. Treas. Reg. §1.409A-6(a)(4)(iv);
(v) the Employers establishment of a trust or the making of Plan contributions to a trust or other
arrangement from which the Plan will pay benefits provided that the contribution to the trust or
other arrangement does not cause an amount to be included in the Participants gross income; (v)
the Participants exercise of any right existing as of October 3, 2004 (except to enhance an
existing benefit or to add a new benefit); (vi) the Employers amendment of the Plan to cease
future Elective Deferrals and Employer Contributions; or (vii) the Employers termination of the
Plan in accordance with Section 6.03. An amendment to the Plan which otherwise would constitute a
material modification is not treated as a material modification provided the Employer rescinds the
amendment before any Participant exercises any right granted under the amendment and in any event
not later than the end of the calendar year in which the Employer made the amendment.
(B) Aggregation. In applying this Section 7.04, Plan means under Section 1.37 and
the Aggregated Plans provisions under Section 1.04 do not apply.
7.05 2005 and 2006 Operational Rules. The following provisions apply to the Plan
during the 2005 and 2006 Taxable Years.
(A) Good Faith. As to 409A Amounts, the Employer will operate the Plan during the 2005
and 2006 Taxable Years in good faith compliance in accordance with: (i) Notice 2005-1; (ii) Code
§409A; and (iii) any Applicable Guidance as of the effective date thereof. The Employer also may
operate the Plan consistent with the Prop. Treas. Reg. §1.409A before such regulations become
effective and may apply such regulations to the extent that they are inconsistent with Notice
2005-1. Although the Employer intends this Plan document to comply with the provisions of Notice
2005-1 and of Prop. Treas. Reg. §1.409A, the Employer will not apply any Plan provision which is
inconsistent therewith and, by December 31, 2006, will amend any such provision to comply with
Applicable Guidance. The Employer and the Participants may not exercise discretion under the Plan
in a manner that would violate Code §409A.
(B) New Payment Elections. A Participant, on or before December 31, 2006, may make a
new payment election as to any previously deferred 409A Amount. Any such election must be a
permissible election under Section 4.03(A), but an election under this Section 7.05(B) is not
treated as a change in the timing or form of distribution and need not comply with Section 4.03(B)
as it applies to such changes. In addition, during 2006, a Participant may not make a new payment
election under this Section 7.05(B) which: (i) would result in the Participant not receiving any
payment which the Plan otherwise would make in 2006; or (ii) would accelerate to 2006 any payment
the Plan would otherwise make after 2006.
(C) Payments Linked to Qualified Plans. Notwithstanding Article IV, the Plan will
honor any Participant election as to the timing or form of payment of Deferred Compensation that is
a 409A Amount provided: (i) such election is controlled by the Participants distribution election
under any Code §401(a) qualified plan; (ii) the election is permitted under the Plan terms as in
effect on October 3, 2004; and (iii) the distribution is made or is commenced on or after January
1, 2005, and no later than December 31, 2006.
(D) 2005 Deferral Election by March 15, 2005. Notwithstanding Section 2.03, if the
Plan was in existence on or before December 31, 2004 (as described in Notice 2005-1, Q/A 21), a
Participant may make an Elective Deferral election as to 409A amounts earned for service to the
Employer through December 31, 2005. A Participant must make an election under this Section 7.05(D)
no later than March 15, 2005, and in accordance with the Plan terms as in effect on or before
December 31, 2005. The election applies only as to amounts not paid or payable to the Participant
at the time of the election. Any amounts subject to this election otherwise are 409A Amounts. This
Section applies only to the 2005 Taxable Year.
(E) Certain Severance Plans. If the Plan provides severance pay benefits and either:
(i) is collectively bargained; or (ii) does not cover any key employees within the meaning of Code
§416(i), the Plan provisions governing 409A Amounts are effective as to the severance benefits for
Taxable Years commencing in 2006. For 2005, the severance benefit provisions of the Plan remain
subject to prior Plan terms. For purposes of this Section 7.05(E), a severance pay benefit means as
described in Notice 2005-1, Q/A 19(d).
20
Nonqualified Deferred Compensation Prototype Plan
(F) Cancellation of Election/Participation. A Participant as to 409A Amounts, on or
before December 31, 2005, may elect to terminate participation in the Plan or to cancel (or reduce
the amount of) any or all existing Elective Deferral elections and Employer Contributions. The
Employer as to 409A Amounts, on or before December 31, 2005, also may terminate any Participants
participation in the Plan or may cancel any Participants Elective Deferral election or Employer
Contribution. The Plan will distribute to an affected Participant all 409A Amounts subject to an
election under this Section 7.05(F) and the Participant will include such amounts in income, in the
2005 Taxable Year, or if later, in the Taxable Year in which such amounts are Vested.
7.06 Incorporation of Applicable Guidance. In the event of Applicable Guidance that is
contrary to any Plan provision, the Employer, as of the effective date of the Applicable Guidance,
will operate the Plan in conformance therewith and will disregard any inconsistent Plan provision.
Any such Applicable Guidance is deemed to be incorporated by reference into the Plan and to
supersede any contrary Plan provision during any period in which the Employer is permitted to
comply operationally with the Applicable Guidance and before a formal Plan amendment is required.
* * * * * * * * * * * * * * *
21
exv21w1
EXHIBIT 21.1
Subsidiaries of Build-A-Bear Workshop, Inc.
|
|
|
Subsidiary: |
|
Jurisdiction of Incorporation/Organization: |
|
Build-A-Bear Entertainment, LLC
|
|
Missouri |
|
|
|
Build-A-Bear Workshop Franchise Holdings, Inc.
|
|
Delaware |
|
|
|
Build-A-Bear Workshop Canada Ltd.
|
|
New
Brunswick |
|
|
|
Build-A-Bear Retail Management, Inc.
|
|
Delaware |
|
|
|
Build-A-Bear Workshop UK Holdings Limited
|
|
United Kingdom |
|
|
|
The Bear Factory Limited
|
|
United Kingdom |
|
|
|
Amsbra Limited
|
|
United Kingdom |
|
|
|
Hobbies and Models Limited
|
|
United
Kingdom |
|
|
|
Build-A-Bear Workshop Ireland Limited
|
|
Ireland |
|
|
|
Build-A-Bear Workshop France, SAS
|
|
France |
exv23w1
EXHIBIT 32.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Build-A-Bear Workshop, Inc.:
We consent to incorporation by reference in the registration statements (No. 333-120012) on Form
S-8 of Build-A-Bear Workshop, Inc. our reports dated March 15, 2007, with respect to the
consolidated balance sheets of Build-A-Bear Workshop, Inc. and subsidiaries as of December 30,
2006, and December 31, 2005, and the related consolidated statements of operations, stockholders
equity and cash flows, for each of the years in the three-year period ended December 30, 2006,
managements assessment of the effectiveness of internal control over financial reporting as of
December 30, 2006 and the effectiveness of internal over financial reporting as of December 30,
2006, which reports appear in the December 30, 2006 annual report on Form 10-K of Build-A-Bear
Workshop, Inc.
Our report with respect to the consolidated financial statements refers to Build-A-Bear
Workshop, Incs adoption of the
provisions of Statement of Financial Accounting Standards No. 123R Share-Based Payment, effective January 1, 2006.
The Company acquired The Bear Factory Limited and Amsbra Limited, during the fiscal year ended
December 30, 2006. Management excluded from its assessment of the effectiveness of the Companys
internal control over financial reporting as of December 30, 2006, these entities internal control
over financial reporting associated with total revenues of $32.8 million, included in the
consolidated financial statements of the Company for the periods from the respective acquisitions
through December 30, 2006. These entities were acquired for total consideration of $39.4 million,
subject to certain contingent purchase price adjustments. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the internal control over
financial reporting of these entities.
/s/ KPMG LLP
St. Louis, Missouri
March 15, 2007
exv31w1
Exhibit 31.1
Certification of Principal Executive Officer
I, Maxine Clark, certify that:
|
1. |
|
I have reviewed this annual report on Form 10-K of Build-A-Bear Workshop, Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors: |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
|
|
|
|
|
March 15, 2007
|
|
/s/ Maxine Clark
Maxine Clark
|
|
|
|
|
Chairman of the Board and Chief Executive Bear |
|
|
|
|
Build-A-Bear Workshop, Inc. |
|
|
|
|
(Principal Executive Officer) |
|
|
exv31w2
Exhibit 31.2
Certification of Principal Financial Officer
I, Tina Klocke, certify that:
|
1. |
|
I have reviewed this annual report on Form 10-K of Build-A-Bear Workshop, Inc.; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
|
5. |
|
The registrants other certifying officers and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors: |
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
|
|
|
|
|
March 15, 2007
|
|
/s/ Tina Klocke
Tina Klocke
Chief Financial Bear, Treasurer and Secretary
Build-A-Bear Workshop, Inc.
(Principal Financial Officer)
|
|
|
exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Build-A-Bear Workshop, Inc. (the Company) on Form
10-K for the period ended December 30, 2006 as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Maxine Clark, Chairman of the Board and Chief Executive Bear of
the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
|
|
|
|
Date: March 15, 2007
|
|
/s/ Maxine Clark
Maxine Clark
|
|
|
|
|
Chairman of the Board and |
|
|
|
|
Chief Executive Bear |
|
|
|
|
Build-A-Bear Workshop, Inc. |
|
|
exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Build-A-Bear Workshop, Inc. (the Company) on Form
10-K for the period ended December 30, 2006 as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Tina Klocke, Chief Financial Bear, Secretary and Treasurer of
the Company, certify, to the best of my knowledge, pursuant to Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
|
|
|
|
Date: March 15, 2007
|
|
/s/ Tina Klocke
Tina Klocke
|
|
|
|
|
Chief Financial Bear, Treasurer and Secretary |
|
|
|
|
Build-A-Bear Workshop, Inc. |
|
|